Breaking Down Blockstack Pt. 2 — Stack Tokens
In Part 1 of this series, I discussed the core ideas behind Blockstack as laid out in their May 2017 whitepaper. Part 2 focuses on the Stack Token, a new concept presented in an October 2017 whitepaper.
Disclaimer: I have no current or past financial interest in Blockstack. I have applied for a non-accredited investor voucher in the Stack token sale.
Blockstack, Stack Protocol, stacks token — aka stacks on stacks
The Blockstack team recently introduced the Stack protocol, a project they’ve been working on since 2016 (before tokens were cool). Blockstack is currently run as a set of ordered operations on top of a separate blockchain, meaning Blockstack’s technology processes functions sent to it and regularly records the results on the underlying chain (currently the Bitcoin blockchain). In the future, Blockstack will run it’s own blockchain layer living on top of the Bitcoin chain. Instead of using bitcoins to pay for transactions, Blockstack’s native “stacks” token will be used. The new structure provides multiple benefits, including but not limited to giving people another coin to speculate on while posting memes on Reddit.
Throughout this article I’m going to refer to a few different facets of Blockstack, and the different names can get confusing. Keep this in mind:
Blockstack: the name of the company and the overall ecosystem
Stack protocol: the new rules for how the Blockstack blockchain will operate
Stacks: the token that will be utilized as currency in the new blockchain format (I reference this the most)
Stack Protocol Benefits
The Stack protocol & tokens are beneficial in a few ways, according to the whitepaper:
- Incentivizing ecosystem growth
- Decentralized governance
- Preserve economic distribution through migrations
- Enable support for “light clients” (aka smartphones)
- Enable support for advanced namespace operations
I’m going to go in depth on the first benefit, and then briefly explain the others. If you want more detail, check out the whitepaper or ask me in the comments.
Benefit 1: Incentivizing ecosystem growth
Blockstack is fundamentally a network of apps and users. Every successful network has at some point or another faced a chicken and egg problem. In a network business, the chicken & egg can be boiled down to two groups: users and developers.
- People won’t use a network unless it has real utility for them
- Example: Instagram is worthless if nobody else is around to like your pictures or post their own for you to stare at jealously and wonder if their life is actually that cool
- A critical mass of developers won’t invest in building apps for a network unless they are going to get paid by people actually using the network/apps
- Example: Nobody uses Windows phones. Therefore it’s a waste of time for developers to make apps for those phones, because all the apps will do is sit on the store and look pretty. So, no developers made Windows OS mobile apps. Users are even less likely to use Windows phones because there are no useful apps. Vicious cycle ensues, Microsoft cancels production of Windows phones 8 years later (quick decision making in action)
Typically, startups bridge the “chicken and egg gap” by bringing in outside investors. These investors make bets that the company will be successful in building a network of users and pay the developers to work on it, making it worthwhile (in the short term) for the team to build network infrastructure.
Blockstack aims to bypass that problem in their own ecosystem by granting stacks to early developers making quality apps. This bootstrapping system will only occur for the first four years after the network goes live. The tokens will (hopefully) appreciate in value over time as the network becomes more valuable, so it’s theoretically similar to a monetary incentive for developers.
The keyword above is quality apps. Only developers making quality Blockstack apps will receive token grants. Quality is subjective (I think my drawings are of artist quality, every other person in the world does not), so how is quality decided?
App Reviewers
“App Reviewers” are chosen judges of quality applications. A quality application will show up in Blockstack like Featured apps do on the Apple App Store. When Reviewers feature an app, it is deemed a quality app and will receive a regular allotment of stacks as a reward. As incentive to continue judging, Reviewers get 2% of the stacks allocated for app-rewards mining.
The Reviewers are a small group elected by community vote based on ownership of the Stack token.
- Elections are held once a year, for 1 year terms
- Reviewers could be individuals or entities such as non-profits or venture capital firms
- Blockstack’s goal is to have a diverse set of App Reviewers (e.g. not all VC firms)
- Voters will have visibility into performance of App Reviewers and can make informed decisions at time of re-election
“The App Reviewers should have an incentive to (a) do the work of evaluating various applications and curating them, and (b) remain honest and neutral during the curation process. Further, the App Reviewers themselves should not become a point of centralization in the ecosystem.”
