Full Text of Avalanche Founder’s Testimony: Blockchain Technology Flourishes, US Needs Legislation to Protect Innovation

Avalanche founder testifies blockchain is flourishing and calls for US legislation to protect innovation.

Dr. Emin Gun Sirer, Founder and CEO of Ava Labs, attended the Digital Assets Hearing of the US House Financial Services Committee early on June 14th Beijing time.

The committee released his written testimony before the meeting. The full text is as follows:

Promoting Responsible Growth of Blockchain Technology

Chairman McHenry, Ranking Member Waters, and distinguished members of the Committee,

It is an honor to be here with you today. I thank you for allowing me, as a computer scientist, to discuss blockchain technology, its innovative applications, its impact on the economy, and how to understand the use cases supported by blockchain. Understanding these key concepts can help craft wise regulatory frameworks to ensure that this technology thrives within the United States. The Committee has already heard several testimonies on blockchain, but they have mainly been provided by lawyers and business people. Therefore, I hope to provide you with a beneficial overview of blockchain and tokenization from a technical and computer science perspective. I will focus on how blockchain has the ability to change society by making digital services more efficient, reliable, and accessible.

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Our shared goal is that the United States should be committed to promoting the free, secure, and responsible growth of blockchain technology and its many applications, so that as a nation, the United States and its citizens can benefit greatly from the economic growth that blockchain technology can bring.

My Background

I am the Founder and CEO of Ava Labs, a software company founded in 2018 and based in Brooklyn, New York, dedicated to digitizing the world’s assets.

Ava Labs is a software company building and helping to implement technology on the Avalanche public blockchain and other blockchain ecosystems. We have developed some of the most important recent technological innovations in blockchain, including the most significant breakthrough in consensus protocols since Bitcoin.

Before founding Ava Labs, I was a computer science professor at Cornell University for nearly 20 years, focusing on improving the scalability, performance, and security of blockchain. During this time, I consulted with various agencies and departments of the U.S. government on multiple issues. I have made important contributions to several areas of computer science, including distributed systems, operating systems, and networks, with dozens of peer-reviewed articles published (in addition, I am one of the most cited authors in the blockchain field after Satoshi Nakamoto). I received the CAREER award from the National Science Foundation and served on the DARBlocking ISAT Committee. I am also a member of the Commodity Futures Trading Commission’s Technology Advisory Committee. But perhaps what I am most proud of is co-writing a satirical piece about the blockchain space with John Oliver.

Big Picture

We are living through an unprecedented period of technological progress and transformation.

The computer revolution drove this trend, initially with mainframe computers, then with personal computers. However, these early systems were limited by their “standalone architecture” and could only process local data and execute local computations. While they improved the efficiency of existing tasks, they were unable to generate multiplier effects due to a lack of network connectivity.

The advent of the internet and subsequently the World Wide Web marked a critical shift from isolated local computing to global scale computing. Architecturally, we transitioned from standalone computers to a “client-server architecture” that allowed us to connect to remote services operated by others to take advantage of their programs and functionality. This new paradigm gave rise to digital services that catered to the entire world, created millions of jobs, and solidified the United States’ position as a global economic leader. Blockchain represents the next stage in the evolution of networked computer systems.

Today, the client-server systems that power the web rely on peer-to-peer technology to connect clients to servers, while blockchain facilitates many-to-many communications through a shared ledger. This allows multiple computers to collaborate, come to consensus, and act in unison. Blockchain technology enables us to build shared services on the web. In turn, this makes it possible to develop unique, secure digital assets, more efficient financial services systems, tamper-proof supply chain tracking, digital identity solutions, transparent voting systems, and many other innovative applications. By leveraging the unique digital properties created by blockchain technology, we can redefine trust, ownership, commerce, entertainment, and communication, ultimately changing the way we interact with digital systems and with each other.

The impact of this breakthrough is profound. Blockchain technology enables us to create systems that lower costs, increase efficiency, and better control our digital lives and virtual worlds. Moreover, we can establish new types of markets, entirely new digital goods and services, empowering individuals and communities to drive economic growth and social impact. Advances in blockchain technology will lead to leaps forward, just as the internet itself did, as it improves the internet itself. This technology creates a new public good, a shared ledger that can be used for a wide variety of applications. As we enter the era of customizable blockchains and smart contracts, the optimization of this software will further enhance and improve the existing functionality of the technology while ensuring compliance with relevant regulations.

Blockchain and Smart Contracts: Cross-Application Impacts

Blockchain solves a long-standing problem in computer science: how to get multiple computers around the globe to agree (reach consensus) on a piece of data and its larger dataset. Although this may seem somewhat obscure, it is a critical cornerstone for solving complex problems that traditional internet systems struggle with, such as creating assets with digital uniqueness, tracking their ownership, and securely executing business and other processes. In this way, the technology doesn’t rely on humans or intermediaries to achieve its security properties; in fact, it often provides robust integrity guarantees even in the case of (partial) system failures.

