A Short Review of 4th Generation Cryptocurrencies
In the course of designing Cypher, our home-brewed cryptoken infrastructure, I have witnessed the emergence of a new generation of cryptocurrency designs I can name 4th generation cryptocurrencies owing my lack of imagination in naming things, but also because a generational classification I had read earlier had seemed to make sense. First generation cryptocurrencies are bitcoin and its various forks, second generation are various altcoins like Monero, and third generation are utility token and smart contract platforms like Ethereum. And then, we are seeing things like Enigma which bring new, strong cryptosystems into the mix. Ben Ricket classifies likewise, only he starts from zero. I also agree with the features of 4th gen coins he listed.
In my opinion, the most important three problems to be addressed regarding the fourth generation coins were scalability, privacy, identity, mobility, decentralization, in that order. Stellar does scale to 10K transactions per second (tps), we should be shooting for 100K tps and more to address utility network scale applications like energy. Public blockchains are too public, I should be able to conceal my identity from unauthorized people, what the transacted amounts are, and what the smart contract computed, which would make it akin to private business contracts/transactions in real life. I should be able to request that another party reveals a part of his identity (such as his name, org., etc.), and that identity must somehow be validated. Mobile platforms should be able to run a sufficiently complete and efficient node software for the cryptocurrency. The cryptocurrency should also be governed without a central authority, and the network software should evolve according to voting by the peers. That is why my own design Cypher begins by addressing scalability, but then tries to add a bit of privacy to the transactions, and uses decentralized ID management and can run on mobile, in that order.
Tezos might be one of the first, since it addressed decentralized governance. The source code is available for OCaml hackers. Enigma brought homomorphic encryption technology to implement what they call secret contracts, that have confidentiality of computation, but are publicly verifiable. The latter property of Enigma also helps with its scalability, since this will likely ease achieving consensus, and thus Enigma also makes a stab at scalability. The kind of homomorphic encryption Enigma uses which is secure multi-party computation can execute arbitrary code that works on encrypted input and produces encrypted output. Although it is not a cryptocurrency, Oasis Labs seems to be an alternative to Enigma, and uses multi-party secure computation to create secure enclaves and also supports differential privacy, their technology will be used by Nebula Genomics project. AvaCoin uses the Avalanche protocol and introduces a scalable POS (Proof of Stake) based cryptocurrency protocol — like Cypher it requires no mining, it also supports custom blockchains and smart contracts. Avalanche protocol uses ideas from distributed computing to propagate consensus and AvaLabs has been backed by VC’s to “build the internet of finance”. Another recent project, xxcoin, uses quantum-resistant cryptography and claims be the first truly high performance scalable cryptocurrency that can scale linearly with the number of users. Designed by cryptography experts, xxcoin puts heavy emphasis on privacy and decentralization through its xx network; the rare combination of robust security features with high performance may indeed make xxcoin attractive. Finally, AlgoRand is a clever twist on the bitcoin consensus logic allowing a pure POS blockchain implementation. AlgoRand exploits cryptographic randomness and staking to distribute rewards to users; it uses a decentralized byzantine fault-tolerance scheme. For non-technical users, that means it does not have a central choke-point, yet it can withstand attacks without needing mining. The departure of AlgoRand from bitcoin is that bitcoin tries to pick a winner based on expensive hashes which are then discarded, AlgoRand like protocols can randomize who gets rewards and do not waste precious computing time. AlgoRand instead randomly selects a committee of verifiers, and rewards them in proportion to their stakes. The cryptocurrency is resistant to up to 1/3 of staking by malicious users. The coins are called algos, and it sounds as if we should be owning more algos. AlgoRand features smart contracts using a new language called TEAL and other standard features that are expected in a complete cryptocurrency platform; what is more, the development team is led by professional mathematicians like xxcoin.
With all these new contenders for the crown, Ethereum faces stiff competition. Although it is quite difficult to forecast whether one of these new cryptocurrencies will be a market winner, we should be seeing significant growth for 4th generation cryptocurrencies after market equilibrium is reached in Bitcoin and Ethereum prices. These coins all have unique features and strengths that will help them gain market share. For the first time, professional cryptographers have directly entered the game, and have created exciting bids for serious minded cryptofinance adopters.
Caveat Emptor: This essay is not investment advice, as usual.