The Value of Blockchain-based Systems
Introduction
This short paper aims to demystify the intrinsic value and benefits of blockchain technology. It serves as essential reading for both newcomers to the blockchain industry and those more experienced. Specifically, we are interested in specifying the beneficial features, characteristics, and properties of blockchain-based systems that we, as a cryptoeconomics-focused group, consider compelling and value-additive for projects and systems looking to integrate the technology. The paper explores these features through nine sections, each focusing on a specific valuable feature of blockchain technology and its comparison with traditional systems.
It is important to note that some often cited properties, such as decentralisation, are not listed here; this is because the focus is more on the effects and implications of properties rather than the properties themselves. For instance, we include permissionless participation resulting from decentralisation. Furthermore, it is worth noting that these features typically exist on a spectrum and could differ significantly based on the implementation details.
Cryptoeconomic Architecture
Cryptoeconomics is an interdisciplinary field at the intersection of technology and economics that concerns the development of economies underpinned by blockchain technology. It focuses on the use of incentive structures to align individual actions with the goals of entire systems and effectively manage digital rights and resources, all without the need for central intermediaries.
Building digital economies, gamified ecosystems, and tokens on infrastructure other than blockchain is possible. However, blockchain’s cryptography, decentralised consensus, security measures, and other relevant technological features lend blockchain-based cryptoeconomic layers unique benefits. These include standardised and transparent rulesets resistant to arbitrary changes, auditable economic parameters, and the ability to enable novel forms of economic coordination and value creation. These benefits are discussed further in this paper and our other writing.
For example, while a traditional online game economy may have a virtual currency and marketplace, the underlying rules and parameters are ultimately controlled by a central authority and can be changed at will. In contrast, a decentralised blockchain-based alternative may have its rules and economic parameters encoded in transparent smart contracts, which cannot be altered without going through a predefined governance process.
Permissionless Participation
Permissionless participation refers to how persons or other entities can access and participate in the system without any external permission being granted or required. Participation can be subdivided into system development (involving block producers, validators, developers, and governance participants) and system usage. Permissionless participation means that anyone can start working on or using the system.
Blockchain-based systems could have multiple types of participation from different participants. A system could exist with a process that is socially agreed upon by everyone involved, as blockchain systems are often controlled by all participants. If a group decided to fork the project, they could. The best process is one that feels fair to everyone and has a net positive effect. Such a socially agreed process could accommodate permissioned development but permissionless usage – in other words, only certain people are allowed to work on the project, but anyone could use it.
Unlike traditional web services, blockchain-based systems offer greater flexibility in defining participation roles. This is due to blockchain technology's cryptographic and distributed consensus enforcement mechanisms, effectively motivating participants to remain engaged.
The core difference relative to traditional systems is that rules of engagement are enforced by the technology rather than a central intermediary that facilitates interaction between participants.
Auditability
Blockchain-based systems are inherently auditable, meaning they can be checked to ensure they behave as advertised. This is particularly important for reducing the probability of vulnerabilities, whether technical, economic or otherwise. Auditability includes verifying that rules such as double-spending, unauthorised monetary issuance, and asset seizure are not circumvented and that asset ownership and economic metrics such as token supply can be proven.
The benefit of auditability is a structural change in how online interaction occurs, as traditional interaction has fewer trust guarantees than a public ledger that is always available. This transparency enhances trust and accountability, as any deviations from the predefined rules can be easily detected and addressed by the system’s participants.
Governance & Metagovernance Transparency
Governance and metagovernance transparency refer to the extent to which information about changes to a system, the decision-making process behind these changes (governance), and the rules for altering this process (metagovernance) is publicly accessible. By leveraging open-source code and its development practices, such transparency provides system actors with greater confidence and predictability regarding future changes and their implementation.
Blockchain technology offers significant opportunities to develop transparent and equitable governance structures. However, the open-source nature of blockchain infrastructure, combined with the blurring of traditional provider-consumer roles and novel value accrual mechanisms, results in highly complex governance requirements.