Let me be clear that the appeal of leveraging the ability of distributed or decentralized networks is for many reasons unrelated to securities laws, financial services regulations, or other business, entertainment, and communication sector laws and rules. Distributed networks are more resilient, secure, auditable, and available for builders.

Blockchain builders are not out to develop this technology to circumvent laws and rules, but to solve computer science problems. Compared to the client-server model, the potential applications of blockchain technology are broad and diverse, with many functions that were previously expensive or impossible. Below, I’ll discuss some of the key applications and innovations that have been implemented using blockchain.

Blockchain is Rapidly Evolving

Blockchain technology has evolved rapidly since Satoshi Nakamoto introduced Bitcoin to the world 14 years ago. The Bitcoin blockchain introduced a consensus mechanism — the way computers agree on data — that is commonly and imprecisely referred to as “Proof of Work.”

Bitcoin has demonstrated to the world that a public, permissionless blockchain is possible. The theme of consensus is called “Byzantine Fault Tolerance” in computer science literature and has been the subject of research involving hundreds of scholars, including myself, funded by the National Science Foundation and DARBlocking for decades. Bitcoin solved this problem and proved that this technology can create and maintain digital assets and establish and transfer their ownership.

Bitcoin has withstood countless attacks in its 14-year journey and remains stable and accessible without a central authority or controlling entity maintaining its operation. In contrast, even the best client-server services built by Microsoft, Google, Amazon, and Facebook have experienced many outages over the same period. Computer scientists have not stopped there. Subsequent blockchain technologies have extended this core functionality. The most notable of these is Ethereum’s introduction of the concept of smart contracts, which are self-executing programs coded on the blockchain. Smart contracts can facilitate a variety of applications, including popular peer-to-peer lending, social networks, digital collectibles (such as NFTs) and game props, and the digitization of traditional physical assets on a single chain governed by a unified set of rules.

The latest breakthrough in blockchain architecture is known as multi-chain blockchains. In these systems, developers can create chains with custom rule sets, execution environments, and governance mechanisms.

This customization not only unlocks use cases previously impossible on a single rule set blockchain, but also isolates traffic and data into environments built specifically for particular tasks or applications. Examples of these systems include Avalanche and Cosmos, which can create dedicated blockchains, sometimes referred to as subnets or app chains, designed to meet compliance requirements. For example, SK Planet, a South Korean company, recently created a private blockchain on Avalanche that attracted over 58,000 fully verified customers in a matter of days. Additionally, Ava Labs is working with Wall Street firms to create a dedicated institutional blockchain. With multi-chain architecture, operators have complete control over who can access the chain, who secures the chain, what tokens (if any) are used as transaction fees, and more.

There is a common trend here. Blockchain technology is rapidly advancing, naturally moving toward more flexible and secure directions. In other words, many complex problems are being solved through code.

From these developments, we can draw a clear lesson: policymakers should define objectives based on the specific implementation of the technology (i.e. the activities it is used for) and leave it to experts to determine the mechanisms for achieving those objectives. Because we can customize the implementation of blockchains, it is now easier than ever to regulate the implementation rather than the technology itself, and achieve neutrality in regulation.

Regulating the Token World

Blockchain is a technology that can build resilient and fault-tolerant applications. In fact, they are open programmable platforms, and users can interact with them like they would with public resources. This powerful construct naturally gave rise to many different types of applications, which in turn led to tokenization, or the creation of representations of digital rights, assets, and other things.

Not all tokens are created equal in terms of implementation and functionality, and they must be treated differently based on their inherent differences. Tokens cannot simply be classified under one set of rules, as they differ greatly in functionality and characteristics. A good analogy is paper; we create rights, assets, or things based on the text, numbers, and images on the page.

Token types include, but are not limited to:

• Real world assets: Tokens can directly or indirectly represent traditional assets. For example, land ownership can be tokenized, making each token correspond to a uniquely identifiable plot of land. In many cases, real-world assets are already subject to regulation, and digitizing them into blockchain format should not result in comprehensive new regulation.

• Virtual items: Tokens can represent digital art, collectibles, game skins, etc. These items have various functions and forms. They can range from simple non-programmable pictures (a common use of NFTs) to complex assets (used for some assets in games) and can encode various functions and features directly within the asset.

