Full testimony of Avalanche founder: We are standing at the edge of a new era

Avalanche founder's testimony: New era ahead.

“The United States and its citizens can benefit greatly from the economic growth brought about by blockchain technology.”

Speech: Emin Gun Sirer, Founder and CEO of Ava Labs

Translation: 0xAyA

Dr. Emin Gun Sirer, founder and CEO of Ava Labs, attended the digital asset hearing of the US House Financial Services Committee held in the early hours of June 14th Beijing time.

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Before the meeting began, the committee released his written testimony, the English original of which can be found here. The full text is compiled and translated by Odaily Star Daily as follows:

Promoting responsible growth of blockchain technology

Chairman McHenry, Senior Waters, and members of the committee of the US House Financial Services Committee.

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

Our common goal is for the United States to be committed to promoting the freedom, security, and responsible promotion of blockchain technology and its many applications, so that as a country, the United States and its citizens can benefit greatly from the economic growth brought about by blockchain technology.

My background

I am the founder and CEO of Ava Labs, a software company founded in 2018 headquartered in Brooklyn, New York, dedicated to digitizing global assets.

Ava Labs is a software company that builds and helps 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 breakthrough consensus protocol after Bitcoin.

Before founding Ava Labs, I was a computer science professor at Cornell University for nearly 20 years, working to improve the scalability, performance, and security of blockchains. During this time, I consulted with various agencies and departments of the US government on multiple issues. I have made significant contributions to several areas of computer science, including distributed systems, operating systems, and networks, with dozens of peer-reviewed articles published (in addition to being one of the most cited authors in the blockchain field after Satoshi Nakamoto). I received a CAREER award from the US National Science Foundation and served on the DARBlocking ISAT Committee. I am also a member of the Technical Advisory Committee of the Commodity Futures Trading Commission (CFTC). But perhaps my proudest achievement was co-writing a satirical piece about the blockchain space with John Oliver. (Odaily note: Professor Emin Gun Sirer once participated in the recording of John Oliver’s comedy show)

The Big Picture

We are in the midst of an unprecedented period of technological progress and transformation.

The computer revolution drove this trend, initially with mainframes and later with personal computers. However, these early systems were limited by their “stand-alone” architectures, able only to process local data and perform local computations. While they improved the efficiency of existing tasks, they were unable to generate multiplier effects due to the lack of network connectivity.

The emergence of the internet and subsequently the World Wide Web marked the crucial transition from isolated local computing to global-scale computing. Architecturally, we moved from stand-alone computers to a “client-server architecture,” which enabled us to connect to remote services operated by others to leverage their programs and functionalities. This new paradigm gave rise to digital services catering to the entire world, creating millions of job opportunities and solidifying the US’s position as a global economic leader. Blockchains represent the next stage in the development of networked computer systems.

Today, the client-server systems powering the internet rely on peer-to-peer technology to connect clients to servers, whereas blockchains facilitate many-to-many communication through shared ledgers. This enables multiple computers to collaborate, reach consensus, and act in unison. Blockchain technology allows us to build shared services on the network. In turn, this allows for the development of unique and 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 blockchain technology and the digital uniqueness it creates, 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. Additionally, we can establish new types of markets, entirely new digital goods and services, and allow individuals and communities to drive economic growth and social impact. The advancement of blockchain technology will lead to leaps forward, much like the internet itself did, as it improves upon the internet itself. This technology creates a new public good, a shared ledger that can be used for a wide range 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 capabilities 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 enable multiple computers worldwide to reach consensus on a piece of data and its belonging to a larger data set.

While this may seem somewhat esoteric at first glance, it is a critical cornerstone in solving complex problems that traditional internet systems have been unable to address, such as creating assets with digital uniqueness, tracking their ownership, and securely executing business and other processes. In this way, the technology does not rely on humans or intermediaries to achieve its security attributes; in fact, it often provides strong integrity guarantees even in the event of (partial) system failures.

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

Blockchain builders are not aiming to develop this technology to circumvent laws and regulations, but rather to solve computer science problems. Compared to the client-server model, the potential applications of blockchain technology are broad and varied, many of which were expensive or impractical in the past. Below, I will discuss some key applications and innovations that have been implemented on blockchain.

Blockchain is rapidly evolving

Since Satoshi Nakamoto introduced Bitcoin to the world 14 years ago, blockchain technology has developed rapidly. The Bitcoin blockchain pioneered a consensus mechanism – a way for participating computers to agree on data – commonly and inaccurately referred to as “Proof of Work”.

Bitcoin has proven to the world that public, permissionless blockchains are possible. The theme of consensus in computer science literature is known as “Byzantine Fault Tolerance,” and research into such systems has involved hundreds of scholars over several decades, funded by the US National Science Foundation and DARBlocking. Bitcoin solved this problem and proved to the world that this technology can create and maintain digital assets and establish and transfer their ownership.

