Key Takeaways
- The blockchain consensus mechanism presented in this article, provides a higher level of trust by creating an efficient judiciary system which has been designed to keep all verifying nodes accountable and allow for bad actors to be identified and effectively neutralized.
- This robust ecosystem will create a blockchain environment where nodes are accountable, ideally enabling more opportunities to generate yield through tokenization, enhance visibility for lenders and borrowers in trade finance, and allow smaller enterprises to source competitive rates for project funding.
- The XinFin Delegated Proof-of-Stake Consensus Protocol 2.0 (XDPoS 2.0) is there to regulate the XDC nodes and to maintain the consistency of the decentralized ledger, utilizing strong security and performance guarantees.
- There is always the risk of ⅓ or more participants becoming malicious, which could deter widespread enterprise usage. This is where XDPoS 2.0’s innovative forensic monitoring capabilities become essential.
- This new form of enforcement on the protocol level addresses concerns held by those users seeking to become early adopters and, potentially, regulators, whilst keeping the trustless nature that makes blockchain technology so powerful.
It’s been well over 10 years since blockchain technology has come on the scene, and plenty has happened in that time. Despite massive advancements in both blockchain speed and scalability, today, only a handful of enterprises are truly beginning to grasp the potential use cases for this technology. There have been some notable obstacles that have kept most of the financial industry from having the confidence to get involved, and perhaps rightly so: the lingering concerns over the security of these networks, not to mention accountability and unresolved regulatory clarity, have kept most organizations on the sidelines.
Fortunately, that is changing now. The latest developments have embraced a system of on-chain forensic monitoring that is both automated, accurate, and maintains decentralization. These new protocols allow for a true “blockchain 4.0” that can finally address every lingering problem and offer a product that stands to benefit small businesses, financial industries, and governments alike.
Building the blocks
Most people first learned about blockchain through Bitcoin. It was one of the first to the scene, and it proved the premise of the technology. Before long we had Ethereum, dubbed blockchain 2.0, and the implementation of smart contracts. The next issue addressed was scaling, and with this, we saw the rise of Delegated Proof of Stake (DPoS) networks, which addressed many of the issues found in the older Proof of Work (PoW) chains. Thanks to all of these developments, businesses are beginning to explore how to integrate them, yet they are stymied by the issues around accountability and attributability.
We’ve seen this with protocols like the HotStuff consensus standard that is even now being utilized for the Facebook-backed stablecoin project, Diem. HotStuff is a Byzantine Fault Tolerance (BFT) system that is powerful and versatile but is still at risk of security issues. For example, it only takes ⅓ of the nodes on the network to begin colluding in order to manipulate the authenticity of transactions. This is frankly a level of risk that many enterprise businesses may be reluctant to tolerate. The odds of compromise may be somewhat low, however, the stakes for a company are high. This is all the more true for smaller organizations, which may have fewer nodes, to begin with.
That isn’t to say potential solutions to this problem haven’t been proposed. Some blockchains have implemented a process called “slashing.” Slashing is a mechanism built into PoS protocols, such as Ethereum 2.0, designed to discourage validator misbehavior by liquidating staked funds. When a node detects invalid transactions coming from a peer, it effectively cuts them off from the network, in the interest of protecting the whole. While this is certainly a step in the right direction, slashing places the onus on whistleblowing network participants to root out the bad actors. Furthermore, the practice is fairly blunt in execution, that is, it eliminates nodes regardless of the circumstance. This means honest mistakes cause the loss of funds the same as attackers. To put this into perspective, there have been 156 instances of validator slashing since the transition to staking on ETH 2.0. Seventy-five of these incidents occurred in February due to a technical bug within a staking-as-a-service platform. Clearly, a tighter system is needed before big business is going to begin using such a service.
This is creating a very real barrier for most of the enterprise world to get involved. There are other obstacles as well, as for some time the regulatory issues have been seen as equally important as technological and scaling issues held by companies regarding blockchain. Then there are the central banks and governments, who will need to deploy flawless networks if they are going to be able to roll out truly successful digital currencies.