• Pay-as-You-Go: Public blockchains constitute shared computing resources that must be allocated efficiently. Tokens are the perfect mechanism for measuring resource consumption and prioritizing the processing of important activities. These tokens are sometimes referred to as “fuel tokens”. For example, BTC is the fuel token for the Bitcoin blockchain, ETH is the fuel token for Ethereum, AVAX is the fuel token for Avalanche, and so on. Without fuel or transaction fees, a single user or small group of users could completely occupy the blockchain, similar to a denial-of-service attack, rendering the blockchain unusable.

The above list covers broad categories…

However, this is just a snapshot of what is currently happening and what could happen. I encourage you to check out our “Owl Explains” educational program for more information.

As a primary principle, determining a regulatory framework must begin with and be based on the functionality and characteristics of the token, not the technology used to create the token. At Ava Labs, we call this reasonable token classification. Let me reiterate: tokenization is not created for the purpose of evading the law. It is a natural product of blockchain technology and an improvement over traditional systems, just as computer databases are an improvement over paper file cabinets.

In addition to reasonable token classification, regulations involving tokens must be formulated in a way that can be enforced at a level where necessary information is present. Just as we do not expect internet routers to check the veracity of content sent on social media applications, we cannot burden regulation on a technical level that has no understanding of on-chain content or operations. These platforms already provide features such as locking and transfer restrictions that can help write these restrictions.

Improve Market Efficiency, Transparency, and Oversight

Blockchain and smart contracts can form the foundation of a more transparent and efficient financial system, enabling all participants to enjoy a level playing field, including regulatory agencies, who can gain clearer insight into the behavior and activities of all market participants. Privacy remains an important component of any system. Developing these new ways of providing and regulating financial services should incorporate individual privacy protections. These improvements can only be fostered through the support and cooperation of regulatory agencies and decision-makers, providing reasonable legal frameworks to promote the responsible growth of these technologies.

How is this achieved in practice? A perfect example is the trustworthiness of exchanges.

Last year saw several cryptocurrency exchanges fail, notably FTX. Make no mistake: these failures were not failures of blockchain technology but rather failures of traditional custodians in safeguarding user deposits. No major decentralized exchange suffered similar failures. Blockchain technology aims to eliminate reliance on centralized intermediaries, which can endanger user funds, market integrity, and other qualities necessary for a well-functioning system.

In addition to on-chain custody and trading, a recent breakthrough innovation known as enclaves enables new markets to strictly limit the behavior of even market owners and operators. This innovation can exclude undesirable behavior, such as front-running, stop-loss hunting, and privacy invasion, which can threaten market integrity. Ava Labs’ own Enclave Markets is at the forefront of this innovation, which we call a fully encrypted exchange.

Another example is the lending space, which demonstrates the benefits of operating on-chain versus with centralized counterparts. Last year, some off-chain lending institutions and borrowers suffered major failures, while major on-chain lending platforms were largely unaffected by market turbulence. Due to their reliance on overcollateralization and automated systems, these protocols were able to flexibly respond to liquidation and collateralization demands during sharp market downturns. While there is no panacea, evidence so far suggests that decentralized networks perform better under stress than centralized trading counterparts, consistent with the expectations of blockchain design.

Stablecoins as a Digital Gateway to the US Dollar

Stablecoins are primarily denominated in USD and have gained widespread adoption globally as a better way to hold dollars. Stablecoins not only improve user experience (by increasing the speed of funds transfer and reducing transaction costs), but also meet the growing demand for stablecoin USD in regions facing economic uncertainty and local currency over-issuance problems.

By translating the store of value ability of the USD into an accessible product outside of the US, stablecoins help individuals protect their savings from fluctuations in local currency values and theft by criminals and other bad actors.

The potential of stablecoins can be realized through proper regulation, which will enable responsible growth of stablecoins through new technology and configuration.

Blockchain Can Speed Up Recovery from Climate Disasters through Insurance

Considering the emerging property insurance crisis being caused by increasingly frequent and extreme climate events. State Farm, California’s largest property insurer, has announced that it will no longer offer coverage due to the high risk of wildfires. Insurance companies in Texas, Florida, Colorado, and Louisiana are also facing the same pressures – either ceasing coverage, raising rates, or seeking backup measures to address bankruptcy.

In this situation, who is going to protect the housing and economic future of American communities? How do we manage this risk if the insurance industry consolidates, leading to the bankruptcy of small regional insurance companies?

Using smart contracts and the Avalanche network, the Lemonade Foundation currently provides insurance to over 7,000 farmers, who previously could only access unaffordable high premiums or delayed payout products with long-term, cross-seasonal impacts. These premiums were economically unfeasible for the organization, as these processes are now compressed into manual work within a smart contract. Another example is in 2019, when the US government completed calculations for Hurricane Katrina payouts, a process that took a full 14 years after the disaster’s catastrophic impact in 2005. The delay was partly due to difficulties in reaching consensus among the many stakeholders involved in the process.

