Ferrum, An exchange protocol across different block-chain technologies
Bitcoin and Ether are examples of major digital currencies on the market today. Currently such digital currencies are traded in traditional centralized exchanges. Etherium provides infrastructure for creating tokens on the Etherium blockchain, hence, such tokens can be exchanged using smart contracts and the transaction will be confirmed within the Etherium blockchain. However, a decentralized exchange of assets across different technologies, such as Bitcoin to Ether exchange is not possible today without modifying the existing blockchain protocols. Additionally, each blockchain technology has its own strengths and weaknesses. The ability of freely moving within technologies can prove extremely useful. In this paper we propose a new intermediate network and exchange system which can be pegged to other digital assets or used as exchange medium between different assets with different decentralized transaction management technologies. We discuss a protocol called Ferrum and its implemented cryptocurrency called Fe. The value of every Fe is pegged to one or a portfolio of various other crypto-currencies and it can be converted to or from the underlying cryptocurrencies it represents. We propose an implementation of Ferrum on a Tangle (based on IOTA tangle), hence, people can convert their Bitcoins to Fe equivalent and execute countless free transactions on the Ferrum network. They can further convert their Fe back to any other originating crypto-currency supported by the Ferrum network. We utilize concepts that we call Proof of Burn, External Wallet, and Futures to enable the exchanges without relying on a centralized market maker.
Crypto-currencies such as Bitcoin and Etherium have recently got so much press that there is no need for an introduction to the concepts of block-chain and crypto currencies. Readers can refer to [wiki-blockchain] for more information. The price of bitcoin has seen phenomenal growth recently and attention of public and institutional investors have significantly increased the potential of using top crypto-currencies as store of value for long term. Additionally, the world of block chain and crypto-currency is widely elemental with hundreds of different coins and distributed ledgers on the market. The dynamism of innovation in the field is not necessarily compatible with the real capacities of adopting markets, hence; causing survival of a only few winner ideas on the market and death of the majority of innovations. Old-fashion exchanges, which are trust based businesses exist that facilitate exchange of crypto-currencies with serious limitations, but currently there is no organic solution for communities to support their crypto-currencies and they need to rely on various exchanges to adopt their technologies.
In this paper we propose a distributed exchange protocol called Ferrum that aims to solve above challenges. Ferrum acts as an intermediate network with plugins for exchange with external networks. Every community can write and start using a plugin on the network which would allow them to exchange their currency with willing parties on the network that adopt their plugin, hence; eliminating the need for any trusted party and enabling a truly global and organic exchange.
In the next few paragraphs we present the several challenges in the world of crypto-currencies that motivated the design of Ferrum:
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Bitcoin is not a good currency but is a good store of value. Bitcoin and a few other major crypto-currencies have established themselves as store of value. This is great news for the world of crypto-currencies. We can think of Bitcoin as gold in the real-world. The scarcity of gold has made it a global store of value that can be used to back the value of other assets, however gold cannot be practically used in day-to-day transaction. Although it is possible to conceive a world in which people buy their morning coffee by passing a miniscule particle of gold to the barista, it is not a probable outcome. We need a crypto-currency (Fe) that can be backed by (pegged to) Bitcoin that can scale and can be transacted with zero fee, and hopefully without producing too much greenhouse gases in the process. Fe should be freely and reliably converted to and from Bitcoin, or other crypto-currencies without volatility. It is important for the pegged transaction to present no volatility in value in relation to the external crypto-currency it represents, however there could be a fee for transacting between Fe and the external crypto-currency. The promise of the Ferrum network is that with enough liquidity people would not need to transfer their currencies back to the external crypto-currency often. Fe can be used as a token for spending Bitcoin (BTC) or other crypto-currencies. For example if a coffee costs BTC 0.0002, consumer will pay the amount of coffee in BTC to the seller, but the transaction happens in milliseconds over the Ferrum network, hence, no transaction fee.
