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Crypto 101: An Introduction to VeChain

Crypto 101: An Introduction to VeChain

Out of the 1,658 cryptocurrencies in existence, only 19 currently have a market capitalization above $500 million – VeChain is one of them.

Despite its impressive size, the China-based blockchain platform is still relatively unknown in the English speaking world. That will likely change in the near future, however, as VeChain provides excellent documentation (the English whitepaper is 114 pages long) and has the resources to make a splash outside of the world’s largest economy. Indeed, how many cryptocurrencies can boast to have had a King and Queen endorse the signing of a partnership agreement?

Only one: VeChain.

So, what is VeChain? What problem is it trying to solve, and how far along is it’s technology stack?

What is VeChain?

Like most large altcoins, VeChain has great plans and its mission is a mouthful, namely:

“Building a trust-free and distributed business ecosystem platform to enable transparent information flow, efficient collaboration, and high-speed value transfers.”

There is a ton to unpack here, but in a nutshell, VeChain is a blockchain-powered supply chain management solution. Just like Qtum, VeChain has identified the Chinese business world as in need of disruption and specifically targets the need for trust in traditional supply chains as a key weakness in the current system. In fact, the VeChain whitepaper suggests that:

“In the world of traditional business, all kinds of collaborative and business operations, as well as the financial industry, agree that TRUST is the biggest cost of doing business.”

Whether you fully agree with this statement or not, it’s clear that cryptocurrency can help solve this problem. By using blockchain technology, VeChain can eliminate the need for trust, replacing it with a technology stack that draws from the innovations of Bitcoin and Ethereum.

More specifically, VeChain’s blockchain (called VeChainThor blockchain) allows manufacturers to track the location and status of their products through compatible RFID chips. Not only does this provide transparency for the business – which wants to track products in order to minimize loss or damage – but also for the end consumer.

We can imagine a situation in which the authenticity of a certain type of drug needs to be verified. In the current system, hospitals and patients simply have to trust that the drugs are what they seem to be. Using VeChain’s solution, however, it would be easy to track the product and journey of the drug from the laboratory to the hands of the patient. There are millions of other use cases for a transparent, incorruptible ledger like this, making it easy to understand why VeChain’s valuation is so high.

Before we wrap the introductory part of the article and move on to the technology stack, it’s worth mentioning that VeChain aims to be far more than a supply chain solution. Instead, the ambitious cryptocurrency hopes to revolutionize the way business is done by pioneering a full-scale, decentralized business platform for enterprises.

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Understanding VeChain’s Consensus Protocol

The consensus protocol is the heartbeat of the blockchain. Without a solid mechanism for achieving a transaction history, the cryptocurrency inevitably fails. Proof-of-Work (POW) is the most widespread consensus protocol, simply because Bitcoin uses it, and all altcoins use (most of) Bitcoin’s source code. Proof-of-Stake (POS) is the second most popular way of achieving consensus and is used by EOS, Lisk, and others.

That said, VeChain doesn’t work with either POW or POS, instead, they implemented a new protocol called Proof of Authority (POA). The high level justification for this, is that VeChain’s philosophy strives for a state which is neither centralized nor decentralized.

Proof of Authority (POA) aims to possess the following characteristics:

  1. Low level of computational power required
  2. No need for the Authority Masternodes (AM) to communicate in order to reach consensus
  3. The system can maintain its performance regardless of the amount of AMs available

POA is specifically designed to suit the philosophical and governance model of VeChain. The result is a variation of POS, consisting of anonymous block producers, validators, and 101 Authority Masternodes which are authorized by the VeChain Foundation and Community.

In order to become an Authority Masternode (MA) on the VeChainThor blockchain, the individual discloses his identity and is vetted by VeChain. This includes a strict Know Your Customer (KYC) procedure and the satisfaction of a number of opaque requirements. If the applicant passes the vetting process, they receive the right to validate and produce blocks.

