|Ethereum white paper pdf download||Archived from the original on 30 April Archived from the original on 30 May Ether can also be used as a digital currency and store of value, but the Ethereum network also makes it possible to create and run decentralized applications and smart contracts. Main article: Decentralized finance. As of January [update]the Ethereum protocol could process about 25 transactions per second.|
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The earliest alternative cryptocurrency of all, Namecoin , attempted to use a Bitcoin-like blockchain to provide a name registration system, where users can register their names in a public database alongside other data. The major cited use case is for a DNS system, mapping domain names like "bitcoin. Other use cases include email authentication and potentially more advanced reputation systems. Here is the basic contract to provide a Namecoin-like name registration system on Ethereum:.
The contract is very simple; all it is is a database inside the Ethereum network that can be added to, but not modified or removed from. Anyone can register a name with some value, and that registration then sticks forever. A more sophisticated name registration contract will also have a "function clause" allowing other contracts to query it, as well as a mechanism for the "owner" ie.
One can even add reputation and web-of-trust functionality on top. Over the past few years, there have emerged a number of popular online file storage startups, the most prominent being Dropbox, seeking to allow users to upload a backup of their hard drive and have the service store the backup and allow the user to access it in exchange for a monthly fee. However, at this point the file storage market is at times relatively inefficient; a cursory look at various existing solutions shows that, particularly at the "uncanny valley" GB level at which neither free quotas nor enterprise-level discounts kick in, monthly prices for mainstream file storage costs are such that you are paying for more than the cost of the entire hard drive in a single month.
Ethereum contracts can allow for the development of a decentralized file storage ecosystem, where individual users can earn small quantities of money by renting out their own hard drives and unused space can be used to further drive down the costs of file storage. The key underpinning piece of such a device would be what we have termed the "decentralized Dropbox contract". This contract works as follows. First, one splits the desired data up into blocks, encrypting each block for privacy, and builds a Merkle tree out of it.
One then makes a contract with the rule that, every N blocks, the contract would pick a random index in the Merkle tree using the previous block hash, accessible from contract code, as a source of randomness , and give X ether to the first entity to supply a transaction with a simplified payment verification-like proof of ownership of the block at that particular index in the tree. When a user wants to re-download their file, they can use a micropayment channel protocol eg.
An important feature of the protocol is that, although it may seem like one is trusting many random nodes not to decide to forget the file, one can reduce that risk down to near-zero by splitting the file into many pieces via secret sharing, and watching the contracts to see each piece is still in some node's possession. If a contract is still paying out money, that provides a cryptographic proof that someone out there is still storing the file.
The members would collectively decide on how the organization should allocate its funds. Methods for allocating a DAO's funds could range from bounties, salaries to even more exotic mechanisms such as an internal currency to reward work. This essentially replicates the legal trappings of a traditional company or nonprofit but using only cryptographic blockchain technology for enforcement.
The requirement that one person can only have one membership would then need to be enforced collectively by the group. A general outline for how to code a DAO is as follows. The simplest design is simply a piece of self-modifying code that changes if two thirds of members agree on a change.
Although code is theoretically immutable, one can easily get around this and have de-facto mutability by having chunks of the code in separate contracts, and having the address of which contracts to call stored in the modifiable storage. In a simple implementation of such a DAO contract, there would be three transaction types, distinguished by the data provided in the transaction:.
The contract would then have clauses for each of these. It would maintain a record of all open storage changes, along with a list of who voted for them. It would also have a list of all members. When any storage change gets to two thirds of members voting for it, a finalizing transaction could execute the change. A more sophisticated skeleton would also have built-in voting ability for features like sending a transaction, adding members and removing members, and may even provide for Liquid Democracy -style vote delegation ie.
This design would allow the DAO to grow organically as a decentralized community, allowing people to eventually delegate the task of filtering out who is a member to specialists, although unlike in the "current system" specialists can easily pop in and out of existence over time as individual community members change their alignments. An alternative model is for a decentralized corporation, where any account can have zero or more shares, and two thirds of the shares are required to make a decision.
A complete skeleton would involve asset management functionality, the ability to make an offer to buy or sell shares, and the ability to accept offers preferably with an order-matching mechanism inside the contract. Delegation would also exist Liquid Democracy-style, generalizing the concept of a "board of directors".
Savings wallets. Suppose that Alice wants to keep her funds safe, but is worried that she will lose or someone will hack her private key. She puts ether into a contract with Bob, a bank, as follows:. If Alice's key gets hacked, she runs to Bob to move the funds to a new contract. If she loses her key, Bob will get the funds out eventually. If Bob turns out to be malicious, then she can turn off his ability to withdraw.
Crop insurance. One can easily make a financial derivatives contract but using a data feed of the weather instead of any price index. If a farmer in Iowa purchases a derivative that pays out inversely based on the precipitation in Iowa, then if there is a drought, the farmer will automatically receive money and if there is enough rain the farmer will be happy because their crops would do well.
