Summer Is Ending: Will Ethereum’s ERC-20 Pass the Governance to ERC-777?

The oncoming release of Ethereum’s ERC-777 may finally free the community from the problem of ‘stuck’ tokens.

The end of summer is a great time to set personal goals, to soak in the final days of sunshine and to reminisce about the summer’s major events, like the promise made by Jordi Baylina, Jacques Dafflon and Thomas Shababi to introduce the ready-made ERC-777 token community standard, which is intended to replace the world’s most popular token standard, the ERC-20. The promise was made by Baylina on July 20 at the DappCon forum in Berlin, where important initiatives, tools and updates related to the Ethereum blockchain are traditionally discussed. The developer stated that the ERC-777 was ready to be launched and would be made fully available in August.

However, August has now come and gone, with the development team seemingly keeping silent — or possibly preparing a surprise — around the latest attempt to create a new standard on Ethereum blockchain. While no updates related to ERC-777 have appeared on GitHub since July, a Twitter post made by Baylina last week may give us a little clue about the upcoming release. For now, let’s go back in time to better understand the background of such an initiative.

Why was it necessary to change the most popular token standard in the world, which has served as the basis for more than 60,000 projects — including EOS, with a capitalization of more than $4.5 billion — and for the tokens of one of the world’s largest crypto exchange, aka Binance? In order to answer this question, it is necessary to compare both existing and new standards, and then assess the risks of their application.

Success story

While Bitcoin is considered the most popular cryptocurrency in the world, Ethereum is not only the second most popular cryptocurrency, but also the blockchain that led to a boom in crypto markets during 2016-2017. If there were no Ethereum platform, there would never have been the phrase “to the moon”, which turned cryptocurrency from entertainment for geeks to a new tool for classical investors and millions of ordinary people in a matter of months.

The main merits of the Ethereum blockchain include that the process of developing an application is extremely simple and the procedure for issuing a token using a smart contract goes off without the slightest hitch. Now, creating a token — that is, issuing a new crypto — can be done by anyone in one minute. This ease led to the explosive ICO boom. Another tool that could further contribute to the development of the ICO market was a single standard for tokens — and thus appeared ERC-20.

The ERC-20 standard

Prior to standardization, Ethereum developers had to create a separate Solidity-based smart contract for each token. In fact, each time, it was necessary to create a new, unique type of smart contract. And the founders of an exchange or wallet had to write a unique code to support each new token. The more tokens that appeared, the more difficult this process became. In addition, tokens issued on unique smart contracts were poorly compatible with each other.

Before ERC-20 was created, Ethereum developers have created a single standard for all tokens — the ERC-20, where ERC means “Ethereum Request for Comment” and 20 is the number of the community request, which in this case is arbitrary.

The emergence of a single standard, which was released in 2015, revolutionized the crypto industry and became the central guideline, specifying which functions and events have to be implemented in a smart contract. Never before was the issuance, exchange and cash out of new currencies so simple.

The standard contains the six mandatory parameters of a smart contract and is responsible for three main directions:

1. Setting the initial distribution of tokens:

totalSupply — determines the maximum number of tokens, which upon reaching, the smart contract stops issuance.

balance0f — a function that assigns a primary number of tokens to any address.

2. Transferring tokens:

transfer — a function that moves tokens from the primary address to the address of the new owner following the results of an ICO.

“transferFrom” — a function that moves tokens between users.

3. Performing management functions:

“approve” — a function to check the availability of tokens for a smart contract.

“allowance” — a function to confirm that the address has enough tokens to initiate the transfer.

Once this standard was formulated, exchanges and wallets were able to unify their code in order to handle any tokens created with the ERC-20 protocol. The growth of future applications using ETH then skyrocketed, as was expected.

The challenges behind the ERC-20 standard

Developers of decentralized networks are programmers first and foremost, and then businessmen. Therefore, in decision making, one almost always follows formal logic. For example, some of developers might be not very concerned about a “51 percent attack” either because the coin itself depreciates or because the attack cost can exceed the profit received by a hacker. But it seems the organizers of such attacks have a completely different logic, which is proved by a big number of new attacks in 2018.

The next thing that the developers did not overlook was considering a token’s functionality to be necessary only for an ICO launch but not for any additional services. This proved not to be the case — some teams, even those far from programming, began to explore possibilities of blockchain. For example, this led to appearance of tokens created for fun, as was the case of the Useless token.

