Avalanche Founder Testimonial: We Are Standing on the Precipice of a New Era

Compilation: Daily Planet

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

Ahead of the meeting, the committee released his written testimony, which can be found here in English.

Fostering Responsible Growth of Blockchain Technology

U.S. House of Representatives Financial Services Committee

Chairman McHenry, Senior Commissioner Waters, and fellow committee members.

It's a great honor to be here with you today. I thank you for allowing me here as a computer scientist to discuss blockchain technology, its innovative applications, impact on the economy, and how to understand the use cases blockchain enables. Understanding these key concepts can lead to a sensible regulatory framework that will ensure the technology thrives across the United States.

The committee has already had several testimony on blockchain, but they have mostly been given by lawyers and business people. Therefore, I hope this testimony has given you a useful overview of blockchain and tokenization from a technical and computer science perspective. I will focus on blockchain's ability to transform society by making digital services more efficient, reliable, and accessible.

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

My background

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

Ava Labs is a software company that builds and helps implement technologies 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 consensus protocol breakthrough since Bitcoin.

Before founding Ava Labs, I was a computer science professor at Cornell University for nearly 20 years, working on improving the scalability, performance, and security of blockchains. During this time, I have consulted with various agencies and departments of the U.S. government on a variety of topics. I have made important contributions in several areas of computer science, including distributed systems, operating systems, and networking, with dozens of publications in peer-reviewed papers (in addition, I am a follow-up to Satoshi Nakamoto in blockchain one of the most cited authors in the field). I received a CAREER award from the National Science Foundation and was a member of the DARPA ISAT committee. I am also a member of the Commodity Futures Trading Commission (CFTC) Technical Advisory Board. But I'm probably most proud of writing a parody article on the blockchain space with John Oliver.

Big picture

We are living through a period of unprecedented technological advancement and transformation.

This trend was driven by the computer revolution, first with mainframes and later with personal computers. However, these early systems were limited by their "standalone architecture" to only process local data and perform local computations. While they increase the efficiency of existing tasks, they cannot have a multiplier effect due to 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've transitioned from stand-alone computers to a "client-server architecture," which enables us to connect to remote services operated by others to utilize their programs and functions. This new paradigm has spawned digital services that cater to the entire world, created millions of jobs, and cemented America's 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 communication through a shared ledger. This allows multiple computers to collaborate, reach consensus and act in unison. Blockchain technology enables us to build shared services in the network. In turn, this enables the development of unique, secure digital assets, more efficient financial services systems, tamper-proof supply chain tracking, digital identity solutions and transparent voting systems, among 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 each other. **

The implications of this breakthrough are profound. **Blockchain technology allows us to create systems that reduce costs, increase efficiency, and provide greater control over our digital lives and virtual worlds. **Additionally, we can build new types of marketplaces, entirely new digital goods and services, that empower individuals and communities to drive economic growth and social impact.

Advances in blockchain technology will lead to leaps, just like the internet itself, because they will improve 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, this software optimization will further enhance and improve the technology's existing capabilities while ensuring compliance with relevant regulations.

Blockchain and Smart Contracts: Cross-Application Implications

Blockchain solves a long-standing problem in computer science: enabling multiple computers around the world to come to a consensus (consensus) about a piece of data and the larger data set it belongs to.

While it may seem obscure at first glance, it is an important building block for solving complex problems that traditional internet systems struggle with, such as creating digitally unique assets, tracking their ownership, and securely executing business and other processes. In this way, the technology does not need to rely on humans or intermediaries to achieve its security properties; in fact, it often still provides strong integrity guarantees even in the event of (partial) system failures.

Let me be clear: **The ability to leverage a distributed or decentralized network is attractive for many reasons that have nothing to do with securities law, financial services regulation, or other laws and regulations pertaining to commerce, entertainment, and communications. 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 to solve computer science problems.

Compared to the client-server model, the potential applications of blockchain technology are wide and varied, many of which have historically been expensive or unachievable. Below, I discuss some key applications and innovations enabled by blockchain.