This can be expanded to natural disaster insurance generally. A decentralized data feed. For financial contracts for difference, it may actually be possible to decentralize the data feed via a protocol called " SchellingCoin ". SchellingCoin basically works as follows: N parties all put into the system the value of a given datum eg.
Everyone has the incentive to provide the answer that everyone else will provide, and the only value that a large number of players can realistically agree on is the obvious default: the truth. Smart multisignature escrow. Bitcoin allows multisignature transaction contracts where, for example, three out of a given five keys can spend the funds.
Additionally, Ethereum multisig is asynchronous - two parties can register their signatures on the blockchain at different times and the last signature will automatically send the transaction. Cloud computing. The EVM technology can also be used to create a verifiable computing environment, allowing users to ask others to carry out computations and then optionally ask for proofs that computations at certain randomly selected checkpoints were done correctly.
This allows for the creation of a cloud computing market where any user can participate with their desktop, laptop or specialized server, and spot-checking together with security deposits can be used to ensure that the system is trustworthy ie. Although such a system may not be suitable for all tasks; tasks that require a high level of inter-process communication, for example, cannot easily be done on a large cloud of nodes.
Other tasks, however, are much easier to parallelize; projects like SETI home, folding home and genetic algorithms can easily be implemented on top of such a platform. Peer-to-peer gambling. Any number of peer-to-peer gambling protocols, such as Frank Stajano and Richard Clayton's Cyberdice , can be implemented on the Ethereum blockchain. The simplest gambling protocol is actually simply a contract for difference on the next block hash, and more advanced protocols can be built up from there, creating gambling services with near-zero fees that have no ability to cheat.
Prediction markets. Provided an oracle or SchellingCoin, prediction markets are also easy to implement, and prediction markets together with SchellingCoin may prove to be the first mainstream application of futarchy as a governance protocol for decentralized organizations. On-chain decentralized marketplaces , using the identity and reputation system as a base.
The motivation behind GHOST is that blockchains with fast confirmation times currently suffer from reduced security due to a high stale rate - because blocks take a certain time to propagate through the network, if miner A mines a block and then miner B happens to mine another block before miner A's block propagates to B, miner B's block will end up wasted and will not contribute to network security.
Thus, if the block interval is short enough for the stale rate to be high, A will be substantially more efficient simply by virtue of its size. With these two effects combined, blockchains which produce blocks quickly are very likely to lead to one mining pool having a large enough percentage of the network hashpower to have de facto control over the mining process.
As described by Sompolinsky and Zohar, GHOST solves the first issue of network security loss by including stale blocks in the calculation of which chain is the "longest"; that is to say, not just the parent and further ancestors of a block, but also the stale descendants of the block's ancestor in Ethereum jargon, "uncles" are added to the calculation of which block has the largest total proof-of-work backing it. To solve the second issue of centralization bias, we go beyond the protocol described by Sompolinsky and Zohar, and also provide block rewards to stales: a stale block receives Transaction fees, however, are not awarded to uncles.
Specifically, it is defined as follows:. This limited version of GHOST, with uncles includable only up to 7 generations, was used for two reasons. First, unlimited GHOST would include too many complications into the calculation of which uncles for a given block are valid.
Second, unlimited GHOST with compensation as used in Ethereum removes the incentive for a miner to mine on the main chain and not the chain of a public attacker. Because every transaction published into the blockchain imposes on the network the cost of needing to download and verify it, there is a need for some regulatory mechanism, typically involving transaction fees, to prevent abuse. The default approach, used in Bitcoin, is to have purely voluntary fees, relying on miners to act as the gatekeepers and set dynamic minimums.
This approach has been received very favorably in the Bitcoin community particularly because it is "market-based", allowing supply and demand between miners and transaction senders determine the price. The problem with this line of reasoning is, however, that transaction processing is not a market; although it is intuitively attractive to construe transaction processing as a service that the miner is offering to the sender, in reality every transaction that a miner includes will need to be processed by every node in the network, so the vast majority of the cost of transaction processing is borne by third parties and not the miner that is making the decision of whether or not to include it.
Hence, tragedy-of-the-commons problems are very likely to occur. However, as it turns out this flaw in the market-based mechanism, when given a particular inaccurate simplifying assumption, magically cancels itself out. The argument is as follows. Suppose that:. A miner would be willing to process a transaction if the expected reward is greater than the cost.
Note that R is the per-operation fee provided by the sender, and is thus a lower bound on the benefit that the sender derives from the transaction, and NC is the cost to the entire network together of processing an operation. Hence, miners have the incentive to include only those transactions for which the total utilitarian benefit exceeds the cost.
However, there are several important deviations from those assumptions in reality:. There is another factor disincentivizing large block sizes in Bitcoin: blocks that are large will take longer to propagate, and thus have a higher probability of becoming stales. In Ethereum, highly gas-consuming blocks can also take longer to propagate both because they are physically larger and because they take longer to process the transaction state transitions to validate. This delay disincentive is a significant consideration in Bitcoin, but less so in Ethereum because of the GHOST protocol; hence, relying on regulated block limits provides a more stable baseline.