Other custom features could even damage users’ security. For example, some developers implemented the option of recharging exchange accounts through the simultaneous execution of the “approve” and “transferFrom” functions. The funds were written off from the sender’s account but were not credited to their exchange balance, since the functionality of the recipient’s smart contract as a deposit was not determined. The problem was that the Ethereum developers did not provide such an option for using this kind of transfer and did not prohibit it, and blockchain did not initially support the self-determination function of the contract. As a result, the owners of the cryptocurrency lost millions of dollars, disappearing into the network forever — as the money simply disappeared if the unfulfilled transaction was not immediately canceled by the sender.

This vulnerability was noticed by security auditor Dexaran, who subsequently developed the ERC-223 standard, in which the “tokenFallback” function was added — which is launched if the “transferFrom” function isn’t performed. Despite the invention, however, this new function, created by the anonymous programmer, hasn’t yet received widespread acceptance.

One more vulnerability has been detected by Lucas Cremer, a Solidity developer from Germany, in June, after Solidity update. It turned out that a significant percentage of ERC-20 tokens — which the author called “bad tokens” — behaved in yet another way regarding the return values of the transfer function. The transfer functions of these token contracts did not return anything. Indeed, among the affected tokens were those of Binance and OmiseGO. What one should be concerned about, Corner states, is that such assets could start behaving in an unpredictable way, and he warned that the bug needed to be fixed “as soon as possible.”

ERС-777: A Heavy Left-Hook Attack on ERC-20

Since tens of thousands of tokens, exchanges and wallets closely interact with ERC-20, its vulnerability is irremovable, — so the Ethereum developers have decided to issue a new standard with a name inspired by the lucky number 777.

EIP (Ethereum Improvement Proposals) on ERC-777 were published on Nov. 20, 2017 and received the community’s approval. However, in order to fully function, the new standard needed an auxiliary ERC-820 protocol, which set the principles for the formation of a single register of smart contracts. With the help of this centralized registry, the main problem of the Ethereum blockchain — the impossibility of determining the functions performed by the contract — was solved.

How does it work now? Any contracts with a description of the functions can be entered into the register once and for all; and, when executing a transaction, the blockchain can apply to the register to clarify the permissible actions. If a user attempts to perform an invalid operation with the tokens, they simply remain on the account and do not disappear.

At Berlin’s DappCon, Jodi Baylina and Jacques Dafflon explained the specifics of the new standard by using a new term — “hook” — to determine “functions that can be called during a transfer.” These functions operate in conjunction with the ERC-820 protocol to provide a simple type of a detailed introspection which is lacking in ERC-20. Thus, it becomes possible to check whether a token possesses concrete features in order to perform or decline the operation, making the smart contract even smarter. The new ERC-777 standard will fix the problem of a recipient’s tokens being lost when sent to a contract that doesn’t support the receiving or managing such assets. Because of such a bug, the Ethereum community has already lost millions of dollars. A big part of the funds appear to be trapped inside some of the top ICO projects contracts forever. Here are some of them:

However, protection against token loss as a result of incorrect transactions is not the only innovation of the new standard, which is aiming to further develop the blockchain.

For example, ERC-777 creators built in a ‘trusted operator’ function for the first time, which can transfer and burn tokens on behalf of the owner. This is achieved by executing the ‘authorizeOperator’ function and can be used, for example, to perform instant, automatic payments in ETH.

In addition, this standard allows you to check the address of the recipient for availability concerning ‘white’ or ‘black’ lists through the function ITokenRecipient. Additionally, the ‘hooks’ mentioned above make possible the monitoring of the behavior of a token, depending on the circumstances, which allow you to block certain addresses and perform a number of other actions — including the intervention by the sender and the receiver in the transaction process.

If you need additional details on ERC-777, you can consult the relevant thread on Ethereum’s GitHub.

A curtain call, number 20

The ERC-777 standard is backward compatible with ERC-20, and any project based on the previous version of the standard can be transferred to the new one without problems. We can assume that the exchanges and wallets, which work with the tokens of the previous standard, will react positively to the initiation of ERC-777 — which finally closes the legendary ‘hole’ in the Ethereum blockchain. In practice, this will mean simplifying the procedure for listing coins on the new standard, which could cause a new surge in activity in the crypto industry comparable to the wave of enthusiasm in 2016-2017.

In addition, the new standard significantly expands the functionality of the Ethereum blockchain system, which will attract the attention of developers. Rampant discussion of the new standard serves as the brightest evidence.

And finally, the ERC-777 standard contains completely redesigned functions and logic, which will avoid crosses with other tokens standards and confusion when executing smart contracts.

Speaking about the disadvantages of ERC-777, yes, there is one: It relies on a centralized register of smart contracts — which is not an ideal approach within the decentralized ideology of blockchain. This will require additional measures from the Ethereum developers to ensure the security of its registry.