Despite these concerns and demands, we are nonetheless seeing many current institutions embracing the cryptocurrency revolution in one form or another. Take for example the fact that a recently passed law in Germany will allow for institutional investment funds to allocate up to 20% of their assets into cryptocurrency. It is likely quite a few firms will be jumping on this ability quite soon. Furthermore, in the United States, the Treasury's Office of the Comptroller of the Currency (OCC) told national banks that they are allowed to run their own independent nodes for various Independent Node Verification Networks, or INVNs.
All of this makes it clear that the basic interest is already out there, and will likely only grow as time goes on. Hence, what companies really need is a system that is both secure and offers advanced transactional oversight, beyond anything that is being implemented on most platforms today. This should come in the form of a higher caliber of blockchain, a true 4.0 evolution. Fortunately, businesses don’t need to wait any longer. On-chain forensics monitoring stands to truly be a game-changer and offer the oversight, control and security that so far has been lacking.
The final piece of the puzzle
Imagine a protocol that builds on the aforementioned slashing mechanism, but instead of the protocol relying on adjacent nodes to hunt down malicious nodes, the forensics system eliminates wrongdoers autonomously, and most importantly, with provable forensic evidence. In the low probability event that more than ⅓ of the system displays a Byzantine fault, afflicted nodes would get shut down before they can cause any permanent network instability, allowing the system to operate as it should. This, then, changes everything in terms of both security as well as accountability.
Companies can feel confident that their transaction history hasn’t suffered and won’t suffer a malicious reorganization. More than that, if implemented on existing, global blockchains it stands to bring in the same level of trust that it can for private networks. This means places that are still acting like the “wild west,” such as decentralized finance, can finally begin to be embraced by the legacy financial system.
This type of system isn’t just hypothetical either. It has already been discussed for the Facebook Diem project, to name one example. There is also the XDC Network, which has proposed a protocol known as XDPoS 2.0. XDC’s forensic monitoring system is specifically designed to actively hunt down and eliminate wrongdoers autonomously using a judiciary system that distinguishes between a genuine security threat and a user error. This development solves the blunt force policing of slashing while maintaining an equally high level of security.
How XDPoS 2.0 Works
XDPoS 2.0 is shorthand for XinFin Delegated Proof-of-Stake Consensus Protocol 2.0. The purpose of this system is to regulate the XDC nodes and maintain the consistency of the decentralized ledger, utilizing strong security and performance guarantees. This is achieved by incorporating the latest peer-reviewed academic research with state-of-the-art engineering designs and development tools.
The whole system is built upon three basic pillars. First, there’s the mechanism for electing Master Nodes, which determines how both delegation and proof-of-stake work. Next is the consensus engine, which is based on the aforementioned HotStuff protocol. Lastly, there is a reward mechanism that incentivizes nodes to contribute towards the maintenance of the XDC Network.
Election of Master Nodes
DPoS systems validate blocks and secure the network via node operators who stake the network’s native asset in return for rewards. In the XDPoS 2.0 network, not all nodes can validate blocks, only certain ones known as master nodes can.
These special participants must pass certain requirements to be eligible, such as staking more than 10,000,000 XDC, a dedicated IP address, and 100% network uptime. During each “epoch,” 108 eligible nodes are selected at random, and collectively form the consensus committee for the next 900 blocks. After which time, a new round of election of master nodes will occur, ensuring that there is almost no chance of collusion between these participants across epochs.
Consensus Engine
Some of the benefits and shortcomings of HotStuff were mentioned above, but overall this consensus mechanism can provide fast, low-cost block consensus with zero chance for chain forks, assuming there are fewer than ⅓ attackers on the network. This offers notable benefits over other protocols such as those used for Bitcoin and Ethereum and is the primary reason so many new networks are adopting this method.