Bitcoin has weathered countless attacks over its 14-year history and remains stable and accessible, without any central authority or controlling body to maintain its operation. In contrast, even the best client-server services built by Microsoft, Google, Amazon, and Facebook experienced many interruptions during the same period. Computer scientists did not stop there. Subsequent blockchain technologies expanded on this core functionality. The most notable of these is Ethereum, which introduced the concept of smart contracts, which are self-executing programs encoded 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 gaming props, as well as digitizing traditional physical assets on a single chain managed by a unified set of rules.

The latest breakthrough in blockchain architecture is called 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 that were previously impossible on a single-rule-set blockchain, but also isolates traffic and data to environments built specifically for a particular task or application. 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 dedicated blockchain on Avalanche that attracted over 58,000 fully verified customers in just a few days. Additionally, Ava Labs is working with Wall Street firms to create a dedicated institutional blockchain. Through multi-chain architecture, operators can have full 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 evolving, naturally moving towards greater flexibility and security. In other words, many complex problems are being solved through code.

From these developments, we can draw clear lessons: policymakers should define objectives based on the specific implementation of technology (i.e., the activities it is used for) and leave it to experts to determine the mechanisms to achieve these objectives. As we can customize the implementation of blockchain, it is now easier than ever to regulate the implementation rather than the technology itself, and achieve regulatory neutrality.

Regulation in the Token World

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

Not all tokens are equal in implementation and function, and they must be treated differently according to their inherent differences. Tokens cannot simply be classified under one set of rules, as they vary greatly in function and characteristics. A good analogy is paper; we standardize the rights, assets, or things we create 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, with each token corresponding 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 artwork, collectibles, game skins, etc. These items also vary in function and form. They can range from simple non-programmable images (a common use case for NFTs) to complex assets (used for some assets in games), and can encode various functions and characteristics directly within the asset.

On-demand payment: Public blockchains constitute shared computing resources that must be allocated efficiently. Tokens are the perfect mechanism for measuring resource consumption and prioritizing processing of important activities. These tokens are sometimes referred to as “fuel tokens.” For example, BTC is the fuel token of the Bitcoin blockchain, ETH is the fuel token of Ethereum, AVAX is the fuel token of 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 a broad range of categories…

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

As a first principle, determining regulatory frameworks must start with and be based on the functions and characteristics of tokens, not the technology used to create them. At Ava Labs, we call this reasonable token classification. Let me be clear again: tokenization is not created to circumvent the law. It is a natural product of blockchain technology, an improvement over traditional systems, just as computer databases are an improvement over paper filing cabinets.

In addition to reasonable token classification, regulations involving tokens must be developed in a manner that can be enforced at a level of necessary information. Just as we don’t expect internet routers to check the veracity of content sent on social media applications, we cannot burden regulation on the technical level of the chain without any knowledge of on-chain content or operations. These platforms already provide features such as locking and transfer restrictions that can help author these limitations.

Improving market efficiency, transparency, and oversight

Blockchain and smart contracts can form the basis of a more transparent and efficient financial system, allowing all participants to operate in a fair competition environment, including regulatory agencies, who can gain a clearer understanding of the behavior and activity of all market participants than ever before. Privacy remains an important part of any system. Developing these new ways of providing and regulating financial services should be integrated with personal privacy protection. These improvements can only be fostered by responsible growth of these technologies with the support and collaboration of regulatory agencies and decision-makers, providing reasonable legal frameworks.

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

Several cryptocurrency exchanges collapsed last year, notably FTX. Make no mistake: these failures were not a failure of blockchain technology, but of traditional custodians in protecting user deposits. No major decentralized exchange has been affected by similar failures. Blockchain technology is designed to eliminate the dependence on centralized intermediaries that may compromise user funds, market integrity, and other features required for good system operation.

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

Another example is in the lending space, which demonstrates the benefits of on-chain activity versus activities with centralized counterparts. Last year, some off-chain lending institutions and borrowers experienced significant failures, whereas major on-chain lending platforms were largely unaffected by market turmoil. Because they rely on over-collateralization and automated systems, these protocols were able to flexibly respond to liquidations and collateral top-up requests during sharp market downturns. While there is no panacea, the evidence so far suggests that decentralized networks perform better under stress than centralized counterparts. These results are consistent with the intended design of blockchain.

Stablecoins as a digital portal to the dollar

Stablecoins are primarily pegged to the dollar, and they have gained broad development globally because they are a better way to hold dollars. Stablecoins not only improve user experience (by increasing the speed of capital flow and reducing transfer costs), but also meet the growing demand for stablecoin dollars in regions facing economic uncertainty and local currency overprinting.