An important note is that the Ethereum virtual machine is Turing-complete; this means that EVM code can encode any computation that can be conceivably carried out, including infinite loops. EVM code allows looping in two ways. Second, contracts can call other contracts, potentially allowing for looping through recursion.
This naturally leads to a problem: can malicious users essentially shut miners and full nodes down by forcing them to enter into an infinite loop? The issue arises because of a problem in computer science known as the halting problem: there is no way to tell, in the general case, whether or not a given program will ever halt. As described in the state transition section, our solution works by requiring a transaction to set a maximum number of computational steps that it is allowed to take, and if execution takes longer computation is reverted but fees are still paid.
Messages work in the same way. To show the motivation behind our solution, consider the following examples:. With this system, the fee system described and the uncertainties around the effectiveness of our solution might not be necessary, as the cost of executing a contract would be bounded above by its size.
Additionally, Turing-incompleteness is not even that big a limitation; out of all the contract examples we have conceived internally, so far only one required a loop, and even that loop could be removed by making 26 repetitions of a one-line piece of code. Given the serious implications of Turing-completeness, and the limited benefit, why not simply have a Turing-incomplete language?
In reality, however, Turing-incompleteness is far from a neat solution to the problem. To see why, consider the following contracts:. Now, send a transaction to A. Thus, in 51 transactions, we have a contract that takes up 2 50 computational steps. Miners could try to detect such logic bombs ahead of time by maintaining a value alongside each contract specifying the maximum number of computational steps that it can take, and calculating this for contracts calling other contracts recursively, but that would require miners to forbid contracts that create other contracts since the creation and execution of all 26 contracts above could easily be rolled into a single contract.
Another problematic point is that the address field of a message is a variable, so in general it may not even be possible to tell which other contracts a given contract will call ahead of time. Hence, all in all, we have a surprising conclusion: Turing-completeness is surprisingly easy to manage, and the lack of Turing-completeness is equally surprisingly difficult to manage unless the exact same controls are in place - but in that case why not just let the protocol be Turing-complete?
The Ethereum network includes its own built-in currency, ether, which serves the dual purpose of providing a primary liquidity layer to allow for efficient exchange between various types of digital assets and, more importantly, of providing a mechanism for paying transaction fees. This should be taken as an expanded version of the concept of "dollars" and "cents" or "BTC" and "satoshi".
In the near future, we expect "ether" to be used for ordinary transactions, "finney" for microtransactions and "szabo" and "wei" for technical discussions around fees and protocol implementation; the remaining denominations may become useful later and should not be included in clients at this point.
The issuance model will be as follows:. Despite the linear currency issuance, just like with Bitcoin over time the supply growth rate nevertheless tends to zero. The two main choices in the above model are 1 the existence and size of an endowment pool, and 2 the existence of a permanently growing linear supply, as opposed to a capped supply as in Bitcoin. The justification of the endowment pool is as follows. If the endowment pool did not exist, and the linear issuance reduced to 0.
Hence, in the equilibrium The organization would also then have 1. Hence, this situation is exactly equivalent to the endowment, but with one important difference: the organization holds purely BTC, and so is not incentivized to support the value of the ether unit. The permanent linear supply growth model reduces the risk of what some see as excessive wealth concentration in Bitcoin, and gives individuals living in present and future eras a fair chance to acquire currency units, while at the same time retaining a strong incentive to obtain and hold ether because the "supply growth rate" as a percentage still tends to zero over time.
We also theorize that because coins are always lost over time due to carelessness, death, etc, and coin loss can be modeled as a percentage of the total supply per year, that the total currency supply in circulation will in fact eventually stabilize at a value equal to the annual issuance divided by the loss rate eg.
Note that in the future, it is likely that Ethereum will switch to a proof-of-stake model for security, reducing the issuance requirement to somewhere between zero and 0. Creators are free to crowd-sell or otherwise assign some or all of the difference between the PoS-driven supply expansion and the maximum allowable supply expansion to pay for development.
Candidate upgrades that do not comply with the social contract may justifiably be forked into compliant versions. The Bitcoin mining algorithm works by having miners compute SHA on slightly modified versions of the block header millions of times over and over again, until eventually one node comes up with a version whose hash is less than the target currently around 2 However, this mining algorithm is vulnerable to two forms of centralization.
First, the mining ecosystem has come to be dominated by ASICs application-specific integrated circuits , computer chips designed for, and therefore thousands of times more efficient at, the specific task of Bitcoin mining. This means that Bitcoin mining is no longer a highly decentralized and egalitarian pursuit, requiring millions of dollars of capital to effectively participate in. Second, most Bitcoin miners do not actually perform block validation locally; instead, they rely on a centralized mining pool to provide the block headers.
The current intent at Ethereum is to use a mining algorithm where miners are required to fetch random data from the state, compute some randomly selected transactions from the last N blocks in the blockchain, and return the hash of the result. This has two important benefits. Second, mining requires access to the entire blockchain, forcing miners to store the entire blockchain and at least be capable of verifying every transaction.