In 2012, Superstorm Sandy damaged nearly half a million homes, resulting in approximately $50 billion in losses. The same gaps in insurance payouts that hindered emergency recovery efforts up and down the East Coast also limited the ability of families who had been paying premiums for years to receive the payouts they needed to rebuild their lives. By the time their lawsuits resulted in action and greater payouts, the damage had been done and the communities were left with scars. A blockchain-enabled distributed ledger could greatly streamline such processes, and our company is working with Deloitte to develop and implement this technology under a contract with FEMA.

Supply Chain and Anti-Counterfeiting

Global supply chains face challenges such as rapidly growing demand for goods and pressures from the pandemic, including our most critical safety infrastructure. When problems arise in the supply chain, they can become particularly thorny, and if fraud is involved, the problem will only worsen. Blockchain and smart contracts can help ensure and verify the safety of supply chains across various global industries.

Blockchain can be used for supply chain management, providing a reliable and transparent record of product origins and authenticity. De Beers’ Tracr platform demonstrates how to manage the diamond supply chain, and other deployments cover areas from luxury goods to concert tickets. Blockchain can be a key tool in combating counterfeiting of medical supplies, pharmaceuticals, food products, and consumer tech, which directly impact our communities and your constituents.

Upcoming Technological Improvements

Although there have been some publicly reported incidents of exploits of smart contracts, this field has matured significantly since its early days, and new technologies are ready to improve the security of on-chain assets and applications.

Unlike fundamental issues inherent to smart contracts and blockchain technology, the potential risks associated with smart contract-based systems are primarily focused on implementation defects, such as poor coding and neglect of best practices, rather than inherent problems. Just as the Internet software stack was weak in the 1990s, smart contract programming tools are currently in their infancy.

This field has rapidly developed, forming a thriving software threat analysis, authentication, and verification services industry through code audits and other technical means to verify that smart contracts meet security standards. Additionally, we have seen automated tools for program verification and model checking to help identify vulnerabilities that are difficult for the human eye to detect. These technologies even run before program deployment to identify vulnerabilities before they impact anyone.

Finally, there have been some new mechanisms such as runtime integrity checks, smart contract security switches, and automatic restrictions on fund flows to help control the impact of any unexpected errors in real-time operations. Systems that follow best practices, such as lending platforms and well-designed bridges (such as those built by Ava Labs), have circulated billions of dollars in their smart contracts without incident.

Given my academic and research background, I am confident that this field can develop even stronger techniques to ensure the correctness of smart contract software. One of the spillover effects of this activity will be to enhance the integrity and security of all software, including non-blockchain software.

Technical Competitiveness and the Risk of Inaction

We are standing on the brink of this new era, and nurturing and supporting the development of this revolutionary technology is critical. By doing so, we can unleash its full potential, ensure that the United States remains at the forefront of innovation, drive the development of the next generation of Internet technologies, and achieve enormous economic growth.

Responsible participants in the blockchain space are eager to develop wise laws and regulations that incentivize growth and good conduct, punish bad actors, and improve the user experience of blockchain networks. The community is ready to provide guidance to decision-makers in achieving these goals. However, the path to losing technological leadership is clear if there is a lack of wise frameworks and collaboration.

The United States won in the first wave of the Internet revolution precisely because it was able to foster responsible innovation freedom. The United States must carefully and wisely classify and regulate blockchain applications and tokens while ensuring the freedom of responsible growth of blockchain technology. Otherwise, any regulatory framework will face two major paths of failure.

First, the blockchain platform itself will be subject to regulation at the protocol level. This is equivalent to regulating the Internet protocol, which would doom information technology and the vibrant Internet we have today. Second, tokens and smart contracts created using blockchain are categorized as homogeneous and incompatible. This is equivalent to regulating social media applications the same way we regulate consumer medical applications. Instead, tokens and smart contracts must be analyzed on a case-by-case basis and regulated with caution based on their functionality and features.

As we move towards an increasingly digital world, benefiting from the social trends of artificial intelligence, virtual reality, and home office, we will increasingly rely on digital value transmission and programmability. Blockchain is a clear technical answer to these needs and has a clear synergistic effect with the global economy. The addressable market for digitally global assets and the secure transmission of value on the Internet is greater than the sum of all existing asset values. Failure to see the power of blockchain technology – whether due to a lack of understanding or misunderstanding of the technology – will have catastrophic consequences. The inability to quickly provide a wise regulatory framework will not only disrupt economic growth, but also make it easier for bad actors to engage in illegal activities.

Finally, we must remember that just as there are good people committed to public service, there are also good people committed to building life-improving technologies. Through joint efforts, we can lay the foundation for trustworthy, efficient, and self-executing systems that will become the cornerstone of our modern economy.

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