By converting the dollar’s value retention capability into a product available outside the United States, stablecoins help individuals protect their savings from local currency value fluctuations as well as theft by criminals and other bad actors.

With appropriate regulation, the potential of stablecoins can be realized, which will result in responsible growth of stablecoins through new technologies and configurations.

Blockchain can accelerate climate disaster recovery through insurance

Considering the emerging property insurance crisis caused by increasingly frequent and extreme weather events. State Farm, California’s largest property insurer, announced that it will no longer provide insurance because the risk of wildfires is too high. Insurance companies in Texas, Florida, Colorado, and Louisiana are also under the same pressure to either stop offering insurance, raise rates, or seek backup solutions to solve bankruptcy.

In this case, who will communities in the United States rely on to protect their housing and economic future? If the insurance industry consolidates, leading to the bankruptcy of small regional insurance companies, how can this risk be managed?

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 payment 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 accounting for Hurricane Katrina payouts, a process that took a full 14 years after the catastrophic impact in 2005. Delay was partly due to the difficulty of reaching consensus among the many stakeholders involved in the process.

In 2012, Superstorm Sandy damaged nearly 500,000 homes, causing about $50 billion in losses. The same gap in insurance payouts has hamstrung emergency recovery efforts along the entire East Coast. Families who have been paying premiums for years have received paltry payouts to rebuild their lives. When their litigation leads to action and more payouts, the loss has already occurred, leaving scars on communities. Blockchain-based distributed ledgers can greatly streamline such processes, and our company is working with Deloitte to develop and implement this technology under a FEMA contract.

Supply chain and counterfeiting

The global supply chain faces challenges such as rapidly growing demand for goods and pandemic-related pressure on critical safety infrastructure. When supply chains break down, the problem can become particularly thorny, and if fraud is involved, the problem will only worsen. Blockchain and smart contracts can help ensure and verify the security of supply chains across global industries.

Blockchain can manage the supply chain, providing a reliable and transparent record of product origin and authenticity. De Beers’ Tracr platform demonstrates how diamond supply chains can be managed, while other deployments cover areas ranging from luxury goods to concert tickets. Blockchain can be an important tool for combating counterfeiting of medical supplies, drugs, food products, and consumer technology, which directly affects our communities and your constituents.

Upcoming technology improvements

While smart contracts have some publicly reported instances of vulnerability exploitation, this field has significantly matured since early days, and new technologies are ready to enhance security of on-chain assets and applications.

Unlike the fundamental issues inherent in smart contracts and blockchain technology, the potential risks associated with smart-contract-based systems are primarily concentrated in implementation defects, such as poor coding and disregard for best practices, rather than inherent issues. Like the thinness of the Internet software stack in the 1990s, smart contract programming tools are still in their infancy.

This field has developed rapidly, forming a thriving software threat analysis, authentication, and verification service sector through code auditing and other technical means to verify that smart contracts meet security standards. In addition, we have seen the emergence of automation tools for program verification and model checking to help discover vulnerabilities that are difficult for the human eye to detect. These technologies even begin running before program deployment to identify vulnerabilities before they affect anyone.

Finally, there are emerging 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 harm.

Given my academic and research background, I am confident that this field can develop stronger technologies 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 software unrelated to blockchain.

Technical Competitiveness and Risks of Inaction

We are standing on the brink of this new era, and it is crucial to nurture and support the development of this revolutionary technology. In 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 want to develop wise laws and regulations to incentivize growth and good behavior, punish bad actors, and enhance the users of blockchain networks. The community is ready to guide decision-makers to achieve these goals. However, the road to losing technological leadership is clear if there is a lack of wise frameworks and collaboration.

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

First, the blockchain platform itself will be regulated at the protocol level. This is equivalent to regulating Internet protocols, which will inevitably determine the fate of information technology and the vibrant Internet we have today. Second, tokens and smart contracts created using blockchain are classified as homogeneous and incompatible categories. This is equivalent to regulating social media applications in the same way as consumer medical applications. On the contrary, tokens and smart contracts must be analyzed on a case-by-case basis and carefully regulated based on their functionality and features.

As we move towards a more digital world, thanks to artificial intelligence, virtual reality, and work-from-home society, we will increasingly rely on digital value transmission and programmability. Blockchain is a clear technological answer to these needs and has obvious synergies with the global economy. The addressable market for digitizing global assets and safely transmitting 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 ignorance or misunderstanding of the technology – will have catastrophic consequences. Failing to quickly provide a wise regulatory framework will not only undermine 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 dedicated to public service, there are also good people dedicated to building life-improving technology. Through collective efforts, we can establish a foundation for trustworthy, efficient, and self-executing systems that will become the cornerstone of our modern economy.

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