A famous crypto YouTuber “Ivan on Tech” is sure that the success of ERC-777 is just a matter of time, even despite the fact that the Ethereum Foundation might be slow in writing off ERC-20 entirely:

“Going forward, [the] Ethereum Foundation really [needs to get] behind ERC-777, and it could replace ERC-20, because it’s better. And therefore, it’s all about [the] Ethereum Foundation still has quite an influence and they are currently pushing for ERC-20. This is what they are advertising the most. But, in the future, it might be the case that we switch to ERC-777.”

Perhaps, a new, promising token standard will give a fresh impetus to the development of the Ethereum network — and ETH, in particular, which has hit a new low since July: $194. Until then, while GitHub is keeping silent, there seems to be nothing better to do than just letting the Ethereum team finish their work — we know that they are good at it.

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Smart Contracts Becoming an Essential Tool for Business

Smart contracts are becoming an important part of conducting business. In the global payroll space, the technology can rid companies of redundant bureaucracy.  The world of business is increasingly global, but some borders persist. Laws, directives and ways to enforce them change from country to country, rendering international business unnecessarily complicated. This complication translates into a waste of many work hours. Those hours are spent trying to comply to the different legislation and make sure

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BANKEX Smart Justice is Bringing Arbitration to Blockchain

The Smart Justice service is an innovative and community-driven way to resolve disputes in the crypto industry. Top-50 FinTech company, BANKEX, launched the beta version of its service on the 14th of May as a way to introduce complete partiality during these disputes. There is no doubt that blockchain technology has the potential to drastically change our lives.  It offers security, immutability and a high level of transparency.  It also an essential part of creating a

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Russia’s Digital Economy Bill Supported by State Duma Committee in Move Towards Crypto Regulation

The State Duma’s Committee for Legislative Work will support a digital economy initiative that will “minimize” the risks of citizens using digital assets.

Russian State Duma’s Committee for Legislative Work will support the first reading of an initiative that will add the basic norms of digital economy to the Russian Federation Civil Code.  This is the latest step on the road to regulating cryptocurrency in the country, local news outlet Izvestia reports Wednesday, May 16.

Pavel Krasheninnikov of political party United Russia and head of the Legislative Work committee, told Izvestia that the initiative aims to “minimize the existing risks of using digital objects for transferring assets into an unregulated digital environment for legalization of criminal incomes, bankruptcy fraud or for sponsoring terrorist groups.”

The initiative, which is scheduled to be considered next week, does not mean that digital currencies will now become a legitimate means of payment. Instead, a separate law developed by the Central Bank, the Ministry of Finance, and the Ministry of Economic Development will set conditions for digital currencies to be used as payment “in controlled quantities.” The initiative does assert that digital confirmation by a user in a smart contract is equal to his written consent.

Russia first prepared a bill “On Digital Financial Assets” in March of this year, which would provide federal laws governing cryptocurrencies and Initial Coin Offerings (ICO) inspired by President Vladimir Putin’s decision to begin crypto regulation on July 1.

The March 20 draft defines crypto and digital tokens are assets only to be traded on authorized exchanges, also requiring user account at crypto exchanges to comply with AML and counter terrorism financing regulations. A review draft of the bill from mid-April added that the exchange of crypto for fiat above around $9,600 will be subject to mandatory currency exchange regulation.

Igor Sudets, the director of the program “Blockchain for Lawyers” at the Plekhanov Russian University of Economics in Moscow, told Izvestia that “it is important that the crypto currency and tokens are included in the legal field of the Russian Federation”:

“On the one hand, these are opportunities that we have no right to miss. On the other hand, while they are outside the legal field, they can be used to give bribes, withdraw money in the case of bankruptcy, pay ‘black salaries, and simply get stolen – with no repercussions [for criminals].”

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Casper: What Will the Upgrade Bring to the Ethereum’s Network?

New friendly protocol to solve the problems of scalability and high transactions costs in Ethereum network. The upgrade means more decentralization, functionality and competitiveness to the system.

On May 8, developers released a planned improvement to Ethereum’s network – a new version of the code of Casper. Hybrid Casper Friendly Finality Gadget was introduced to move network away from mining-related problems, as “excessive energy consumption, issues with equal access to mining hardware, mining pool centralization, and an emerging market of ASICs”, the ultimate goal being to move the network from a PoW to a PoS system.

Let’s see what is known about “possibly the most significant” change to the network to date, according to Ethereum News.

