The blockchain and smart contracts you interact with may be decentralized, but the cloud services often used to access them aren’t. Dfinity’s Internet Computer is stepping up to set that straight.
Proponents of blockchain technology herald decentralization as a key facet of its revolutionary nature.
But the majority of users are still accessing decentralized exchanges, or DEXs, decentralized finance, or DeFi, and decentralized applications, or DApps, through web browsers served by centralized cloud services.
Cointelegraph spoke to Dfinity founder and Chief Scientist, Dominic Williams, about its Internet Computer platform, which allows direct interaction with code held on the blockchain, and completely eliminates third party intermediaries from the equation.
One (decentralized, autonomous) computer to rule them all
Williams got involved in blockchain full-time in 2013. He hooked into the buzz around Ethereum and interacted with its early developers.
“I saw the potential for an Internet Computer which could eventually host everything, from search engines to email and everything in between.”
After all, if all of the world’s internet services were on one single blockchain computer, the networking benefits alone would be enormous. The idea went through several scaled-down iterations, before an oversubscribed fundraiser in 2016 convinced Williams to revert to his original vision.
No easy task ahead
Such an undertaking would not be easy. The science is several giant leaps ahead of that required for a standard blockchain. The first stage was to build the necessary structure for the organisation, which was helped by substantial backing from Andreessen Horowitz.
“Hands down we have the strongest blockchain team in the world, bar none. We have a huge capacity for research and development. You won’t get the top cryptographers for free on GitHub.”
The next issue was scalability. The complexity of standard software is immense, and a large proportion of the $3.9 trillion spent globally on IT annually goes on securing systems. The Internet Computer needed a secure protocol which was tamper-proof and unstoppable.
“Bitcoin rewards electricity burning, and proof of stake blockchains reward staking on a server, but this doesn’t work for scaling on the Internet Computer.”
Instead, the Internet Computer rewards data centres based on the number of computer nodes they run, providing a platform on which to scale. The result is a giant blockchain computer running on the public internet, which provides performance and capacity, but also enhanced security.
Hey, you, get off of my cloud
Code on the Internet Computer is held in canisters which essentially run forever, and can be served directly from the blockchain into a browser as a user experience. This means that the users can be sure that they are interacting directly with the underlying blockchain.
In contrast, smart contracts and DApps which are accessed through websites hosted on proprietary closed cloud services provide no such guarantee. Use of cloud services creates an external point of failure, whether through hacking or other vectors.
There is also the risk that a cloud provider could block the service based on the whims of its management or the authorities. Furthermore, a web services account can only be held by a legal entity, so cannot be autonomous by definition.
“Some of the key requirements of blockchain are to be uncensorable, unstoppable and tamper proof. This is the basis of the Internet Computer.”
Dfinity recently opened up the Internet Computer to third party developers with its “Tungsten” release. The final public release is scheduled for later in the year.
Examining COMP’s ability to pass the Howey test for being qualified as investment contracts and to be considered a security.
Innovation springs eternal in the digital asset ecosystem, and with Compound’s launch of its governance token, COMP, last month, the burgeoning world of decentralized finance continues to pick up steam. The broader cryptocurrency community has embraced COMP, which now trades on OKEx, Binance and Coinbase Pro, among other digital asset exchanges, while other investors were dumping Compound tokens after listing on major exchanges, according to the report by Flipside Crypto. By democratizing access to liquidity and yield, DeFi is in many ways the next logical step in cryptocurrency’s seemingly unstoppable march toward disrupting the traditional financial services markets.
However, innovative blockchain and cryptocurrency applications do not occur in a regulatory vacuum. Issuances of digital tokens must always take into consideration United States federal securities laws, lest they fall victim to the cold, hard grip of the U.S. Securities and Exchange Commission, with Telegram as a case in point. Therefore, it is imperative to ask the question: “Is Compound’s token, COMP, a security?”
What is COMP?
Compound is a decentralized protocol that establishes money markets with algorithmically set interest rates based upon supply and demand, allowing users to lend and borrow various digital assets. COMP, on the other hand, is the native Compound ERC-20 token that allows for decentralized governance of the Compound protocol. Those who hold COMP may debate, propose and vote on all changes to the Compound protocol.
