Ethereum's Rising Gas Fee Hurts DeFi and the Ethereum Ecosystem Itself - Kiran Pachhai of Elastos

There is no question that there has been considerable progress and development in the DeFi ecosystem. Still, it is prudent for investors to steer clear at least at the moment as transaction fees guzzle the entire ecosystem.

The Ethereum network is now facing the longest congestion due to massive traffic and has reached its most extended bottleneck. August itself saw an aggregate daily transaction cost of $3.68 million. It is a 240 percent rise from the previous month. Participation and fee increases were attributed to new products offering customers with incentives to lock up their tokens to earn high-interest rates.

Besides, Forsage, a gas-guzzling Ethereum dapp, which accounted for 13 percent of the Ethereum network activity, has been condemned as a possible Ponzi scam by the Philippines Securities and Exchange Commission. An official statement by its SEC on June 30 informed the consumers of the dapp in question, Forsage, to stop using it indefinitely and asked that the operator register formally with the Authority. Ethereum gas network prices hit $15.13 on September 2.

I sat down for an interview with Kiran Pachhai, VP of Technology, Elastos. We explored the flaws of the Ethereum network and identified the solutions that different architecture proposes.

Ishan Pandey: Hi, welcome to our series “Behind the Startup.” According to you, what can be the solutions to the current transaction fees problem that Ethereum is facing?

Kiran Pachhai: The Ethereum blockchain is currently experiencing rather insane gas prices, but unfortunately, this is nothing new and nothing out of the ordinary for Ethereum. This major flaw regarding its inability to scale has already been demonstrated by the once-famous application known as "Cryptokitties".

The application became so popular back in 2017 that it took up a significant amount of space for transactions on the Ethereum blockchain. What we're seeing now is not a new reveal, but rather a byproduct of mass interest in Defi (Decentralized Finance) projects.

To put it simply, the more popular Ethereum gets, the less efficient it gets, causing it to significantly slow while charging ridiculous gas fees.

The Ethereum team has been working on improving scalability with its upcoming Ethereum 2.0 release for the last few years, yet it may still take a couple of years to fully implement this solution. This timeline, in my opinion, is rather concerning.

While the Ethereum platform is poised to potentially solve its scalability issue by the year 2022, Elastos has already solved this issue with its unique mainchain-sidechain architecture.

This allows the Elastos platform to integrate any existing platforms as a sidechain, such as Ethereum. This provides a number of key benefits, one of which is the reduction in gas fees by over 1000%. This is an essential improvement and it is available today on Elastos.

Ishan Pandey: Ensuring scalability using mainchain and sidechain architecture. That sounds interesting. Can you explain more about how this works?

Kiran Pachhai: The Elastos platform has a unique mainchain-sidechain architecture. The mainchain is responsible for handling all ELA payments in and out of the system while the sidechains are responsible for providing other decentralized solutions such as a sidechain for smart contracts, a sidechain for Decentralized Identifiers (DIDs), and so on.

There can be any number of sidechains running at any time and they are all sandboxed, in a way. For instance, Elastos has an Ethereum sidechain that can run any smart contracts compatible with Ethereum Virtual Machine, so it does not require much effort in migrating all of the existing smart contracts from the main Ethereum blockchain to Elastos Ethereum sidechain while also gaining the benefits of low transaction fees.

Another key feature is that the mainchain of Elastos is merge-mined with Bitcoin (and any other SHA-256 coins such as Bitcoin Cash, Bitcoin SV, etc) and currently amasses around 70% of the total hashpower of Bitcoin, which means this extremely high security is recursively passed down to all the sidechains on Elastos as well.

It really is the best of both worlds where you are not sacrificing security for more scalability. One thing to note is that there can be not just one, but multiple Ethereum sidechains running simultaneously on the Elastos platform if the need arises, so the Elastos platform is horizontally scalable. This is really valuable. 

Ishan Pandey: Applications built on elastOS don’t have access to the traditional internet. Why have you chosen this approach, and what are its advantages and disadvantages?

Kiran Pachhai: Let’s try to first differentiate between the different terminology - more specifically, Elastos and elastOS. While they’re spelled the same, they mean two different things.

Elastos is a platform that consists of the Elastos blockchain (mainchain and its sidechains), Elastos Carrier (a peer to peer, decentralized and encrypted messaging platform) and Elastos Hive (a storage platform). elastOS is the first ever product that utilizes all 3 components - Blockchain, Carrier and Hive, and packages them into a single application browser.

elastOS is the flagship product of Elastos and it is currently available on Android, but will soon be available on iOS, Windows, Mac and Linux in the future. elastOS is unique and is not like other browsers such as Chrome or Brave browsers, because by default, applications running inside the elastOS browser don’t have direct access to the internet.

Rather, they have to utilize Elastos Carrier to communicate with the outside world, Elastos Hive to store application and personal data and Elastos Blockchain for interacting with the mainchain and sidechains (such as for smart contracts execution).

The Elastos team has taken this approach with their first consumer grade product, elastOS, because you have to assume that there are always bad actors on the internet, therefore by disallowing applications running inside elastOS to have direct access to the internet, it removes a lot of potential attacks such as man in the middle attacks and distributed denial of service attacks.