Consequently, governance poses a significant and unprecedented challenge for all cryptoeconomic systems, with its specific implementation varying considerably depending on the project's nature and objectives.
Interoperability
Interoperability refers to the extent to which a system and any secondary systems it supports can interact with other systems, including but not limited to blockchain-based systems. Interoperability can introduce security trade-offs that should be considered.
In contrast to how existing systems interoperate, blockchain-based architectures allow for a higher degree of interoperability by default. While internet services have seen significant improvement concerning interoperability with the API revolution, fundamentally, systems still have to decide and provide which components are made available to external partners and such APIs are generally permissioned. The open platform nature of blockchain ecosystems allows various options for interoperability. This benefit comes at the cost of complexity to cryptoeconomic designers, as systems are less isolated, and there is often uncertainty regarding the flow of value.
Composability
While interoperability in the blockchain industry generally refers to the compatibility of disconnected systems to communicate with each other, composability relates to the ability of standards, assets, and tools within an environment, such as the Ethereum ecosystem, to interact seamlessly. This interaction allows for combining these elements into larger systems, where the output of one interaction can function as the input for another. Composability encompasses several features, including the ability for systems to fork and integrate other systems (e.g., dApps calling contracts from other dApps), standards that remain interoperable and cross-compatible (e.g., ERC20 tokens), and the capacity to bundle multiple cross-dApp operations into a single transaction, with all operations either executing or failing together (atomic composability).
In contrast to blockchain-based services, traditional alternatives typically focus on standardising software components but not to the extent they are inherently compatible. In contrast, blockchain technology has simplified access to and interaction with all standards, assets, and tools within an ecosystem for engineers and product developers. This ease of access and interaction has fostered an environment where composability thrives. Interoperability, meanwhile, extends composability beyond the boundaries of a specific ecosystem, enabling interaction between disparate systems.
Privacy
‘Cryptography is the practice and study of techniques for secure communication in the presence of adversarial behavior.’ — Ronald L. Rivest, Cryptography, 1990.
Several cryptographic techniques are essential for the practical functioning of blockchain technology. These cryptographic schemes are applied extensively, from consensus processes to public-private key transaction verification. Certain schemes provide privacy features while maintaining trust assumptions and have been widely used for privacy-focused applications. For instance, they allow for knowing the output of a transaction without revealing the input details.
Currently, most blockchain-based systems are significantly less private than traditional alternatives. Implementing privacy at scale in blockchain systems has been challenging due to added complexity and costs, leading most projects to prioritise adoption over widespread application of privacy features.
In blockchain-based systems, privacy is often achieved by compromising other attributes, such as auditability. Striking the right balance between robust privacy and maintaining other key features is crucial to unlocking the full potential of blockchain-based systems. As blockchain technology evolves, privacy solutions, such as zero-knowledge proving schemes, that can maintain fundamental principles will be key to driving adoption and success.
Security and Resilience
Blockchain-based systems often exhibit a higher degree of resilience to direct attacks and weaknesses stemming from errors (e.g., node failures) than legacy systems, owing to their distributed architectures and robust security measures. Resilience can encompass and overlap with properties such as stability and availability.
The incorporation of Byzantine fault-tolerant systems, distributed architectures, asymmetric cryptography, consensus algorithms, Sybil-attack prevention mechanisms, cryptoeconomic incentives, and other advanced technologies equip blockchain-based systems with security guarantees and assumptions that are fundamentally different and arguably superior to centralised legacy alternatives.
Automation
The ability to replace human actions and oversight with self-executing code is a significant disintermediating force. Blockchain-based systems enable process automation, reducing the need for intermediaries and increasing efficiency. Smart contracts can automatically enforce agreement terms, eliminating human intervention.
The disintermediating potential of blockchain automation is enhanced by its interoperability, enabling seamless interaction between different blockchain systems and composability, allowing the creation of complex, automated workflows. Auditability ensures transparency and verifiability of automated processes, increasing trust.