COMP is distributed on a daily basis to users of the Compound protocol. Each time a user interacts with the Compound protocol — e.g., by supplying, borrowing or repaying assets — COMP is automatically distributed to the user.
The Howey test
A “security” under U.S. federal securities laws includes the exceptionally broad concept of an “investment contract.” Whether any asset (including a digital asset) constitutes an investment contract and, thus a security, is determined by applying the Howey test.
An asset is deemed a security when all four criteria of the Howey test are met:
- An investment of money.
- In a common enterprise.
- With a reasonable expectation of profits.
- To be derived from the efforts of others.
Investment of money
While seemingly straightforward, the first prong of the Howey test does not specifically require a traditional investment of cash. As the SEC stated in the DAO Report, a digital asset can satisfy this prong if exchanged for cash or “other contributions of value.” Perhaps more importantly, as stated in the cease-and-desist proceedings of Tomahawk, the SEC has highlighted that “free” distributions of tokens or “airdrops” in exchange for economic gain can satisfy this prong of the Howey test.
While COMP is issued for “free” to users, it is offered in exchange for their participation in the Compound market. Once users hold COMP, they will be able to vote on updates to the Compound protocol, as well as the underlying lending and borrowing mechanics.
In one of the SEC’s rare pieces of public guidance on the topic of digital assets and the application of the U.S. securities laws, it explicitly stated that a common enterprise typically exists in the digital asset context. With respect to COMP, the token’s purpose is to actively promote the distributed governance of the Compound protocol — making it very likely to qualify.
Expectation of profits
The third element of the Howey test requires an expected return from profits. COMP is now available on multiple secondary trading markets. According to the SEC, the existence of a secondary trading market is typically an indication that people wishing to buy the digital asset may be expecting profits. It is worth noting that COMP has been trading at a 100% premium since its initial launch on June 16, 2020. Whether or not there is an “expectation of profits” typically depends on the intent of the purchasers of COMP.
Furthermore, the expectation of ancillary benefits does not diminish or serve to undermine this analysis. Therefore, if individuals purchase COMP to earn profits but also obtain some ancillary benefits, such as governance rights with respect to the Compound protocol, then the investment can nonetheless still be deemed to be made with an expectation of profits.
From the efforts of others
The fourth and final element of the Howey test requires that a return on an investment originate from the efforts of others. It would seem clear that the value of COMP is derived intrinsically from the value, operability and success of the underlying Compound protocol and its effective implementation of DeFi.
There is also no doubt that individual holders of COMP, by participating in the governance of Compound through their COMP ownership, may contribute to such returns. Unfortunately, it would appear that Compound, albeit indirectly, may likely continue to play a leading role in the development and success of its protocol. While the company will be distributing approximately 2,880 COMP to its users over the next four years, shareholders and founders of Compound will retain almost 50% of the total supply of COMP, and Compound will continue to create and focus on services that run on its protocol. While this state of affairs by no means indicates that the return on investment with respect to COMP will originate solely from Compound itself, in order to satisfy this prong of the Howey test, profits need not come exclusively from others, but rather “primarily” or “substantially.”
The final verdict
Where does this leave us? COMP’s recent listing on Coinbase is of particular significance, given that the market views the platform as an informal arbiter in these matters — only listing tokens that it believes are not securities. Unfortunately, the SEC has the final say, and the Howey test is as expansive as it is nebulous.
Despite COMP’s utility and decentralized governance mechanics, if history is any indication, there is a strong likelihood that the SEC would view COMP as satisfying each of the Howey test prongs and, therefore, constitute it a security regardless of the fact that it has yet to make such a definitive statement concerning any of the most widely distributed tokens on major U.S. exchanges.
It is worth noting that this determination says nothing of the regulatory implications of the underlying DeFi mechanics. Participants in traditional retail lending can attest to the myriad state lending laws, licensing obligations and money transmission implications. As DeFi continues to challenge traditional lending mechanics, we cannot help but contemplate the challenges that such a structure may also pose to traditional lending regulation. However, we leave that discussion for another time.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article was co-authored by Ethan Silver and William Brannan.
Ethan Silver and William Brannan are attorneys with Lowenstein Sandler. They advise cryptocurrency, blockchain and digital asset businesses navigating federal and state regulatory frameworks. They also counsel cryptocurrency trading platforms, exchanges, custodians and related businesses with respect to federal securities laws and work with technology-focused broker-dealers and robo-advisors on formation, structuring and regulatory matters. Ethan is the chair of the firm’s fintech practice, in which Will is counsel.