-Blockstack Token Whitepaper
If this was all TL;DR, check out the handy drawing below for an explanation of the App Rewards process.
Benefit 2: Decentralized governance
The paper is relatively light on details for decentralized governance of the Blockstack protocol. Essentially, the goal is to give the Blockstack community control over major changes and upgrades to the ecosystem. The team plans to expand further on details at a later date, but the main points can be boiled down to:
- Major protocol changes should require a vote by all stakeholders in the Blockstack ecosystem
- Since it may be difficult to get everyone to vote (particularly on more technical issues), stakeholders will be able to choose a representative who will vote for them. This representative will come from a pre-defined set of options; it’s currently unclear how this set will be chosen.
- Votes will be decided based on simple economic majority
To learn more about decentralized governance, check out my post on Colony.
Benefit 3: Preserve economic distribution through migrations
As I explained in Part 1 of this series, Blockstack is a virtualchain that sits on top of another “layer 1” blockchain. Currently, the layer 1 chain is bitcoin. The layer 1 chain used to be Namecoin, and then that coin tanked (probably due to having a terrible name, in the irony of all ironies), so the team switched to bitcoin.
This had the side effect of making Namecoins suddenly worthless in the Blockstack ecosystem. While that wasn’t a big deal at the time because Blockstack didn’t have a large user base, it would be a bigger deal if the ecosystem grows to be as large as the team hopes. Imagine if suddenly all your bitcoin you’d received in return for your hard work making a great app was unusable in Blockstack! You are no longer a happy developer. By switching to rewards in stacks, the team eliminates this problem — your stacks will always follow the virtualchain and be usable in the system.
Benefit 4: Enable support for light clients (phones)
For a lot of reasons that are too complicated to explain in a concise manner, it’s very hard for mobile phones to view the current state of a blockchain or run a “full node” (which basically means they’re confirming transactions on the network — read this for more info). Viewing the state of the blockchain is important; it’s the equivalent of seeing the most updated version of the ledger, preventing the double spend problem. Right now viewing the latest state requires downloading a full copy of the blockchain, which is basically impossible due to space and computing limitations on mobile phones. Implementing the Stack protocol will allow light clients to see the current state without downloading the whole chain.
Benefit 5: Advanced Namespace Operations
As I mentioned in Part 1, Blockstack’s main “products” are human-readable names & namespaces that act as web addresses in the decentralized internet. “Advanced Namespace Operations” does not refer to Blockstack SWAT teams completing covert missions to decentralize the world. Rather, it means giving users the ability to more easily sell or trade namespaces, conduct namespace auctions, or collect name registration fees. I know, waaaay less cool. BUT still important functionality for developers and users, so I guess I’ll take it.
Mining Stacks
“Mining” is the creation of stacks. Users can create stacks in 3 ways:
- Proof of Burn mining
- App rewards mining
- Web of trust mining
I already discussed App rewards mining above under Benefit 1, so I’ll go through proof of burn and web of trust mining here.
Proof of Burn Mining
In Blockstack, proof of burn (“PoB”) mining is the main form of stack token creation. To officially create a block (which is full of transaction data) in the chain, miners “burn” bitcoin. When the block is created, the miners who burned the bitcoin receive a reward of stacks. Burning is an important concept for this section, so here’s a block quote definition for emphasis:
Burning: Sending bitcoin to an address that has no owner. Since blockchain transactions are irreversible, there is only way for bitcoin to be removed from an address: the owner of that address must send it to another address. There is no owner of a burn address (and never will be, for reasons that I will sum up as “math”), so that bitcoin is irretrievably lost. This is why it’s called burning, because it’s like setting cash on fire.
“WTF WHY ARE YOU DESTROYING BITCOIN???”
That was my first thought too. But, after reading through the whitepaper explanation a few times, I understand why it works this way. It boils down to one word: security.
