Skycoin Overview

• Skycoin Introduction
• Innovations And Flaws With Bitcoin And The Current Blockchain Protocols
• Innovations Produced By Bitcoin
• Major Flaws Of Bitcoin
• Desirable Properties For Systems Of Distributed Consensus For Financial Ledgers
• Skycoin Security Philosophy
• Transparency And Security: Obelisk And Public Broadcast Channels
• Obelisk
• Simple Binary Consensus Algorithm: Choosing Between Two Blocks
• Consensus On Multiple Concurrent Branch Choices

Skycoin Introduction

Skycoin is based on technology which introduces a new cryptographic primitive known as a public broadcast channel. It also introduces a new consensus algorithm implementation, called Obelisk, which mitigates the commitment problems arising from the Proof-of-Work and mining processes underlying Bitcoin, thus addressing a host of security issues associated with the latter. Obelisk is not a single algorithm, but an implementation employing multiple techniques to deliver specific security guarantees.

Innovations and Flaws with Bitcoin and The Current Blockchain Protocols

In Bitcoin, new transactions are placed into a block, which is appended to the blockchain. Any peer in the Bitcoin network can create new blocks. Each block therefore has a single parent but one or more valid successors (children). The chains form a tree and the core problem that Bitcoin solves is getting every node in the network to agree on which of the prospective chains in the chain tree is the consensus blockchain.

Bitcoin uses a technique called Proof‐of‐Work (PoW) to determine a unique blockchain. A valid block requires a hash value, which is below a target value. Nodes add transactions to a new block and randomly try nonces until a valid hash for a block is found.

A function is used to create a total ordering of chains in the block tree. The chain which has the highest difficulty and required the most hashing operations to produce is “the longest chain” and forms the consensus chain. The notion of “block depth” and “difficulty” create a total ordering over all linear chains in the block tree and only the most resource intensive chain is accepted to produce the consensus chain.

Bitcoin nodes connect to each other randomly and each node relays the most difficult chain of blocks that it knows about to its peers. If one node has a more difficult to produce chain than another connected peer, the peer will receive the blocks sequentially. The peer will evaluate the function and decide whether the received chain is more difficult to produce and thus potentially switch its consensus to the received chain. The peer will then advertise its new chain to its peers. In this way, consensus is propagated throughout the network and all nodes reach the same consensus.

Bitcoin does not assume that nodes have identities and does not assume that nodes are honest. Nodes may send other nodes any data and it cannot affect consensus decisions because difficulty is something that can be independently verifed on its own merit.

Innovations Produced by Bitcoin

* The Blockchain

A single data structure that everyone can possess.

* Public Ledger for Transactions

Storing financial transactions in the blockchain.

* Use of PoW and Difficulty Retargeting to Maintain A Constant Rate of Block Production

* Use of Public Key Hashes as Addresses

Public keys are not disclosed until used.

* Use of “outputs” for Balances

It ignores trying to create divisible digital cash: To pay $20 from a $25 output, send $20 to person and $5 back to yourself.

* Pow Difficulty Function and Block Depth

First use of a function that defines total ordering on block trees. The public ledger circumvents the double spending problem of traditional digital cash.

Major Flaws of Bitcoin

These are the issues that must be addressed in the development of new cryptocurrency solutions. Bitcoin should be regarded as an embryonic cryptocurrency upon which future developments must improve. The technology upon which Skycoin is based addresses Bitcoin’s major deficiencies by redesigning the entire system of distributed consensus.

* Consensus Decisions in Bitcoin Are Not Final and Can Be Reverted

A person or organization that can rent or buy enough hashing power can revert transactions.

* Bitcoin Achieves Network Consensus But Individual Bitcoin Nodes Are Highly Vulnerable to Adversaries Who Control The Routers Through Which Packets Pass

A router-controlling adversary has absolute control over the view of a node and can arbitrarily influence the node’s consensus decisions.

* Bitcoin Exchanges Have Become Highly Vulnerable to Attack

Skilled attackers may employ 51% attacks and the buying and selling of alt coins at Bitcoin exchanges to drive the latter into insolvency.

* Banks and Gambling Sites Have Become Vulnerable to 51% Attacks

* As Bitcoin Matures, The Buying of Options Against Bitcoin and Attacks Against The Networks Become More Profitable

In the future, successful attacks on Bitcoin could result in several hundred millions of dollars in profit from options trading.

* States With Strong Capital Controls, As Well As Competing Corporations, May Directly Attack The Bitcoin Network to Protect Their Financial Interests

Such entities may easily absorb the costs of attacking the network and undermining Bitcoin’s security.