Polkadot is now officially in mainnet mode as the last centralizing shackle has been thrown off by the network.
The Polkadot blockchain is now fully decentralized and permissionless after a decision passed by community governance removed the admin rights enjoyed by the Web3 Foundation.
Gavin Wood, the co-founder of Polkadot developer Parity Technologies, tweeted the unshackling as it happened. The governance proposal to remove special admin privileges was enacted around 8 AM UTC on July 21, which signaled the true launch of Polkadot.
Polkadot was live since late May, but it began its life as a permissioned “proof-of-authority” network. The Web3 Foundation both validated the network and had special access to intervene on the blockchain if a crisis were to occur.
These measures were enacted to lower the damage from potential catastrophic security breaches and bugs in the newly-launched network. Over time, validation was decentralized to the community via a proof-of-stake system, which currently employs over half of the DOT tokens in circulation through 197 validators.
A key component of Polkadot consensus is the community governance system, which allows token holders to express their view on key ecosystem parameters. One of these parameters is the denomination of DOT tokens, as Cointelegraph previously reported.
The governance system was used to remove admin access as well, in what Wood called a “nicely poetic” ending. However, the procedure was also required from a practical perspective to test the governance system one last time.
With the vote, Polkadot struck off the “CC1” tag for its mainnet network, standing for “Chain Candidate 1.” This signaled the beginning of the true mainnet for the smart contract platform.
Gearing up for launch
In anticipation of the final launch, Polkadot was busy onboarding companies and developers to its community.
As Cointelegraph previously reported, the modularity of Polkadot allows it to attract both developers from other smart contract platforms like Ethereum and those from more traditional backgrounds. It uses WebAssembly for its virtual machine, which accepts “Web2” programming languages like Rust and C++ to code DApps. Frameworks to deploy decentralized apps in Solidity, Ethereum’s programming language, are also being developed.
Previously, Parity began integrating Chainlink oracles onto Kusama, Polkadot’s “canary network” used for experimenting with technology in a slightly lower stakes environment.
Cointelegraph also reported that Celer Network was working to bring layer-two scalability over to Polkadot.
Foreword: This essay represents my thinking at the end of college about the potential for p2p and blockchain technology in society. I have…
When Thibault Schrepel and Vitalik Buterin released their co-authored article, “Blockchain Code as Antitrust,” during the height of the first COVID-19 wave in May, they couldn’t present it at conferences.
So, to broaden the reach of their paper, the associate at Harvard’s Berkman Klein Center for Internet & Society and the co-founder of Ethereum instead presented their paper to the public on YouTube today.
The paper lays out something of a unified theory of decentralization as it relates to untangling real-world monopolies and coding smart contracts. The authors contend that states should use public, permissionless blockchains to complement antitrust law.
“Both antitrust and blockchain seek decentralization,” said Schrepel in the video. They’re both about making it possible for everyone in a market to gain economic power. Antitrust law does this by preventing companies from holding too much economic power. Blockchains do it by reducing intermediaries and enabling peer-to-peer transactions.
Schrepel, who in addition to his position at Berkman Klein is also an assistant professor at Utrecht University School of Law, explains in the paper that legal systems try to keep markets functioning properly, but that there are “situations where the rule of law does not apply.”
Sometimes that’s because two states can’t cooperate and sometimes that’s because a state itself lacks the strength to enforce its rules.
Buterin used his screen time to swat away what he sees as misconceptions about blockchain, the primary one being that every aspect of the technology must be decentralized. According to Buterin, centralization can occur when it’s valuable to have centralized actors, from wallet providers to layer-2 infrastructure companies.
“At the same time, there is this pressure to really try hard to reduce the extent to which this happens…at the protocol layer, we really try hard to push for more decentralization at the application layer and so forth.”
Screpel agreed that the goal in both blockchain and antitrust was to create pragmatic rather than dogmatic decentralization: “It’s about decentralization that creates efficiency.”
In their paper, Schrepel and Buterin encourage governments to establish sandboxes and legal safe harbors for technology so that blockchain can become more decentralized and assist in reaching the objectives of antitrust laws.