Energy consumption and commissions

While 2017 was exciting due to the exponential price speculation of cryptocurrencies, it emerged that neither Bitcoin nor Ether in their present form would be able to become a fully fledged alternative to fiat currencies because of their very low transaction speeds.

An additional concern was the high amount of energy required to mine leading cryptocurrencies. Therefore, it should come as no surprise that among journalists and analysts, the latest trend has been comparing mining costs to the rate of the energy consumption in each country to determine where mining would be most profitable.

Pic

Image source: Powercompare.co.uk

To date, developers of leading cryptocurrencies have failed to solve the issues related to scalability. In particular, Ethereum scales poorly despite a huge number of miners. Hypothetically, it may seem that as more people mine the cryptocurrency, the more transactions the network can handle. The reality is that as all these miners simultaneously try to process one block, the complexity of production increases and the network bandwidth remains the same. This means that even if the number of miners grows a thousand times, one block will still be produced in ten seconds and the cost of electricity would noticeably increase.

A direct consequence of poor scalability is high commissions. Miners choose transactions with a higher commission, as they are hunting for a greater reward. This leads to thousands of low commission transactions which accumulate and await processing for several days to infinity, turning the blockchain into a universe of unprocessed requests – not to mention small payments which are impossible to process.

Moreover, in recent months a fundamentally new problem has emerged. The arrival of super powerful ASIC miners in the market has become a serious threat for decentralized networks, as they increase the chances that one of the mining pools will occupy a significant share of the hash and make the network centralized.

Ethereum archipelago

Attempts to solve these problems led to an epidemic of Bitcoin hard forks aimed at creating a “new Bitcoin” with higher transaction speed. They were followed by a wave of forks among the most popular cryptocurrencies, such as Ethereum, Monero, and Litecoin. This movement was assigned the name of “ASIC resistance” and has started to gather more and more supporters as the threat of ASIC mining dominance becomes more real.

So far, one of the reasonable approaches to solving this avalanche of problems was demonstrated by the Ethereum team, who decided to create a protocol combining the parameters of two algorithms – Proof-Of-Stake (PoS) and Proof-Of-Work (PoW).

This new protocol is called Casper – Friendly Finality Gadget (FFG) and it completely changes the principles of creating and distributing Ethereum blocks, while reducing the overall complexity of the whole blockchain.

Ethereum developers are sure that the root of all the problems faced by leading cryptocurrencies is the principle of PoW:

“Although effective in coming to a decentralized consensus, PoW consumes an incredible amount of energy, has no economic finality, and has no effective strategy in resisting cartels.”

Furthermore, the performance of the blockchain operating on the PoW algorithm is limited and can hardly provide several dozen transactions per second.

Cryptocurrencies Transaction

Image source: HowMuch

For these reasons, the Ethereum team plans to move from the PoW to the PoS algorithm. The difference between the two is that in the PoW case, users buy real computers that consume energy and calculate blocks at a rate proportional to costs. The subject of purchase in the PoS case is virtual coins inside the system, which are then converted into virtual computers calculating blocks. Under this approach, the probability of signing a block depends not on the processing power, but on the number of coins on the account of a user-validator. If the validator decides to participate in the confirmation of transactions, their funds are frozen with each confirmed block rewarded.

Proof of work

The Casper protocol would become an intermediate step in the transition from PoW to PoS, combining the possibilities of both principles:

“Through the use of Ether deposits, slashing conditions, and a modified fork choice, FFG allows the underlying PoW blockchain to be finalized. As network security is greatly shifted from PoW to PoS, PoW block rewards are reduced.”

Sharding

In addition to the PoS algorithm introduced in Casper, there is another technological novelty being developed – sharding. The idea is that the nodes store only part of the distributed registry, and the underlying mathematics would ensure the system’s transparency and accountability in such a way that each node could rely on the information of others.

The founder of the Ethereum network, Vitalik Buterin, compared the elements of the sharding with islands belonging to the same archipelago:

“Imagine that Ethereum has been split into thousands of islands. Each island can do its own thing. Each of the islands has its own unique features and everyone belonging on that island, i.e. the accounts, can interact with each other and they can freely indulge in all its features. If they want to contact with other islands, they will have to use some sort of protocol.”

In other words, Ethereum’s main chain will be divided into separate chains, or shards, that associated with each other and the main block. The purpose of shards is to provide parallel processing of transactions. Each node can process its shard separately, while together nodes can work in parallel, increasing the network’s bandwidth and transaction speed by several times. At the same time, the task of scalability is solved.