Blockchain is developing rapidly

In the 14 years since Satoshi Nakamoto introduced Bitcoin to the world, blockchain technology has evolved rapidly. The Bitcoin blockchain pioneered a consensus mechanism — the way participating computers agree on data — popularly and inaccurately called “proof of work.”

Bitcoin has proven to the world that public, permissionless blockchains are possible. The topic of consensus is known in the computer science literature as "Byzantine Fault Tolerance," and research on such systems is funded by the National Science Foundation and DARPA and has involved hundreds of academics, myself included, over several decades. Bitcoin solved this problem and proved to the world that this technology can create and maintain digital assets, as well as establish and transfer their ownership.

Bitcoin has survived countless attacks over its 14-year history and has remained stable and accessible, with no central authority or control maintaining its operation. In contrast, even the best client-server services built by Microsoft, Google, Amazon, and Facebook experienced many outages during the same time period.

Computer scientists didn't stop there. Subsequent blockchain technologies extended this core functionality. The most notable of these is that Ethereum introduced the concept of smart contracts, which are self-executing programs encoded on the blockchain. Smart contracts can facilitate a variety of applications, including currently popular peer-to-peer lending, social networking, digital collectibles (such as NFTs) and game props, as well as the digitization of traditional physical assets on a single chain governed by a unified rule set.

The latest breakthrough in blockchain architecture is known as a multi-chain blockchain. 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 not previously possible on a single ruleset blockchain, but also isolates traffic and data into environments purpose-built for specific tasks or applications. Examples of these systems include Avalanche and Cosmos, which create dedicated blockchains, sometimes called subnetworks or appchains, that can be designed to meet compliance requirements.

For example, South Korea’s SK Planet recently created a private blockchain on Avalanche, attracting more than 58,000 fully verified customers in a few days. Additionally, Ava Labs is working with Wall Street firms to create a specialized institutional blockchain. With a multi-chain architecture, operators have full control over who has access to the chain, who secures the chain, what tokens (if any) are used for transaction fees, and more.

There is a general trend here. Blockchain technology is evolving rapidly, naturally moving in the direction of being more flexible and secure. In other words, many complex problems are solved through code.

There is a clear lesson to be drawn from these developments: policymakers should define goals based on the concrete realization of the technology (that is, the activities for which it is used), and leave it to experts to determine the mechanisms for achieving those goals. Since we can customize blockchain implementations, it is now easier than ever to regulate the implementation, rather than the technology itself, and achieve regulatory neutrality.

Regulation of the Token World

Blockchain is a technology that enables building resilient and fault-tolerant applications. In effect, they are open, programmable platforms that users can interact with as if they were public resources. This powerful construct naturally spawned many different types of applications, leading to tokenization, the creation of digital representations of rights, assets, and other things.

All tokens are not equal in implementation and function, they must be treated differently based on their nature. **Tokens cannot simply be categorized into one set of rules, as they vary widely in functionality and characteristics. A good analogy is paper; we regulate rights, assets, or things we create from the words, numbers, and pictures 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 titles could be tokenized so that each token corresponds to a uniquely identifiable parcel of land. In many cases, real-world assets are already regulated, and digitizing them into a blockchain format should not lead to sweeping new regulation.
• Virtual Items: Tokens can represent digital artwork, collectibles, game skins, etc. The items also vary in function and form. They can range from simple non-programmable images (a common use of NFTs) to complex assets (used in some assets in games), where various functions and features can be directly encoded inside the assets.
• Pay on demand: Public blockchains constitute a shared computing resource that must be allocated efficiently. Tokens are the perfect mechanism to measure resource consumption and prioritize 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 gas or transaction fees, it is possible for a single user or small group of users to completely take over the blockchain, similar to a denial of service attack, rendering the blockchain unusable.

The above list covers a wide range of categories...

However, this is only a snapshot of what is and could be happening right now. I encourage you to review our "Owl Explains" educational program for more information.

**As a first principle, it is determined that the regulatory regime must begin and be based on the functions and characteristics of the token, not the technology used to create the token. **At Ava Labs, we call this sensible token taxonomy.

