VeradiVerdict - Issue #88

  • Scalability is one of the largest ongoing problems in blockchain. Bitcoin can process around 7 transactions per second and Ethereum can process around 15 transactions per second, which pale in comparison to Visa’s upper limit of 24,000 transactions per second. Many DeFi services, particularly exchanges, are limited by this, because they cannot process transactions fast enough or provide enough liquidity for the scale of its operations.

  • One solution towards scalability is leveraging scalable cryptographic proofs systems such as SNARKs and STARKs. These are advanced cryptographic tools that allow a prover to efficiently prove the computational integrity of a large batch of transactions, via a proof that is succinct and can be verified on-chain in exponentially small time. STARKs are a trustless and lightweight cryptographic proof system that can be used to prove the computational integrity of batches of transactions (trades and payments, for example), and other records that need to be stored on the blockchain. How much more efficient? 20X faster than any other prover available today.

  • StarkEx is a platform that uses STARKs to power decentralized exchanges. Trades are sent to an off-chain cloud service that validates batches of trades, and produces a proof (STARK) attesting to the integrity of each batch. The proof is then sent to a smart contract on the public blockchain, which verifies the proof and stores a commitment to the new state of account balances. The transaction history can be stored on-chain or it could be stored off-chain. Crucially, verifying a batch of trades scales logarithmically (or “exponentially faster”) than natively checking each and every transaction, without compromising computational integrity.

  • StarkEx’s architecture generates 2 main benefits:

    1. Faster speeds. Because each transaction isn’t individually verified, but rather batches of transactions are verified together, StarkEx can process many more transactions in a shorter amount of time. Testing demonstrated that it could handle over 9,000 self-custodial trades per second, which is orders of magnitude better than native Ethereum. Moreover, with StarkEx, 9,000 is not the upper limit: in fact, blockchain resources are no longer the bottleneck for StarkEx’s capacity - rather, it is the magnitude of the prover service in the cloud, which determines its throughput.

    2. Self-custody. Most exchanges hold custody of user assets to ensure that they have liquidity and trades can be executed despite the slow blockchain speeds. StarkEx’s scalability solution enables users to hold custody of their assets at all times, which provides better security guarantees on the assets. Users can walk away with their funds at any time, even if the exchange operator and StarkWare go down..

  • Last week, a first StarkEx system was deployed to the Ethereum mainnet to power the decentralized exchange DeversiFi. DeversiFi can handle over 9,000 transactions per second and is fully non-custodial, which distinguishes it from custodial exchanges that have been responsible for the loss of over $1.4 billion in crypto assets since 2014.

  • StarkEx demonstrates a powerful use case for STARKs in greatly improving transaction speeds and custody guarantees for decentralized exchanges. The enhanced scalability and security are important steps forward in providing the same capabilities of traditional financial exchanges in the decentralized sphere while maintaining complete user ownership of assets.

Speeding Up DeFi Transactions

Visa, one of the most popular electronic platforms powering payments, can enable up to 24,000 transactions per second. In contrast, Bitcoin can do around 7 transactions per second and Ethereum can support 15 transactions per second. For decentralized finance (DeFi) and decentralized apps (Dapps) to reach the same widespread use and versatility as conventional online payment platforms, it’s important that they are capable of scaling in the same way and aren’t hindered by speed and efficiency concerns. Particularly for exchanges that support transactions from thousands of users daily, it’s important to find secure, efficient ways to record data and broadcast it across the network of nodes. Additionally, exchanges need liquidity in order to support the scale of its operations; slow transaction speeds compromise liquidity, so it’s necessary to find a faster alternative.

The core underlying reason that slows down networks like Bitcoin and Ethereum is Inclusive Accountability - the principle that says each and every individual connected to the internet must be allowed to verify the integrity of the whole blockchain, using a laptop. This puts a severe limitation on scaling the system (say, 100x), as Visa would easily do (by purchasing larger computers). The problem of blockchain scalability is not novel –– people have been trying to tackle it for a while. Some popular approaches use modified consensus algorithms, but often run into the issue of trading too much security for efficiency. Another popular solution is the Lightning Network, often dubbed a “second-layer” solution, which speeds up transactions with off-chain payment channels and broadcasting a final history of transactions to the entire network after some period of time. Still, the underlying proof and verification protocols for Lightning and other consensus algorithms are computationally expensive, creating delays.

What can we do better?

One of the most popular technical developments in cryptography in recent years is ZKP - Zero-Knowledge Proofs, including ZK-SNARKs and ZK-STARKs. Zero-knowledge indicates that the proof proves nothing other than the computational statement itself. To give an example: a zero-knowledge proof for the statement “I own more than $100”, will allow others to verify the correctness of this statement, but they will not have learned whether I have $101 or $1,000,001. ZKP systems have evolved rapidly in recent years, and their evolution and categorization is discussed in detail in The Cambrian Explosion of Crypto Proofs, by Eli Ben-Sasson (co-founder & President at StarkWare, founding scientist of Zcash).