This removes the need for centralized mining pools; although mining pools can still serve the legitimate role of evening out the randomness of reward distribution, this function can be served equally well by peer-to-peer pools with no central control.
This model is untested, and there may be difficulties along the way in avoiding certain clever optimizations when using contract execution as a mining algorithm. However, one notably interesting feature of this algorithm is that it allows anyone to "poison the well", by introducing a large number of contracts into the blockchain specifically designed to stymie certain ASICs.
The economic incentives exist for ASIC manufacturers to use such a trick to attack each other. Thus, the solution that we are developing is ultimately an adaptive economic human solution rather than purely a technical one. One common concern about Ethereum is the issue of scalability.
Like Bitcoin, Ethereum suffers from the flaw that every transaction needs to be processed by every node in the network. With Bitcoin, the size of the current blockchain rests at about 15 GB, growing by about 1 MB per hour. Ethereum is likely to suffer a similar growth pattern, worsened by the fact that there will be many applications on top of the Ethereum blockchain instead of just a currency as is the case with Bitcoin, but ameliorated by the fact that Ethereum full nodes need to store just the state instead of the entire blockchain history.
The problem with such a large blockchain size is centralization risk. If the blockchain size increases to, say, TB, then the likely scenario would be that only a very small number of large businesses would run full nodes, with all regular users using light SPV nodes. In such a situation, there arises the potential concern that the full nodes could band together and all agree to cheat in some profitable fashion eg.
Light nodes would have no way of detecting this immediately. In the case of Bitcoin, this is currently a problem, but there exists a blockchain modification suggested by Peter Todd which will alleviate this issue. In the near term, Ethereum will use two additional strategies to cope with this problem. First, because of the blockchain-based mining algorithms, at least every miner will be forced to be a full node, creating a lower bound on the number of full nodes.
Second and more importantly, however, we will include an intermediate state tree root in the blockchain after processing each transaction. Even if block validation is centralized, as long as one honest verifying node exists, the centralization problem can be circumvented via a verification protocol. If a miner publishes an invalid block, that block must either be badly formatted, or the state S[n] is incorrect.
Since S is known to be correct, there must be some first state S[i] that is incorrect where S[i-1] is correct. Nodes would be able to use those nodes to run that part of the computation, and see that the S[i] generated does not match the S[i] provided.
Another, more sophisticated, attack would involve the malicious miners publishing incomplete blocks, so the full information does not even exist to determine whether or not blocks are valid. The solution to this is a challenge-response protocol: verification nodes issue "challenges" in the form of target transaction indices, and upon receiving a node a light node treats the block as untrusted until another node, whether the miner or another verifier, provides a subset of Patricia nodes as a proof of validity.
The Ethereum protocol was originally conceived as an upgraded version of a cryptocurrency, providing advanced features such as on-blockchain escrow, withdrawal limits, financial contracts, gambling markets and the like via a highly generalized programming language. The Ethereum protocol would not "support" any of the applications directly, but the existence of a Turing-complete programming language means that arbitrary contracts can theoretically be created for any transaction type or application.
What is more interesting about Ethereum, however, is that the Ethereum protocol moves far beyond just currency. Protocols around decentralized file storage, decentralized computation and decentralized prediction markets, among dozens of other such concepts, have the potential to substantially increase the efficiency of the computational industry, and provide a massive boost to other peer-to-peer protocols by adding for the first time an economic layer.
Finally, there is also a substantial array of applications that have nothing to do with money at all. The concept of an arbitrary state transition function as implemented by the Ethereum protocol provides for a platform with unique potential; rather than being a closed-ended, single-purpose protocol intended for a specific array of applications in data storage, gambling or finance, Ethereum is open-ended by design, and we believe that it is extremely well-suited to serving as a foundational layer for a very large number of both financial and non-financial protocols in the years to come.
For history of the whitepaper, see this wiki. Ethereum, like many community-driven, open-source software projects, has evolved since its initial inception. Skip to main content. Help update this page. Translate page. See English. No bugs here! Don't show again. What is ether ETH? Use Ethereum. Search away! Open the Ethereum Whitepaper as a PDF A Next-Generation Smart Contract and Decentralized Application Platform Satoshi Nakamoto's development of Bitcoin in has often been hailed as a radical development in money and currency, being the first example of a digital asset which simultaneously has no backing or " intrinsic value " and no centralized issuer or controller.
Introduction to Bitcoin and Existing Concepts History The concept of decentralized digital currency, as well as alternative applications like property registries, has been around for decades. Bitcoin As A State Transition System From a technical standpoint, the ledger of a cryptocurrency such as Bitcoin can be thought of as a state transition system, where there is a "state" consisting of the ownership status of all existing bitcoins and a "state transition function" that takes a state and a transaction and outputs a new state which is the result.
If the provided signature does not match the owner of the UTXO, return an error. Mining If we had access to a trustworthy centralized service, this system would be trivial to implement; it could simply be coded exactly as described, using a centralized server's hard drive to keep track of the state. The algorithm for checking if a block is valid, expressed in this paradigm, is as follows: Check if the previous block referenced by the block exists and is valid. Check that the timestamp of the block is greater than that of the previous block fn.