Let me be clear again: tokenization was not created to circumvent the law. It is a natural product of blockchain technology, an improvement of blockchain over traditional systems, just like the improvement of computer databases over paper filing cabinets.

**In addition to a reasonable classification of tokens, regulations involving tokens must be developed in a way that can be enforced at a level with the necessary information. **Just as we don’t expect internet routers to check the authenticity of content sent on social media apps, we cannot place regulatory burdens on technical layers that have no knowledge of on-chain content or operations. These platforms already offer features like lock and transfer limits that can help write those limits.

Improve market efficiency, transparency and oversight

Blockchain and smart contracts can form the basis of a more transparent and efficient financial system, enabling a level playing field for all players, including regulators, who can gain a clearer than ever understanding of the behavior and activities of all market participants. Privacy remains an important component of any system. The development of these new ways of providing and regulating financial services should incorporate the protection of individual privacy. These improvements can only facilitate the responsible growth of these technologies with the support and cooperation of regulators and policymakers, providing sound legal regulations.

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

The last year saw the collapse of several crypto asset exchanges, notably FTX. Make no mistake: these failures are not failures of blockchain technology, but failures of traditional custodians in protecting user deposits. No major decentralized exchange has been affected by a similar failure. Blockchain technology aims to remove reliance on centralized intermediaries that can compromise user funds, market integrity, and other properties needed for a well-functioning system.

In addition to on-chain custody and trading, a recent breakthrough innovation called enclaves enables new markets to strictly limit the behavior of even the owners and operators of the market. This innovation can rule out unwanted behaviors such as front-running, stop-hunting, and privacy violations that threaten the integrity of the market. Ava Labs' own Enclave Markets is at the vanguard of this innovation, what we call a fully encrypted exchange.

Another example is the lending space, which demonstrates the benefits of doing activities on-chain versus with a centralized party. Some off-chain lenders and borrowers suffered major failures last year, while major on-chain lending platforms were largely unscathed by the market turmoil. Because of their reliance on overcollateralization and automated systems, these protocols are able to flexibly respond to liquidation and collateral call requests during sharp market declines. While there is no panacea, the evidence so far suggests that decentralized networks handle stressful situations better than their centralized counterparts. These results are consistent with expectations from blockchain design.

Stablecoins as a digital gateway to the US dollar

Stablecoins are primarily denominated in dollars, and they have grown widely around the world because they are a better way to hold dollars. Stablecoins not only improve the user experience (by increasing the velocity of funds and reducing transfer costs), but also meet the growing demand for stablecoins in regions facing economic uncertainty and local currency oversupply.

**By turning the value-preserving power of the U.S. dollar into a product accessible outside the U.S., stablecoins help individuals protect their savings from fluctuating local currency values and theft by criminals and other bad actors. **

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

Blockchain can accelerate climate disaster recovery through insurance

Consider the emerging property insurance crisis triggered by increasingly frequent and extreme climate events. State Farm, California's largest property insurance company, announced it would no longer provide coverage because the risk of wildfires was too high. Insurers in Texas, Florida, Colorado and Louisiana are under similar pressure to either stop offering coverage, raise rates or seek fallbacks to resolve bankruptcy.

Under these circumstances, who will America's communities rely on to secure their housing and economic future? If the insurance industry consolidates, leading to bankruptcy of small regional insurers, how can this risk be managed?

Using smart contracts and the Avalanche network, the Lemonade Foundation currently provides insurance to more than 7,000 farmers who previously had access to unaffordable high premiums or payout-delayed products with long-term, cross-seasonal effects. These premiums are not economically viable for the organization as these processes are now compressed into manual work in a smart contract. Another example is that in 2019, the US government completed accounting for Hurricane Katrina payments, a process that took a full 14 years after the catastrophic impact of 2005. The delay is due in part to the difficulty of reaching agreement among the many stakeholders involved in the process.