* Services That Allow “Cloud Hashing” and Rental of 3rd Party Hash Power Are Increasingly Successful

Many large pools now have the ability to rent the hash power for a majority attack.

* Hackers Can Use Numerous Security Holes in Routers and Networking Equipment to Steal Coins From Banks and Exchanges

An attacker can control the peers connected to a Bitcoin node and ensure connections to attacker-controlled nodes. For instance, an attacker may introduce a deposit transaction to the side chain of a bank and get the bank to issue a withdraw transaction which is then relayed to the main network.

* Bitcoin Cannot Offer Security at A Low Cost

The Bitcoin network is using immense and exponentially growing amounts of electricity. Bitcoin’s security purposely relies upon creating as much electrical waste as possible. As security is related to the cost of achieving majority hash rate, the cost of running the Bitcoin network are constantly driven up. In a well-designed system, $1 in security costs $1000 to circumvent. In Bitcoin the ratio is $1 to $1. In addition, this is environmentally irresponsible.

* Bitcoin Fundamentally Cannot Decrease Transaction Times Without Compromising Security

Bitcoin transactions take on average 10 minutes to get included in a block, and more time is required for more security.

Desirable Properties for Systems of Distributed Consensus for Financial Ledgers

The criteria on which Bitcoin can be improved are:

* No Double Spending

Once a transaction has executed, it should be impossible to revert consensus. Consensus should be as irreversible as possible.

* Efficiency

The cost to run a perfectly secure ledger should be extremely low.

* Speed

The system should allow transactions to be confirmed within seconds.

* Transparency

It should be easy to audit and identify malicious nodes.

* Router Attack Security

Nodes should be able to detect if their consensus differs from the network.

Some security properties should remain intact even if the vast majority of nodes in the network are malicious and colluding.

On a fundamental level, many of the security issues associated with the Bitcoin system arise from the inherent commitment problem of the Proof of Work and mining processes. Its security issues represent a real-world Byzantine General Problem. Incentives exist for participants to manipulate verification processes, by engaging in bribery and hacking for instance. Attackers will manipulate system clocks, compromise routers, use hash collisions, flood the network with hundreds of thousands of bots and exploit signature malleability.

A secure system must not only protect against every known attack, but be robust enough to evolve and adapt to future attacks. Some issues in Bitcoin can be fixed, such as signature malleability. Other issues are fundamental and cannot be addressed without defining an entirely new framework, such as the reliance on Proof of Work and miners.

Skycoin Security Philosophy

Security is a process of continuous identification and fortification against threats. A good system achieves “defense in depth”, has multiple redundant systems and will survive the complete failure of any individual measure. Good security requires the differentiation between threats which are existential and those which are mere annoyances.

While it is obvious that no single system can eliminate all security threats and simultaneously achieve all the objectives listed above, Skycoin represents the next step in cryptocurrency technology because it takes a modular layered approach to security and uses different systems to enforce particular guarantees. Skycoin security is focused on addressing the existential threats faced by Bitcoin and protecting users from day-to-day threats, attempting to give the highest degree of protection against the class of attacks that would infict the greatest losses upon its users, stakeholders and institutions. This requires a complete redesign of Bitcoin at both ends from wallet generation to blockchain consensus and fundamental innovation is several other areas.

Most of the losses in Bitcoin derive from deficiencies in design, a lack of usability, and end user mistakes rather than fundamental technical attacks in the software or mathematics. Skycoin must address both the looming existential mathematical threats and the security perils that Bitcoin’s incomplete and poorly thought out user experience has created for everyday users. The poor usability and design has forced users to compromise security, with millions of dollar routinely relying on insecure web wallets. Despite the frequent and massive thefts reported by the media on a daily basis, to date more Bitcoin have been lost due to usability issues than all the efforts of criminals to steal Bitcoin.

As many as half of all existing Bitcoins have never been moved from their initial addresses and never will be because they are lost as unrecoverable wallet files, lost wallets, or misunderstandings of what was actually being backed up in a wallet file. Mt. Gox recently reported “finding” 200,000 Bitcoin in a wallet they were unaware carried Bitcoins. The wallet had been previously ignored and could have easily been deleted by mistake. Wallets are frequently mistaken as empty because computer software was unable to load a wallet created by software that is “too old”. Thus most security issues concerning Bitcoin occur at the level of usability, end users and exchange security.

The rest of this section covers some of the new techniques we have created in cooperation with our partners to address network level security issues and render the Skycoin blockchain more secure than previous networks.