Let S be the state at the end of the previous block. Suppose TX is the block's transaction list with n transactions. For all i in Return true, and register S[n] as the state at the end of this block. The attacker's strategy is simple: Send BTC to a merchant in exchange for some product preferably a rapid-delivery digital good Wait for the delivery of the product Produce another transaction sending the same BTC to himself Try to convince the network that his transaction to himself was the one that came first.
Merkle Trees Left: it suffices to present only a small number of nodes in a Merkle tree to give a proof of the validity of a branch. Alternative Blockchain Applications The idea of taking the underlying blockchain idea and applying it to other concepts also has a long history. Namecoin - created in , Namecoin is best described as a decentralized name registration database.
Ideally, one would like to be able to have an account with a name like "george". However, the problem is that if one person can create an account named "george" then someone else can use the same process to register "george" for themselves as well and impersonate them. The only solution is a first-to-file paradigm, where the first registerer succeeds and the second fails - a problem perfectly suited for the Bitcoin consensus protocol. Namecoin is the oldest, and most successful, implementation of a name registration system using such an idea.
Colored coins - the purpose of colored coins is to serve as a protocol to allow people to create their own digital currencies - or, in the important trivial case of a currency with one unit, digital tokens, on the Bitcoin blockchain.
In the colored coins protocol, one "issues" a new currency by publicly assigning a color to a specific Bitcoin UTXO, and the protocol recursively defines the color of other UTXO to be the same as the color of the inputs that the transaction creating them spent some special rules apply in the case of mixed-color inputs. This allows users to maintain wallets containing only UTXO of a specific color and send them around much like regular bitcoins, backtracking through the blockchain to determine the color of any UTXO that they receive.
Metacoins - the idea behind a metacoin is to have a protocol that lives on top of Bitcoin, using Bitcoin transactions to store metacoin transactions but having a different state transition function, APPLY'. This provides an easy mechanism for creating an arbitrary cryptocurrency protocol, potentially with advanced features that cannot be implemented inside of Bitcoin itself, but with a very low development cost since the complexities of mining and networking are already handled by the Bitcoin protocol.
Metacoins have been used to implement some classes of financial contracts, name registration and decentralized exchange. Scripting Even without any extensions, the Bitcoin protocol actually does facilitate a weak version of a concept of "smart contracts". However, the scripting language as implemented in Bitcoin has several important limitations: Lack of Turing-completeness - that is to say, while there is a large subset of computation that the Bitcoin scripting language supports, it does not nearly support everything.
The main category that is missing is loops. This is done to avoid infinite loops during transaction verification; theoretically it is a surmountable obstacle for script programmers, since any loop can be simulated by simply repeating the underlying code many times with an if statement, but it does lead to scripts that are very space-inefficient. For example, implementing an alternative elliptic curve signature algorithm would likely require repeated multiplication rounds all individually included in the code.
Value-blindness - there is no way for a UTXO script to provide fine-grained control over the amount that can be withdrawn. This would require an oracle to determine the value of 1 BTC in USD, but even then it is a massive improvement in terms of trust and infrastructure requirement over the fully centralized solutions that are available now. However, because UTXO are all-or-nothing, the only way to achieve this is through the very inefficient hack of having many UTXO of varying denominations eg.
Lack of state - UTXO can either be spent or unspent; there is no opportunity for multi-stage contracts or scripts which keep any other internal state beyond that. This makes it hard to make multi-stage options contracts, decentralized exchange offers or two-stage cryptographic commitment protocols necessary for secure computational bounties. It also means that UTXO can only be used to build simple, one-off contracts and not more complex "stateful" contracts such as decentralized organizations, and makes meta-protocols difficult to implement.
Binary state combined with value-blindness also mean that another important application, withdrawal limits, is impossible. Blockchain-blindness - UTXO are blind to blockchain data such as the nonce, the timestamp and previous block hash. This severely limits applications in gambling, and several other categories, by depriving the scripting language of a potentially valuable source of randomness. Ethereum The intent of Ethereum is to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications, with particular emphasis on situations where rapid development time, security for small and rarely used applications, and the ability of different applications to very efficiently interact, are important.
Ethereum Accounts In Ethereum, the state is made up of objects called "accounts", with each account having a byte address and state transitions being direct transfers of value and information between accounts. An Ethereum account contains four fields: The nonce , a counter used to make sure each transaction can only be processed once The account's current ether balance The account's contract code , if present The account's storage empty by default "Ether" is the main internal crypto-fuel of Ethereum, and is used to pay transaction fees.
Messages and Transactions The term "transaction" is used in Ethereum to refer to the signed data package that stores a message to be sent from an externally owned account. Transactions contain: The recipient of the message A signature identifying the sender The amount of ether to transfer from the sender to the recipient An optional data field A STARTGAS value, representing the maximum number of computational steps the transaction execution is allowed to take A GASPRICE value, representing the fee the sender pays per computational step The first three are standard fields expected in any cryptocurrency.