In its current iteration, a block is produced every 10 seconds. By ensuring a high-octane block production, VeChain is laying the foundation for a scalable blockchain platform. If the project proves to be successful, the blockchain will process thousands of transactions per second, and this seems to be possible in the current setup.

Exactly which masternode produces the block is decided by a deterministic pseudo-random process (DPRP). As all masternodes have an equal chance of producing the next block, DPRP ensures that future block producers cannot be identified and manipulated, thus protecting the integrity of the blockchain.

Understanding the VeChain Tokens

In the whitepaper, the VeChain token is described as “the blood” of the ecosystem. More specifically, we can think of the native tokens as corresponding to gas and ether on the Ethereum blockchain.

Just like Ethereum, VeChain has a token which is responsible for the transfer of value, called VeChain token. This token is an ERC20 token, giving it smart contract functionality as well as allowing enterprises to transfer value via the VeChainThor blockchain. As of November 2018, roughly 86 billion tokens exist, with 55 billion in circulation.

When you have a token that can perform a computation, you open yourself up to attacks from malicious actors running infinite – or self-perpetuating – processes. You can imagine a hacker performing a smart contract which then runs another smart contract and so on. This puts undue pressure on the network and potentially weakens it.

To counter this, cryptocurrencies like Ethereum and VeChain introduce a secondary token, which has a small monetary value and is required to perform a computation. By putting a monetary value on each computation, the protocol protects the network from infinite-loop attacks, as these would become incredibly expensive very quickly. In the case of VeChain, this token is called VeThor (VTHO).

Understanding the VeChain’s Governance Model

One of the most fascinating aspects of VeChain is its governance model. As mentioned previously, the blockchain-powered project aims to find a balance between centralization and decentralization.

As such, the non-profit VeChain Foundation has laid out a governance model which consists of both decentralized voting, and centralized decision-making. More specifically, the strategy and direction of the platform is decided by the Board of Steering Committee.

VeChain Governance Structure

Interestingly, the members of the committee are voted for by stakeholders. All vetted stakeholders who meet a set of minimum requirements are allowed to vote.

VeChain Voting Authority

Importantly, simply holding the required amount of VET is not enough. Instead, stakeholders (except VEOK) need to apply through the VeChain portal and provide additional information. Depending on how the application goes, stakeholders are assigned specific voting rights, which are then fed into the voting authority model.

Ostensibly, the result is a democratic process in which every stakeholder can participate in the governance of VeChain. In comparison to most other cryptocurrency projects, however, the VeChain Foundation has an inordinate amount of power to manipulate voting authority and therefore, determine the outcome of the vote.

Understanding VeChain’s Partnerships

VeChain has done an excellent job of attractive high profile advisors and partners. PricewaterhouseCooper (PwC), BWM, Kuehne & Nagel, and DB Schenker are just some of the multi-billion dollar corporations VeChain is working with.

The biggest, and most important partner, is the Chinese government. This might come as a surprise given that cryptocurrency is currently illegal in China, but that hasn’t stopped the relationship from flourishing.

One such partnership is between VeChain and the People’s Insurance Company of China. As of September 2018, the state-owned insurer will be working with VeChain to reduce information asymmetries, and improve efficiency within the industry.

VeChain is also working with the Chinese government to modernize the new economic development zone in Gui’an. The new zone is designed to become a testing ground for a highly innovative technologies, pioneered by companies like Microsoft, Apple, IBM, and now VeChain.

Conclusion

VeChain has done an excellent job of finding a pain point, creating an innovative solution, and communicating that solution to the world. The whitepaper is comprehensive and highly technical, giving plenty of thought to every aspect of the project. This in combination, along with the impressive quality and quantity of partnerships, strike a very positive note for the China-based project.

The only concern relates to the governance model. If the Steering Committee really is voted for by free and impartial stakeholders, then the system will work well. However, if stakeholders with differing allegiances are rejected during the vetting process, a free and democratic vote will not be possible. In this case, VeChain would be governed by a small and unaccountable oligarchy.

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