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Exchanges are not decentralized The promise of block chain and crypto-currencies were to provide a decentralized network for peer to peer transactions, but in reality majority of crypto-currencies are held and transacted at a few big companies and exchanges such as Coinbase. The current situation is far from the premised world of decentralized transactions and community owned currencies and is more like a traditional, but less effective banking system (hence scalability issues and expensive transaction fees). There is clearly a need for a decentralized exchange where once can contribute to the system without no need to trust or rely on giant corporations. This is by far the biggest failure of crypto currencies and the need to address this problem is felt by the community and consumers. Ideally between the multi-billion dollar crypto currency world, transfer of value should be able to happen without the need to resort back to fiat currencies or traditional trust-based organizations. Ferrum network can fill this gap by providing an intermediate network for exchange of values across different crypto-currencies.
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Regulatory risks in technology proposals Many proposals and white papers over existing or new decentralized transaction systems rely on nodes acting certain tasks which are parallel to roles of a money transmitting agent, a market maker, or other roles. It is important to know that by giving roles such as market maker to the nodes, they could become subject of regulatory risks. In many places in the world, the regulatory framework regarding to the crypto-currencies is in development and it is very likely that governments could start recognizing and regulating crypto-currency transactions. Therefore a market maker in a blockchain network might be subject to licenses, fees, or liabilities. We believe it is important that any exchange proposal does not introduce roles for nodes or wallets other than validating peer-to-peer transactions.
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Tax consequences Once governments classify crypto-currencies as assets or currencies, it is possible that they might want to regulate or tax transactions between different crypto-currencies and tokens. Our proposal (Fe) is not technically a crypto-currency of its own. Instead it is a surrogate of external currencies which can be transacted on an intermediate network. Please note that this is not a legal advice and merely a description of what Fe is in relation to the external crypto-currencies it represents.
Ferrum network and Fe are designed to solve above problems. In the rest of this paper we propose the Ferrum network and its essential concepts.
In a general form, Ferrum network is a peer-to-peer distributed network with a consensus protocol in which the following statements are true:
- Read-only access to other external networks. All or some agents on a Ferrum network should be able to read information from one or more external networks. For example a Ferrum agent could validate transactions from the Bitcoin blockchain.
- Irreversible transactions into the network from an external network. There must be a method of transacting into the Ferrum network from external networks - such as sending Bitcoins into the Ferrum network. Such transactions cannot be reversible, meaning the originator cannot double spend the Bitcoins or undo the transaction. Such guarantees should be made possible without modification of the external network.
- Delayed transactions. A transaction on the Ferrum network can be delayed. We call such transactions Futures. A future transaction can be considered void after the agreed-upon time is reached, if the condition of transaction is not met. For the Ferrum network it suffices to limit the underlying condition to the "completion of another transaction". This is a special case of smart contracts, but for Ferrum network to work as a distributed exchange, no custom contract other than the above (Futures) needs to be implemented.
The subjects of transactions on the Ferrum network is Fe which, for the lack of better world we refer as Token or Crypto-currency. Fe, however, is not a crypto-currency on itself. Instead the value of Fe is a function of the values of external crypto-currencies it represents. To clarify, imagine the following scenario:
Alice generates 1 Fes by transferring one Bitcoin to the Ferrum network. She then generates another Fe by transferring one Ether to the Ferrum network. Alice now has 2 Fes but her total wealth is 1 Bitcoin and 1 Ether. We represent Alice's wealth as "1 Fe(Bitcoin)+ 1 Fe (Ether)". The general form of Alice's wealth is Sigma_i(a_i.Fe(i)) where i is the external cryptocurrency and w_i is the amount for i. In-fact a Fe wallet is nothing but a surrogate for a portfolio of external cryptocurrencies.
Alice then sends all of her Fe(Ether), plus 50 percent of her Fe(Bitcoin) to Eve for her birthday gift. Alice now has only 0.5 Fe(Bitcoin), and Eve has 1 Fe(Ether) and 0.5 Fe(Bitcoin). Eve can decide to get back some actual Bitcoins by engaging in a Future transaction with Mike. The future transaction can be described as: "Transfer 0.5 Fe(Bitcoin) from Eves Fe wallet to Mike's Fe wallet, under the following condition; Transfer of 0.5 Bitcoin from Bitcoin Wallet W0 to Bitcoin Wallet W1 has happened before tomorrow 12:00pm". Wallets W0 and W1 are Bitcoin wallets where Mike and Eve have agreed upon before starting the Future transaction. If the external transaction is completed before the agreed time, Eve's Fe's would be invalidated and Mike would own 0.5 Fe(Bitcoin). Otherwise Fe's would be release back to Eve and Mike ends up with nothing.