Messages Contracts have the ability to send "messages" to other contracts. A message contains: The sender of the message implicit The recipient of the message The amount of ether to transfer alongside the message An optional data field A STARTGAS value Essentially, a message is like a transaction, except it is produced by a contract and not an external actor. If not, return an error.
Subtract the fee from the sender's account balance and increment the sender's nonce. If there is not enough balance to spend, return an error. Transfer the transaction value from the sender's account to the receiving account. If the receiving account does not yet exist, create it. If the receiving account is a contract, run the contract's code either to completion or until the execution runs out of gas.
If the value transfer failed because the sender did not have enough money, or the code execution ran out of gas, revert all state changes except the payment of the fees, and add the fees to the miner's account.
Otherwise, refund the fees for all remaining gas to the sender, and send the fees paid for gas consumed to the miner. For example, suppose that the contract's code is: if! The process for the state transition function in this case is as follows: Check that the transaction is valid and well formed. If it is, then subtract 2 ether from the sender's account. Subtract 10 more ether from the sender's account, and add it to the contract's account.
The Vault owner initiates a transaction, and then confirms it in her unhosted cryptocurrency wallet in order to generate a specific amount of Dai in exchange for keeping her collateral locked in the Vault. To retrieve a portion or all of the collateral, a Vault owner must pay down or completely pay back the Dai she generated, plus the Stability Fee that continuously accrues on the Dai outstanding.
The Stability Fee can only be paid in Dai. With the Dai returned and the Stability Fee paid, the Vault owner can withdraw all or some of her collateral back to her wallet. Once all Dai is completely returned and all collateral is retrieved, the Vault remains empty until the owner chooses to make another deposit.
Importantly, each collateral asset deposited requires its own Vault. So, some users will own multiple Vaults with different types of collateral and levels of collateralization. Each Vault type has its own Liquidation Ratio, and each ratio is determined by MKR voters based on the risk profile of the particular collateral asset type. The auction mechanisms of the Maker Protocol enable the system to liquidate Vaults even when price information for the collateral is unavailable.
At the point of liquidation, the Maker Protocol takes the liquidated Vault collateral and subsequently sells it using an internal market-based auction mechanism. If enough Dai is bid in the Collateral Auction to fully cover the Vault obligations plus the Liquidation Penalty, that auction converts to a Reverse Collateral Auction In a Reverse Auction, Keepers bid in decreasing amounts of collateral they are willing to accept for a fixed amount of Dai.
This process is part of the Collateral Auction and will only be initiated if there is enough initial interest in the collateral to cover the Vault's outstanding Dai. Once enough Dai is bid to cover those obligations, then the Reverse Collateral Auction kicks in.
The purpose of the Reverse Collateral Auction is to provide a process that best enables the Vault owner to recover as much leftover collateral as possible, while ensuring all outstanding Dai obligations are first met. Any leftover collateral is returned to the original Vault owner. When the amount of Dai in the Maker Buffer reaches a specific number determined by Maker Governance the surplus amount is put into a Surplus Auction and is used to buy and remove MKR from the total supply.
The surplus amount is net of system debts, such as outstanding Vault obligations in the Collateral Auction and DSR accruals. Dai proceeds from the Collateral Auction go into the Maker Buffer, which serves as a buffer against an increase of MKR overall supply that could result from future uncovered Collateral Auctions and the accrual of the Dai Savings Rate discussed in detail below. Example Collateral Auction Process : A large Vault becomes undercollateralized due to market conditions.
An Auction Keeper An Auction Keeper is a human or automated bot incentivized by the Maker Protocol to monitor the system and trigger liquidation when a Vault's Liquidation Ratio is breached. Each Auction Keeper has a bidding model A bidding model is the strategy behind when to bid, how often to bid, and at what price to bid. A bidding model includes a price at which to bid for the collateral ETH, in this example.
The Auction Keeper uses the token price from its bidding model as the basis for its bids in the first phase of a Collateral Auction, where increasing Dai bids are placed for the set amount of collateral. This amount represents the price of the total Dai wanted from the collateral auction. With enough Dai in the Collateral Auction contract to cover the system's debt plus the Liquidation Penalty, the first phase of the Collateral Auction is over. In order to reach the price defined in its bidding model, the Auction Keeper submits a bid in the second phase of the Collateral Auction.
In this phase, the objective is to return as much of the collateral to the Vault owner as the market will allow. After the bid duration limit is reached and the bid expires, the Auction Keeper claims the winning bid and settles the completed Collateral Auction by collecting the won collateral. In addition to its smart contract infrastructure, the Maker Protocol involves groups of external actors to maintain operations: Keepers, Oracles, and Global Settlers Emergency Oracles , and Maker community members.