Quick recap: the point of a blockchain (distributed ledger) is to be an immutable source of data. It’s immutable because a multitude of people all over the world have copies of the agreed true state of the transaction history.
Let’s say I ask Bob, Alice, and you what the true state of the ledger is. You are trying to trick me, so you can buy something from me with stacks that you don’t actually own. However, Bob and Alice are telling the truth about how many stacks everyone owns. I’ll immediately know you are lying, because Bob’s and Alice’s records match, while yours is different.
How do Bob and Alice agree on the true state? They are following the chain with the most burnt coin, aka the longest or most expensive chain. Think of it this way:
- A large quantity of individual miners will have more economic capability to burn coins than a smaller group of colluding tricksters trying to show a fake state of the blockchain
- Since the individual miners are not colluding, the easiest way for them to complete a block (and be rewarded with stacks) is to record real transactions. They are economically incentivized to be truthful.
- With the majority of people burning coins to record real transactions into a single chain, that chain will have the most transactions (longest) and most coins burned (most expensive)
The whitepaper sums up the conclusion well (I’ve replaced a few words for clarity out of context):
“An attacker who wants to present an alternate blockchain history…will need to destroy a lot of money to present an alternate history on a [chain] longer than the current blockchain; such attacks become prohibitively expensive and impractical for tampering with data that is several days or weeks old.”
- Blockstack Token Whitepaper
Basically, you would have to destroy too much bitcoin to outrun the real chain and trick people into believing that your chain represents the true ledger.
Like I said. Security.(1)
Web-of-trust mining
In it’s simplest form, web-of-trust mining = refer-a-friend bonus. Uber gives you $5 off your next ride for referring a friend who downloads the Uber app, right? This is the same thing. It’s a way to incentivize growth of the Blockstack network.
They don’t go into many details on how the refer-a-friend reward will work (more details to come later, it’s still actively being researched). The most important goal in web-of-trust mining is to ensure that only real users are signing up. For the initial set of users, the Blockstack team will perform various checks to ensure users are real people. As the network expands they will presumably economically incentivize current users to help verify that new users are real people.
Takeaways
1. From a 30,000 foot view, I think the shift to a true blockchain is a good move for Blockstack. The benefits outlined in the whitepaper make sense and could help grow the platform while keeping it from becoming a centralized juggernaut like app platforms today. I particularly like the use cases for decentralized governance, ease of light client use, and preservation of value during layer 1 chain migrations.
2. However, it will be interesting to see if the use cases for spending stacks are strong enough for this change to significantly increase network growth & token value. Here are the bear & bull cases:
Bear — The current uses for spending stacks are registering a name/namespace and potentially utilizing the decentralized storage system. A name needs to be registered once and re-upped each year. If you pay for storage on the network, let’s assume you pay once a month. So that’s 13 transactions per year for a single entity. I’m not sure how many entities will be participating in the early years, but we can assume it will be relatively small, meaning a small number of stack transactions.
When a block is mined using proof of burn, 8,000 stack tokens are created. The Blockstack team assumes 144 blocks will be mined per day (average in Bitcoin), so that is over 1 million stacks created per day. We are obviously missing some variables (like the cost in stacks of registering a namespace) to calculate the implied price of each stack token, but just looking at the small number of transactions + high number of tokens created tells me each token may not be worth much at first. How well does that incentivize early developers to create apps on the platform if the tokens they’re rewarded with are low value? What about miners who burn bitcoin when mining stacks, particularly if the price of bitcoin is skyrocketing?
Bull — Miners and developers will want stacks mostly for their future value, not present value. So, those who believe that eventually the ecosystem will really take off are more incentivized to join early and receive larger stack rewards.
If the amount of domain names in the current internet are any indication, there could be a ton of names registered on Blockstack when it grows into a robust ecosystem(2). Add in the fact that speculators are driving up the value of every token with even an ounce of respectability (and this team has a lot of respectability), and you can assume that stacks will have more value than the supply/demand math says it should. Either way, the early community will likely have to hold onto their tokens for years to realize significant return (this isn’t a bad thing).