Miners and validators: rescue rangers

The verification of transactions inside each shard will be performed by validators who are the main marshals of the Casper system along with the miners. The validators will ensure the legitimacy of operations with coins and act as a kind of escrow in the system, confirming transactions with their deposit. It should work the following way – if the validator has found a block that, in their opinion, should be included in blockchain, they will be able to approve it by placing a part of the deposit on this block. In the event that this block is added to blockchain, the validator will receive a reward proportional to the share that they invested. Otherwise, if they approve an incorrect or malicious block, they will lose their deposit.

Another task of validators is to create checkpoints every fifty blocks. This will ensure the completion of the blockchain and significantly increase the security of the network, since it excludes the possibility of returning transactions before the checkpoint. According to Ethereum developer Vlad Zamfir, economically any manipulation or an attempt to attack will be of no interest for validators:

“It’s as though your ASIC farm burned down if you participated in a 51 percent attack.”

The minimum deposit size the validator can make for confirmation is set at 1500 ETH which is a significant enough amount to lose and the more reason to think twice before taking part in any manipulation schemes.

The developers also provided a solution to the scalability problem which has been a critical condition for the further development of the network and Ethereum’s ability to compete with more advanced blockchain systems like Graphene.

The increase in processing speed has been reached by developers by means of participation of smaller amount of nodes and delegation of the major work to light clients. Therefore the transaction processing speed will be much higher than on a separate computer, and at the same time the entire network will be able to work on a large number of conventional laptops, while maintaining full decentralization.

Additionally, the network’s security is significantly shifted from the complexity of PoW to the completeness of PoS with the reward given to both validators and miners. At the same time, the reward for the miners for the production of ethers will decrease fivefold – from the current 3 ETH to 0.6 ETH. This will make the coin less attractive for ASIC miners and will reduce the risks of network centralization.

Validators will also become the recipients of rewards, however, in a smaller amount. Their total award is to be only 0.82 ETH per block, which is almost four times lower than the current amount. In the future, according to Vitalik Buterin, Ethereum developers will completely get rid of the PoW algorithm, leaving the reward only for validators in the amount of 0.22 ETH per block:

“Come up with an estimate for the annual rewards given out by the full Casper and sharding mechanisms. Currently, an expected value is 10 mln ETH staking at 5 percent interest, which is 500,000 ETH per year – approximately 0.22 ETH per block.”

At the same time, the efficiency of the network will increase significantly for two reasons. First of them is behind the PoS algorithm consensus which to be provided without mining, reducing energy costs and ensuring the necessary emission of ETH. Secondly, the generation time of the block will be reduced to a minimum, since it is easier to check who owns the largest share rather than to find out which of the miners has the greatest computing power.

Latest news

At the Edcon conference in early May 2018, the creator of Ethereum Vitalik Buterin reported new details about the “friendly ghost”. In particular, Casper, in addition to the reward system of validators, will provide a system of penalties. The main principle of the new reward system is the following – the greater the stake is, the lower the interest rate. For example, the owner of 2.5 mln ETH will receive an annual fee of 10 percent, and the owner of 10 mln ETH – only 5 percent.

Table

Image source: HowMuch

The amount of penalties will depend on the severity of the validators’ faults and can reach 100 percent. In particular, the validators will be subject to fines in case of frequent absence from the network. The emergence of problems with the shard or disk on which the wallet is located will be punished with a fine of 2 percent of the deposit amount. For a group of validators whose shards are simultaneously out of order, penalties will be much higher and measured in double digits. At the same time Buterin notes that the main problem of this approach will be the risk of hacker attacks, because in this case, collective penalties can leave validators without any deposits.

The last news related to the “friendly ghost” came on May 8, when one of Ethereum developers Denny Ryan published the first version of Casper’s updated code on GitHub:

“v0.1.0 marks us more clearly tagging releases to help clients and external auditors more easily track the contract and changes.”

He also added that client developers can now start writing and testing software in their own languages.

What can we expect from Casper?

The launch of the Casper FFG is planned for the summer – autumn of 2018. Since the system will be incompatible with previous versions of Ethereum software, the update will be implemented through a hard fork.

As a scalability solution, Casper remains an important blockchain upgrade and solution for both developers and ordinary users. The Ethereum foundation spent three years to apply all the accumulated experience in making the network decentralized, efficient and competitive industry improving in the long run.

With the bandwidth increased, more transactions are expected to be processed at higher speeds, which means that big companies will be able to build complex structures and develop ecosystems based on the network. A loyal enthusiastic community behind the platform will help to contribute to its development and improve its functionality.

There is still a lot of work to be done on how a new reward system will work in practice and how validators will manage the protocols, but one thing is obvious – Casper is getting closer.

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