Keepers take advantage of the economic incentives presented by the Protocol; Oracles and Global Settlers are external actors with special permissions in the system assigned to them by MKR voters; and Maker community members are individuals and organizations that provide services. A Keeper is an independent usually automated actor that is incentivized by arbitrage opportunities to provide liquidity in various aspects of a decentralized system. The Maker Protocol requires real-time information about the market price of the collateral assets in Maker Vaults in order to know when to trigger Liquidations.
The Protocol derives its internal collateral prices from a decentralized Oracle infrastructure that consists of a broad set of individual nodes called Oracle Feeds. MKR voters choose a set of trusted Feeds to deliver price information to the system through Ethereum transactions.
They also control how many Feeds are in the set. To protect the system from an attacker attempting to gain control of a majority of the Oracles, the Maker Protocol receives price inputs through the Oracle Security Module OSM , not from the Oracles directly.
The OSM, which is a layer of defense between the Oracles and the Protocol, delays a price for one hour, allowing Emergency Oracles or a Maker Governance vote to freeze an Oracle if it is compromised. Emergency Oracles are selected by MKR voters and act as a last line of defense against an attack on the governance process or on other Oracles.
Emergency Oracles are able to freeze individual Oracles e. It is used during emergencies as a last-resort mechanism to protect the Maker Protocol against attacks on its infrastructure, and used to facilitate a Maker Protocol system upgrade. The process is fully decentralized and controlled by Maker Governance. The flexibility of Maker Governance allows the Maker community to adapt the DAO team framework to suit the services needed by the ecosystem based on real-world performance and emerging challenges.
Examples of DAO team member roles are the Governance Facilitator, who supports the communication infrastructure and processes of governance, and Risk Team members, who support Maker Governance with financial risk research and draft proposals for onboarding new collateral and regulating existing collateral.
It can be accessed via the Oasis Save portal or through various gateways into the Maker Protocol. The DSR is a global system parameter that determines the amount Dai holders earn on their savings over time. When the market price of Dai deviates from the Target Price due to changing market dynamics, MKR holders can mitigate the price instability by voting to modify the DSR accordingly:. Initially, adjustment of the DSR will depend on a weekly process, whereby MKR holders first evaluate and discuss public market data and proprietary data provided by market participants, and then vote on whether an adjustment is necessary or not.
The motivation behind this plan is to enable nimble responses to rapidly changing market conditions, and to avoid overuse of the standard governance process of Executive Voting and Governance Polling. Any voter-approved modifications to the governance variables of the Protocol will likely not take effect immediately in the future; rather, they could be delayed by as much as 24 hours if voters choose to activate the Governance Security Module GSM.
The delay would give MKR holders the opportunity to protect the system, if necessary, against a malicious governance proposal e. In practice, the Maker Governance process includes proposal polling and Executive Voting.
Proposal polling is conducted to establish a rough consensus of community sentiment before any Executive Votes are cast. This helps to ensure that governance decisions are considered throughtfully and reached by consensus prior to the voting process itself. Executive Voting is held to approve or not changes to the state of the system.
An example of an Executive Vote could be a vote to ratify Risk Parameters for a newly accepted collateral type. At a technical level, smart contracts manage each type of vote. A Proposal Contract is a smart contract with one or more valid governance actions programmed into it. It can only be executed once.
When executed, it immediately applies its changes to the internal governance variables of the Maker Protocol. After execution, the Proposal Contract cannot be reused. It cannot initiate new transactions on its own; rather, when it receives a message from an externally owned account or another contract account, it executes its code, allowing it to read, write, and send messages or create smart contracts.
MKR token holders can then cast approval votes for the proposal that they want to elect as the Active Proposal. The Ethereum address that has the highest number of approval votes is elected as the Active Proposal. The Active Proposal is empowered to gain administrative access to the internal governance variables of the Maker Protocol, and then modify them. In addition to its role in Maker Governance, the MKR token has a complementary role as the recapitalization resource of the Maker Protocol.
If the system debt exceeds the surplus, the MKR token supply may increase through a Debt Auction see above to recapitalize the system. This risk inclines MKR holders to align and responsibly govern the Maker ecosystem to avoid excessive risk-taking. MKR holders can also allocate funds from the Maker Buffer to pay for various infrastructure needs and services, including Oracle infrastructure and collateral risk management research.
The governance mechanism of the Maker Protocol is designed to be as flexible as possible, and upgradeable. Should the system mature under the guidance of the community, more advanced forms of Proposal Contracts could, in theory, be used, including Proposal Contracts that are bundled. For example, one proposal contract may contain both an adjustment of a Stability Fee and an adjustment of the DSR.
Nonetheless, those revisions will remain for MKR holders to decide. Each Maker Vault type e. The parameters are determined based on the risk profile of the collateral, and are directly controlled by MKR holders through voting. The successful operation of the Maker Protocol depends on Maker Governance taking necessary steps to mitigate risks.
Some of those risks are identified below, each followed by a mitigation plan. One of the greatest risks to the Maker Protocol is a malicious actor—a programmer, for example, who discovers a vulnerability in the deployed smart contracts, and then uses it to break the Protocol or steal from it.