3. The App Reviewer concept will be tricky to implement without it becoming a source of centralization. In the first year, there will be seven App Reviewers. Imagine that one or two chosen reviewers in a given year are VC funds, which the whitepaper mentions as a possibility. The VC funds could easily curate projects they are backing, giving those projects more visibility (like being featured on the App Store) and money via the Stack token curation reward. Keep in mind that these projects are already ahead of the curve because they have the benefits of VC funding and networks. This seems like a major conflict of interest to me that could be detrimental for the average user without them even realizing it. App Reviewers will be required to disclose all conflicts of interest and investments, so it should be a transparent system, but even when taking that into account one thing comes to mind: how often does the average user read disclosures?
Why does this bother me? Because the point of decentralization is to remove power from the “good ole boys club” and give it to the average person. Decentralization should drive our economy towards rewarding companies based on the merit of what they created, not based on who they know (as it currently works in the Silicon Valley-driven world of tech). I can’t see how allowing Reviewers to curate products they have already invested in has any positive implications for the new internet.
On one hand, it may not be a big deal because the App Rewards concept will only be active for the first four years of the platform. On the other hand, a four-year head start is a pretty dang big deal when it comes to building a business with network effects.
4. I can see this as a first step toward moving Blockstack fully onto it’s own chain. This makes sense: Blockstack’s community of miners will initially be much smaller than Bitcoin’s community, meaning it’s less secure because there are less people validating the true state of the chain. So, Blockstack utilizes the virtualchain and uses Bitcoin’s chain to provide security. In the future, however, Blockstack could easily just “break off” their virtualchain into a real blockchain once the community of miners and users is strong enough to support it. This would remove reliance on another chain and allow the Blockstack chain more flexibility. This might be particularly useful for avoiding issues caused by hard forks & other political in-fighting on the underlying chain.
Conclusion
Overall, I like the Stack protocol, and I love the Blockstack project. There are parts of the token’s design that I disagree with, and I’ve outlined them honestly above. But that doesn’t stop me from being optimistic about this project, and here’s why:
Many of the concepts in this whitepaper are marked as “needs more work”, and the team has expressed their desire to include feedback from the community as they fill out the details. Given the transparent nature of Blockstack’s development so far, I have no doubt they will actually take into account community feedback. Whatever your opinions on the Stack protocol, you have a chance to influence a project that could build Internet 3.0; I consider that an amazing opportunity. If you are inclined to dig into details, I strongly suggest you read the whitepaper and post constructive suggestions & feedback on the Blockstack forum. The founding team frequents it and constantly interacts with the community on many topics!
Thanks for reading my series on Blockstack! I have received a few requests for a post detailing how the virtualchain works, and I’m thinking about the best way to approach it. If I do a part 3, it won’t be released for a while due to some other projects I’m working on. Feel free to leave any comments below & I’ll do my best to answer them!
Footnotes
(1) For those Bitcoin proof of work junkies out there who refuse to accept any other proofs as secure, think of it this way. You can go out and spend a bunch of money buying a sweet Bitcoin mining rig, then spend more money on electricity to mine bitcoins (and secure the Bitcoin blockchain). If you then take those bitcoins and burn them to mine on the Blockstack chain, you’re effectively transferring that proof of work to secure the proof of burn chain. So via the transitive property* that I learned about as a young 10th grader, the two proofs are relatively equal in security.
* I have no idea if that’s the correct use of the term “transitive property”. Just like any self-respecting 10th grader, I immediately purged all knowledge of a subject once I passed the test, so I don’t really remember that stuff.
(2) According to the Blockstack Token Sale Mechanics paper released in November 2017: “Approximately $425,000 worth of bitcoins (in today’s dollar value) have been destroyed to register ~74,000 domains on the Blockstack network.”
I’m Nick, a product manager and learner of all things blockchain in my spare time. I hope to write more reviews like this, with the goal of making blockchain whitepapers more approachable for the average person. If you enjoyed reading this, I’d appreciate you sharing it with others who might enjoy it as well.