In 2012, Superstorm Sandy damaged nearly half a million homes and caused an estimated $50 billion in damage. The same gap in insurance payouts is stifling urgent recovery efforts across the East Coast. Families who have been paying premiums for years have received pitiful payouts to rebuild their lives. By the time their lawsuits lead to action and more payouts, the damage has been done and the community has been scarred. Blockchain-based distributed ledgers could greatly simplify such processes, and our firm is working with Deloitte to develop and implement this technology under contract from FEMA.

Supply Chain and Fighting Counterfeiting

Global supply chains, including our most critical security infrastructure, are facing challenges from burgeoning demand for commodities and strains from the impact of the pandemic. The problem can become especially problematic when there are problems in the supply chain, and it can be further exacerbated if there is fraud. **Blockchain and smart contracts can help secure and verify supply chain security across various global industries. **

Blockchain enables supply chain management, providing a reliable and transparent record of product provenance and authenticity. De Beers' Tracr platform shows how it can enable management of the diamond supply chain, while other deployments have covered everything from luxury goods to concert tickets. Blockchain can be an important tool in the fight against counterfeiting of medical supplies, pharmaceuticals, food products, and consumer technology that directly impacts our communities and your constituents.

Upcoming Technical Improvements

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

**Unlike the fundamental problems inherent in smart contracts and blockchain technology, potential risks associated with smart contract-based systems focus on flaws in implementation, such as poor coding and neglect to follow best practices, rather than inherent problems. ** Like the weak internet software stack of the 1990s, smart contract programming tools are still in their infancy.

This field has rapidly developed to verify whether smart contracts meet security standards through code auditing and other technical means, forming a flourishing field of software threat analysis, certification and verification services. In addition, we have seen automated tools used for program verification and model checking, helping to find vulnerabilities that are imperceptible to the human eye. These techniques start running before the program is even deployed to find vulnerabilities before they affect anyone.

Finally, there are new mechanisms such as runtime integrity checks, smart contract safety switches, and automatic fund movement restrictions that operate in real time to help control the impact of any accidental errors. Systems that follow best practices, such as lending platforms and well-designed bridges (such as the one built by Ava Labs), have circulated billions of dollars in their smart contracts without compromise.

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

Technological competitiveness and risk of inaction

We are standing on the precipice of this new era, and it is critical to nurture and support the development of this revolutionary technology. In doing so, we can unleash its full potential and ensure that America remains a leader in innovation, driving the next generation of Internet technology, and achieving tremendous economic growth.

Responsible players in the blockchain space want sensible laws and regulations that incentivize growth and good behavior, punish bad actors, and uplift the users of the blockchain network. The community is ready to provide guidance to decision makers to achieve these goals. However, in the absence of sensible frameworks and collaboration, the path to loss of technical leadership is clear.

** The United States won the first wave of the Internet revolution precisely because it was able to promote the freedom to innovate responsibly. The United States must prudently and judiciously classify and regulate blockchain applications and tokens while ensuring the free but responsible growth of blockchain technology. Otherwise, any regulatory framework faces two major paths to failure. **

**First, the blockchain platform itself will be regulated at the protocol level. **This amounts to regulation of the internet protocols that will doom information technology and the vibrant internet we have today. **Secondly, tokens and smart contracts created using the blockchain are classified as homogenous and incompatible categories. **This amounts to the same regulation of social media apps as consumer medical apps. Instead, tokens and smart contracts must be analyzed on a case-by-case basis and carefully regulated according to their functions and characteristics.

As we move towards a more digital world, thanks to artificial intelligence, virtual reality and a work-from-home society, we will increasingly rely on digital for value transfer and programmability. Blockchain is the clear technological answer to these needs and has clear synergies with the global economy. The addressable market for digitizing global assets and securely transferring value over 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 disastrous consequences. Failure to quickly deliver a sensible regulatory framework will not only undermine economic growth, but also make it easier for bad actors to carry out illicit activities.

In the end, we must remember that just as there are good people dedicated to public service, there are also good people dedicated to building life-enhancing technology. Working together, we can lay the groundwork for the trusted, efficient, self-enforcing systems that will become the bedrock of our modern economy.