The Future transaction is limited by the Ferrum network, such that Bitcoins can only be transacted with Fe(Bitcoin) of the exact same value. Although Fe(Bitcoin) can freely be transacted by Fe(Ether), external futures are constrained by the network. The obvious question here is what motivates Mike to converts his Bitcoins to Fe(Bitcoin)? Once the Ferrum network achieves enough maturity the only motivation that Mike needs is access to Fe which would allow him to buy goods or exchange crypto-currencies without fees, but until such level of maturity is achieved an incentive system needs to be implemented. We propose several inventive ideas in the later sections of this paper.
For the Ferrum network to act as a decentralized exchange, it needs to be able to talk to external network. The implementation of Ferrum network allows this by utilizing a plugin model. Every plugin has a unique identifier, a version and a signature. It then implements the Ferrum network interface. Nodes may adopt a plugin for an external network. There might be several plugins for an external network such as Bitcoin. It would be up to the community to use any of them. Unreliable plugins would be rejected by the community.
Plugins also define the proof of burn addresses as a mean of generating Fes. Hence it is important for the community to adopt reliable plugins or a bad actor can use his personal wallet for the proof of burn address and use all the external currency that were supposed to be burned but weren't. Nodes can also choose to use multiple plugins with an AND or some other voting mechanism for validating external transactions (For example, one can use the validation result from three different Bitcoin plugins before issuing a Fe(Bitcoin) transaction for increased security).
Transactions originated from new plugin that are not widely accepted would still be validated by normal nodes, however; if a node is validating a transaction does not have the appropriate plugin, it only validates the chain up to the network edge. To issue an edge transaction, one would need to do some proof of work. This will help prevent spamming the network with invalid edge transactions.
Although an edge transactions cannot be confirmed by users that do not have the appropriate plugin installed, they can be included in the validation process. There is little incentive for a bad actor to create invalid edge transactions (i.e. generating Fe(Bitcoin) without burning any Bitcoin). The bad actor needs to create proof of work, however the created *Fe(Bitcoin)*s as the result of this edge transactions would be invalid. Although other nodes without the appropriate plugin could validate these edge transactions, an eventual buyer of Fe(Bitcoin) would inevitably have the right plugin installed and can confirm that those *Fe(Bitcoin)*s are invalid. Hence a bad actor cannot generate value from thin air.
We the notation Fe(0) to call a worthless Fe. To a node without plugin X, Fe(X) is equal to Fe(0) and acts like an empty transaction. Generating *Fe(0)*s is a way to contribute to the network security since to generate one Fe(0) one has to validate at least two other transactions.
Ferrum implementation would have hard-coded names for external networks (e.g. Bitcoin, Etherium, etc.). Plugins can introduce new external networks by extending the default list. It would be up to the community to ensure the validity of a plugin and uniqueness of the names other than the ones in the reference implementation.
With external network plugins, any mature or experimental crypto currency can be exchanged on Ferrum without a need to trust or ask permission from any person or entity as long as enough people are willing to do so.
There are two essential types of transaction in the Ferrum network. The internal transaction which can be understood by all the nodes, and the edge transactions which are transactions that rely on validation of another transaction in external networks. The edge transactions can only be validated by the nodes that are running the appropriate plugin.
An edge transaction needs to be validated with two internal transaction immediately to be validated. One from sender and another from reviver. Each of these transactions require proof of work attached to them which helps prevent spamming the network with edge transaction.
We implement edge transactions as two future transactions linked together. The Edge futures are described in more details later in this section.
Proof of burn is the main method for creating Fes in the Ferrum network. We define proof of burn as Sending funds to a wallet such that the funds become provably not spendable afterwards.