How can ZKP be used to scale the blockchain?

StarkEx is a platform that uses STARKs to power better-scaling, non-custodial trades on cryptocurrency exchange. STARKs, or scalable transparent arguments of knowledge, are a variant of SNARKs that don’t require a trusted setup and are also faster and more lightweight that conventional SNARKs; they fulfill the same function of proving knowledge of something without exposing any other information, but just do it more efficiently.

StarkEx contains an on-chain and an off-chain component. When a user makes a trade, it gets sent to the StarkEx cloud (off-chain) to be executed. When enough trades come through, the cloud service groups the recent trades into a batch, checks that all transactions have the appropriate cryptographic signatures, that the balances are sufficient, etc, and creates a proof of validity (STARK) attesting to the integrity of this batch of trades.

Then, the service sends the proof and a commitment to the new state of the system’s data to the StarkEx Verifier smart-contract on the blockchain. Here, a verifier checks the proof and if it is verified, the commitment accompanying the proof is stored on-chain. StarkEx supports both a ZK-Rollup mode (where transaction history is stored on-chain), or Validium (where transaction history and balances are stored off-chain by the StarkEx operators and a Data Availability Committee.

StarkEx Infrastructure (Source: StarkEx Blog)

Essentially, StarkEx offers a variant of the Layer-2 solution, by handling batches of transactions off-chain, proving their validity efficiently, and then verifying proofs of entire batches of transactions simultaneously and efficiently, which allows for higher throughput of transactions. This leads to two key benefits:

  1. Faster transaction speeds on balance. Because not every transaction needs to be individually validated across the entire network, and validation is done efficiently with STARKs in batches, systems with StarkEx can handle much more transactions per unit time.

  2. Exchanges can be non-custodial. Without proper scalability infrastructure, to ensure they have sufficient liquidity, exchanges have to maintain custody of user assets, which makes them prone to financial attacks and catastrophes. STARKs can efficiently prove ownership and speed up transactions overall, so they can also enable traders to be self-custodial, meaning traders maintain custody of all their assets at all times. Exchanges don’t need custody of traders’ assets because there is no problem of low liquidity due to poor scalability.

How does it work in action?

Last Wednesday, StarkEx launched their platform on the Ethereum mainnet to power the exchange DeversiFi. DeversiFi uses StarkEx’s scalable platform to enable users to trade at lightning-fast speeds and deep levels of liquidity.

Because of StarkEx’s speed, DeversiFi can power over 9,000 transactions per second, a huge step up from vanilla Ethereum’s 15 transactions per second. Because of StarkEx’s non-custodial nature, DeversiFi can also maintain stronger security guarantees on user assets. Since 2014, nearly $1.4 billion has been compromised in crypto assets from centralized exchanges that maintain custody of user assets. DeversiFi, via StarkEx, can guarantee that user assets are always available because they don’t have to take custody of user assets; instead, to guarantee sufficient liquidity, they aggregate liquidity from centralized and self-custodial services. Additionally, DeversiFi requires no KYC and exposes no information about transactions to the public, because of the security and anonymity guarantees of STARKs.

Simply by leveraging StarkEx as the underlying platform powering trades, DeversiFi can offer lightning-fast trades, self-custodial trades and high levels of user liquidity, and enhanced security, privacy, and simplicity.

The Road Ahead

StarkEx will evolve to support a wider range of assets and functionality. 

A StarkEx system will power Immutable’s (Gods Unchained) NFT exchange that will launch this fall: as painful as Ethereum’s throughput is for fungible tokens, it is much more limiting for Non-Fungible Tokens, and StarkEx alleviates that problem not only for the trading of such assets, but also for their minting. Last week, the StarkWare team demonstrated on Ethereum mainnet the ease with which they could onboard the user base of huge reddit communities (referred to as subreddits) .

StarkEx will also support functionality beyond spot trading. A natural evolution would be to support DeFi in its ever-expanding scope: perpetual contracts, synthetic assets, etc.

Final Thoughts

The blockchain scalability problem is one of the most significant challenges in getting the DeFi ecosystem up to par with traditional electronic financial services. As DeFi grows in popularity and diversity of use cases, more users are demanding faster transaction speeds for higher liquidity, better arbitrage, and high-frequency trading opportunities. It’s important that blockchain developers come up with scalable workarounds to generic settlement on Ethereum, which can handle at most 15 transactions per second. STARKs are a powerful cryptographic tool for verifying transactions faster with high security guarantees, making the entire payment process more scalable. StarkEx’s use of STARKs enables exchanges to process higher volumes of transactions, over 9000 per second, and also to allow users to maintain complete custody of their assets, without compromising the liquidity and speed of the exchange. Their launch on the Ethereum mainnet with DeversiFi demonstrates a new kind of exchange that is more scalable, private, and secure than ever before. It’s a huge step towards getting the same security, and speed guarantees as we see in traditional financial systems, and fundamentally better ownership guarantees.  



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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-auction ICOs, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.

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