Reward Mechanism
Similar to other blockchains, the reward mechanism is the incentive for nodes to generate, populate, and validate blocks, as they earn XDC for doing so. The main benefit for XDPoS 2.0 is that blocks are finalized quickly, allowing the reward to be determined and announced instantly after the block is finalized. Generally speaking, Master nodes can expect to receive their reward compensation in about 30 seconds — much faster than most systems.
All of the above three pillars help to create a powerful and fast blockchain, but there’s still the issue of the risk of ⅓ or more participants becoming malicious. Unlikely though it may be, it does represent a potential exploit for the system, which, as mentioned, is unacceptable for widespread enterprise usage. This is where XDPos 2.0’s innovative forensic monitoring capabilities become essential.
Forensic Monitoring
In the event that an adversary corrupts more than 1/3 of the master nodes in the BFT committee of any given epoch, it is then technically possible for said adversary to violate the safety and jeopardize the consensus by creating forks, resulting in two or more finalized blockchains. However, certain messages would need to be signed and sent by these nodes to make this happen, which can then be detected by the system immediately after a fork with a length of only one appears.
The signed messages can then be used as irrefutable proof of the misbehavior. Those messages are embedded into the blockchain and can be obtained by querying master nodes for forked blockchains. This is what enables the forensic monitoring feature, which can identify as many Byzantine master nodes as possible, all while obtaining the proof from querying as few witnesses as possible. For example, two separate honest nodes, each having access to one of the two conflicting blockchains respectively, is sufficient for the proof.
Should more than ⅓ malicious nodes be detected, the system will temporarily halt in order to remove the offenders and immediately form a new master committee before proceeding. Though the network can experience some brief downtime in this event, the system doesn’t take long to become operational, most importantly, however, overall trust and integrity is maintained.
More information about XDPos 2.0’s consensus abilities is also available within a peer-reviewed research paper which outlines in much greater detail what the system is capable of. Overall, the outlook is that this is a solution that stands to bring decentralized products and services to enterprise businesses, overcoming the issues that have held this tech back for so long. Furthermore, the team behind XDC is by no means done. The roadmap for 2021 involves additional wallet integrations, pushing awareness and adoption, launching on more exchanges, interoperability with Ethereum and so much more.
Conclusion
Creating an efficient judiciary system designed to keep all verifying nodes accountable and allow for bad actors to be identified and effectively neutralized — no matter how many nodes are malicious — will provide a higher degree of trust than previous blockchain consensus mechanisms, which offer no means to identify attackers. In identifying forensic capabilities of the most popular BFT protocols and the most promising variants and building a systematic approach to accountability and attributability in blockchains, these new forensic tools can meet the unique needs of enterprises in a way that most blockchains simply can’t.
A new layer of systemic accountability, on top of a scalable, robust framework, truly opens the door to further enterprise participation—particularly when it comes to trade finance and the developing decentralized finance (DeFi) sectors. Creating a robust blockchain ecosystem with judicial checks and balances will create more opportunities to generate yield through tokenization, enhance visibility for lenders and borrowers in trade finance, and allow smaller enterprises to source competitive rates for project funding.
Both the general public, private businesses, and of course governments will likely benefit immensely from technology such as this. The legitimate concerns that have kept this technology from revolutionizing finance and ecommerce may no longer be an issue, and it is only a matter of time before more institutions begin to take notice. Creating a form of enforcement on the protocol level negates many of the problems that regulators have shown concern over, while still keeping the decentralization and trustlessness that makes blockchain technology so powerful. Soon, this type of system may become the industry standard, with today being just the beginning.
About The Author
Dr. Fisher Yu is a postdoctoral researcher whose work includes analysis and innovations on coded distributed computing, distributed machine learning, and blockchain. Dr. Yu co-authored the "XDC Consensus Engine DPoS 2.0" whitepaper for the XDC Network, a delegated proof of stake consensus network (XDPoS), enabling hybrid relay bridges, block finality, and interoperability with ISO 20022 financial messaging standards. This led to the XDC Network’s XinFin's Hybrid architecture enterprise and developer-friendly.