Let X be than external network to Ferrum. Let w_X_0 be the wallet in the X network that is not spendable. Any funds sent to w_X_0 will be effectively disappeared. Let w_X_p be the wallet p in network X. One can generate Fe(X) by burning funds in X which means transferring funds from w_X_p to w_X_0, then claiming equivalent amount of Fe(X) pointing to the relevant transaction on network X.
Above transaction on the X network is not enough to constitute a safe proof of work mechanism. Because any person can watch transactions coming to w_X_0 and immediately claim the equivalent *Fe(X)*s as theirs. To mitigate this problem we should modify the proof of burn protocol as follows:
Owner of funds w_X_p, first; creates a wallet w_X_p' in network X. She then creates a wallet p' in Ferrum network and claims her *Fe(X)*s. At this point these claimed *Fe(X)*s are worthless because they are not backed by a transaction w_X_p' -> w_X_0. Now she initiates a transaction from w_X_p to w_X_p' then another transaction from w_X_p' to w_X_0. Once these two transactions complete, her *Fe(X)*s become valid and she will be spend them.
In the above proof of burn protocol, anybody can see the newly claimed Fe(X) on the Ferrum network, but this information does not make it any easier to steal funds.
A future, is a transaction that executes in some future time. Ferrum supports three special future protocols to accomplish two tasks. To allow exchange of funds with external networks, and to allow exchange of funds within the Ferrum network. Proof of burn futures and Edge futures facilitate exchange of funds with external networks, while Exchange futures facilitate exchange of funds within the Ferrum network.
Three type of futures:
- Proof of burn futures: The proof of burn future is the only future that does not involve a specific time. It involves two transactions, one to claim *Fe(X)*s in the form of transferring funds from a null wallet to the w_p' (where p' is a temporary wallet), and another to transfer funds from w_p' to w_new where w_new is a new wallet. The wallet w_p' is created to match an external wallet w_X_p' and is of a temporary nature. The second transaction can be validated within the network by nodes that can not read into the X network.
- Edge futures: In addition to proof of burn, edge futures provide means of transacting between Ferrum network and an external network X. An edge future is a transaction that happens between Alice and Bob and in the process they exchange Fe(X) with equivalent amount of funds from X at future time t_f. Let w_X_a be Alice's wallet in X and w_X_b be Bob's wallet in X. Also w_a is Alice's wallet in Ferrum. Alice already has funds in her wallet w_a. She will create a special temporary wallet w_a' plus another permanent wallet w_a''. Bob will also create a wallet w_b. Alice will send a special transaction T_a,a',a'',b: w_a -> *w_a'*with a reference time t_f. T_a,a',a'',b references w_a'' as the rollback address, and w_b as the target address. T_a,a',a'',b will also have a condition w_X_b -> w_X_a for a set amount. Note that Alice and Bob have already agreed on the external wallets, the amount, and the future time t_f. t_f could also be influence by the plugin to ensure enough time is passed for the transaction w_X_b -> w_X_a in network X be completed irreversibly. Up until t_f+buffer is reached, funds in w_a' are locked. After t_f, T_a,a',a'',b will be read as T_a',b if the condition is fulfilled, or T_a',a'' if the condition is not fulfilled, hence the transaction is rolled back. A node that does not have the relevant plugin for X cannot validate an edge transaction, so it can assume that either T_a',a'' or T_a',b are valid. However, Alice or Bob can only use their Fe_X if the node accepting their funds has the appropriate plugin and can validate the Edge transaction.
- Exchange futures (inside network): -> One user creates an special exchange address with a timeout. Two parties send Xs and Xr {amount, rollback address, other party (target) address, target amount} to this special address. Funds cannot be spend before timeout + buffer. By timeout, the transaction is considered valid or void. If the transaction is valid, the funds are considered as sent to the target addresses, e.g. *Xc.amount -> Xr.target address and Xc.amount -> Xc.target address. If the transaction is void, the funds are considered sent to each parties rollback address. The validity of transaction after timeout is calculated by ensuring the following conditions: *X0.amount == X1.target amount and X0.target address == X1.address). If any of the values do not match the transaction is considered void.