In the worst-case scenario, all decentralized digital assets held as collateral in the Protocol are stolen, and recovery is impossible. Mitigation: The Maker Foundation's highest priority is the security of the Maker Protocol , and the strongest defense of the Protocol is Formal Verification Formal Verification means creating mathematical specifications of the intended behavior of the system, alongside mathematical proofs that the codebase implements behavior that is identical to the intended behavior, with no unintended side effects as there is no mathematical evidence that the intended behavior produces effects inconsistent with the intended behavior.
The Dai codebase was the first codebase of a decentralized application to be formally verified. These security measures provide a strong defense system; however, they are not infallible. Even with formal verification, the mathematical modeling of intended behaviors may be incorrect, or the assumptions behind the intended behavior itself may be incorrect.
A black swan event is a rare and critical surprise attack on a system. For the Maker Protocol, examples of a black swan event include:. Please note that this list of potential "black swans" is not exhaustive and not intended to capture the extent of such possibilities. Oracle price feed problems or irrational market dynamics that cause variations in the price of Dai for an extended period of time can occur. If confidence in the system is lost, rate adjustments or even MKR dilution could reach extreme levels and still not bring enough liquidity and stability to the market.
As a last resort, Emergency Shutdown can be triggered to release collateral to Dai holders, with their Dai claims valued at the Target Price. The Maker Protocol is a complex decentralized system. As a result of its complexity, there is a risk that inexperienced cryptocurrency users will abandon the Protocol in favor of systems that may be easier to use and understand.
Although Dai is designed in such a way that users need not comprehend the underlying mechanics of the Maker Protocol in order to benefit from it, the documentation and numerous resources consistently provided by the Maker community and the Maker Foundation help to ensure onboarding is as uncomplicated as possible. The Maker Foundation currently plays a role, along with independent actors, in maintaining the Maker Protocol and expanding its usage worldwide, while facilitating Governance.
Moreover, successful management of the system should result in sufficient funds for governance to allocate to the continued maintenance and improvement of the Maker Protocol. Users of the Maker Protocol including but not limited to Dai and MKR holders understand and accept that the software, technology, and technical concepts and theories applicable to the Maker Protocol are still unproven and there is no warranty that the technology will be uninterrupted or error-free.
The Mitigation section there explains the technical auditing in place to ensure the Maker Protocol functions as intended. The Dai Target Price is used to determine the value of collateral assets Dai holders receive in the case of an Emergency Shutdown. Emergency Shutdown or, simply, Shutdown serves two main purposes. First, it is used during emergencies as a last-resort mechanism to protect the Maker Protocol against attacks on its infrastructure and directly enforce the Dai Target Price.
Emergencies could include malicious governance actions, hacking, security breaches, and long-term market irrationality. Second, Shutdown is used to facilitate a Maker Protocol system upgrade. The Shutdown process can only be controlled by Maker Governance. This prevents the Governance Security Module if active from delaying Shutdown proposals before they are executed. With Emergency Shutdown, the moment a quorum is reached, the Shutdown takes effect with no delay.
When initiated, Shutdown prevents further Vault creation and manipulation of existing Vaults, and freezes the Price Feeds. The frozen feeds ensure that all users are able to withdraw the net value of assets to which they are entitled. Effectively, it allows Maker Vault owners to immediately withdraw the collateral in their Vault that is not actively backing debt.
After Shutdown is triggered, Collateral Auctions begin and must be completed within a specific amount of time. That time period is determined by Maker Governance to be slightly longer than the duration of the longest Collateral Auction. This guarantees that no auctions are outstanding at the end of the auction processing period. At the end of the auction processing period, Dai holders use their Dai to claim collateral directly at a fixed rate that corresponds to the calculated value of their assets based on the Dai Target Price.
There is no time limit for when a final claim can be made. Dai holders will get a proportional claim to each collateral type that exists in the collateral portfolio. Note that Dai holders could be at risk of a haircut, whereby they do not receive the full value of their Dai holdings at the Target Price of 1 USD per Dai. This is due to risks related to declines in collateral value and to Vault owners having the right to retrieve their excess collateral before Dai holders may claim the remaining collateral.
For more detailed information on Emergency Shutdown, including the claim priorities that would occur as a result, see the published community documentation. A cryptocurrency with price stability serves as an important medium of exchange for many decentralized applications. As such, the potential market for Dai is at least as large as the entire decentralized blockchain industry.
But the promise of Dai extends well beyond that into other industries. Should MKR holders approve new assets as collateral, those assets will be subject to the same risk requirements, parameters, and safety measures as Dai e. As a result, many decentralized applications use MakerDAO Oracles to ensure the security of their systems and to provide up-to-date price data in a robust manner.
This confidence in MakerDAO and the Maker Protocol means that Maker Governance can expand the core Oracle infrastructure service to better suit the needs of decentralized applications. The Maker Protocol allows users to generate Dai, a stable store of value that lives entirely on the blockchain.
Dai is a decentralized stablecoin that is not issued or administered by any centralized actor or trusted intermediary or counterparty.