We have proven mathematically that our system achieves consensus, has the security properties we want and operates well under normal network conditions. We have some exciting new data‐structures that have not been seen in any coin or piece of software before. At the moment we are prototyping the system for deployment. The Skycoin development process is iterative. There will be changes, improvements and refinements as we work through the details, address known flaws, test the system and get feedback.

Transparency and Security: Obelisk and Public Broadcast Channels

To address the commitment problems associated with the Bitcoin system, the technology underlying our Skycoin implements the blockchain in the form of a public broadcast channel. Everyone can read the chain, but only the owner can mint blocks for it. To be valid for a personal chain, each block must be signed by the owners private key. Each node in this consensus algorithm system (Obelisk) has a personal blockchain and it is the core primitive in the Obelisk system.

The public broadcast channel imposes several constraints:

* Once A Block is Published, It Cannot Be Unpublished

Blocks are replicated peer to peer to all subscribers. Once a block has been published, it spreads to all subscribers. You have to destroy all peers who have received the block to erase it from internet.

* A Node Cannot Publish A Different Version of An Earlier Block Without Detection

Blocks are numbered and it would be detected if the node signed two different blocks with the same sequence number.

* A Node Cannot Backdate The Timestamp on The Receipt of A Block, Without Delaying The Publication of A Block

Timestamps only go up, timestamps increase monotonously with block sequence count.

* A Block in The Middle of The Chain Cannot Be Changed Without Invalidating Every Block That Comes After It

In a hash chain, each block header contains a hash of the previous block.

Obelisk

Each Obelisk node (Skycoin Consensus Node) has a public key (an identity) and personal blockchain (a public broadcast channel). Consensus decisions and communication happen within the personal blockchains of each Obelisk node. This is a public record of everything a node does. This allows the community to audit nodes for cheating and collusion. It gives the community a way to identify nodes which are participating in attacks on the network and it makes public how decisions in the network are being made and which nodes are influencing those decisions.

Each node has a list of other nodes that it subscribes to. Nodes with more subscribers are more “trusted” and yield more influence in the network. If the community does not trust the nodes representing them or feels that power within the network is too concentrated (or not concentrated enough) the community is able to collectively shift the balance of power in the network by collectively changing their trust relationships in the network.

Node subscription relationships can be random and/or can be formed through web of trust (subscribe to nodes of people you know and people in the community you trust).

When a node receives a new block from a chain it is subscribed to, it publishes the hash of the block it publishes. This is a public acknowledgment of the receipt of the block. Each block is timestamped and counter-references blocks from other chains. This creates a dense interlinked chain of block acknowledgments. These chains establish causal relationships and can act as a distributed time stamping system as described in the next section. This allows the network to prove that data did not exist or was not published to the network or establish that particular nodes were active or offline during a particular time interval.

The current Obelisk consensus algorithm is based upon Ben‐Or’s randomized consensus algorithm.

A Sybil attack in a random graph (worst case) allows the Sybil nodes to control consensus, but the nodes are unable to revert transactions, removing the only economic incentive to attack the network. In real world graphs the Sybil resistance of the network is actually very high and running a node is moderately costly in terms of bandwidth, which makes large botnets prohibitive.

Trust relationships are scarce and can be rescinded. In the event of an attack, the network reacts by severing connections to less trustworthy nodes and contracting to a smaller core of trusted nodes. The public record left by each node’s personal blockchain makes it very easy to identify the nodes participating in an attack. As attacking nodes are identifed, individuals sever relationships with those nodes, reducing their influence. Therefore, the major benefits of the Skycoin network are:

• Skycoin consensus is democratic and nodes are run by the community
• Skycoin node consensus is public
• Every node is accountable to the community and 3rd party audits
• Influence within the skycoin consensus system is democratic and transparent (but unequal)

Simple Binary Consensus Algorithm: Choosing Between Two Blocks

Each voting decision is a hash pair (A,B). A is the hash of the parent of the block and B is the hash of the block. Each node votes on the next block it believes should be the consensus block. If 40% of the nodes it is subscribed to have the same candidate for consensus, the node changes its consensus to that block. The node flips randomly between candidates until consensus is reached.

Consensus on Multiple Concurrent Branch Choices

A more advanced system publishes (A,B,P), where P is a value from 0 to 1. P values across all successors to block would sum to 1. This allows for concurrent consensus decisions on multiple chain branches.

If the majority of nodes in the network are honest, they will also converge to the same consensus.

Skycoin also has a limited form of Proof of Stake. We bias voting in favor of blocks with a larger transaction fee.

If there are only two possible consensus choices for a given parent and both blocks execute your transaction, then the transaction is effectively executed regardless of which of the two blocks end up chosen by the network. The probability of reversion of an early consensus decision declines exponentially with block depth.