With that said, elastOS is also flexible in that it does allow application developers to whitelist certain addresses if they so choose, but the users using the application will be aware of this whitelist. So if an application wants to truly be decentralized, they are better off using Elastos Blockchain, Carrier and Hive while not relying on any whitelisting of IP addresses.

Ishan Pandey: How do you allow different parties to trust each other in a decentralized ecosystem? What are Decentralized Identifiers (DIDs)?

 Kiran Pachhai: One of the main problems with the current internet is trust. How do I trust you if I don’t even know who you are? This is the exact problem Decentralized Identifiers try to solve.

On Elastos, every user, every device and every application can have a DID which conforms to the W3C standard. Users can also choose to get certain information such as their name, age, etc verified (or KYC’ed) by a trusted third party.

Once this is done, two users, even if they don’t know each other’s names, can decide to talk to each other because they’re both verified by the third party they both trust.

This creates an internet of trust. It doesn’t mean you have to submit your personal information for the public to see, but rather having verified DIDs lets you trust each other because the DIDs are signed by someone who you both equally trust. This is just one simple use case of how DIDs can be used. 

Ishan Pandey: Can you explain what IPFS and Hive are? Why do you need this when blockchain is already storing data?

Kiran Pachhai: IPFS stands for Inter-Planetary File System and is a peer to peer decentralized storage platform. Hive is an Elastos component that may or may not utilize IPFS.

A lot of applications choose to utilize IPFS because it provides a way for users to store their data in a decentralized manner, however one major drawback to using IPFS for everything is that everyone can see all data that lives on the IPFS platform. 

This is where Elastos Hive comes in. 

Elastos Hive provides a semi-decentralized solution whereby users can choose where to store their data, rather than applications deciding for them. An Elastos Hive node can run on a simple Raspberry Pi or somewhere on the cloud and the authentication is handled via DIDs, so no other user can access their data if they’re not authorized to do so. In the background, Elastos Hive node can also be set up to sync their data to some other remote storage service such as Google Drive or Dropbox or even IPFS.

So, by doing this, users are in full control of their own data no matter what applications they’re using on the Elastos platform. More importantly, only the user can access their own data. 

With this, you could build a Facebook clone without a company in between users and the application,  and where you let users decide where to store their Facebook clone data. This is really an important alternative. The possibilities are endless because utilizing Elastos Hive, you could theoretically build any sort of application imaginable. 

Ishan Pandey: How do you stop Ponzi schemes like Foresage and FairWin from developing applications on a decentralized network? Isn’t regulation such activity against the fundamentals of decentralization?

Kiran Pachhai: The very idea of a decentralized network is that it’s decentralized. In other words, there is no intermediary to blacklist someone from using their platform.

There will continue to be Ponzi schemes out there, however this risk can be greatly mitigated if you build a decentralized platform with an open identification system with security in mind. This doesn’t mean you have to hand over your personal information to everyone to see.

For instance, applications could utilize KYC’ed DIDs to verify someone is over 18 years old without actually knowing their age. This is like a zero-knowledge proof but applied to establish trust between two parties. Everyone can decide to stay anonymous while also being able to verify certain information about each other while transacting with each other. 

Ishan Pandey: What advice do you have for blockchain developers who are building decentralized applications?

Kiran Pachhai: My first advice for any developers would be to first realize that smart contracts and decentralized applications don’t mean the same thing. You could certainly decentralize a large part of your application (whether web or mobile) using smart contracts that can not be tampered with, however some part of your application can still be centralized such as when it comes to storing large amounts of data.

Blockchain is not used to store large amounts of data, so the storage solution that is robust and secure is almost as important as the smart contract layer. At the end of the day, it’s all about giving users the choice. Instead of you, the developer, deciding how to deal with users’ data, if you can provide a capability for the user to choose how they want to store their data, that in itself is already way more powerful than simply trying to put everything on the blockchain.

Blockchain can be used to make sure the application is secure but at the same time, the smart contract logic that is deployed should also be thoroughly tested and audited before deploying it to production. Also, last but not least, just because you can decentralize an application doesn’t mean you need to. Only decentralize it if there is an added benefit. 

Ishan Pandey: According to you, in the year 2020, what is the best way for blockchain startups to raise funds?

Kiran Pachhai: Back in 2017 during the Initial Coin Offering (ICO) craze, anyone could easily create an ICO on the Ethereum blockchain with a simple whitepaper and people were willing to throw money at projects that sounded reasonable.

These days, especially in 2020, the market has matured, and users have gotten smarter, so it’s not as easy to crowdfund a project. This is both good and bad. It’s good regarding scam projects since they cannot simply raise money from investors without anything to show.

Yet it’s bad for legitimate projects because they’ll have a hard time being funded initially. I think there may be a compromise somewhere in between. Instead of offering an ICO or something similar, the best solution may be for teams to start something small, for instance by creating a token that starts at 0 on genesis block and then every block, a certain percentage (eg. 15%) is sent to the team treasury while the other 85% is distributed to the community who help bootstrap the system.

While this may be a bit risky, it may also be good to give early contributors peace of mind with the fact that there is no constant selling pressure from the tokens that are generated on the blockchain while the early contributors are also rewarded at the same time. This may help in creating a healthy community while also building trust in the blockchain team.

Ishan Pandey: What trends and challenges do you see in the year 2020 for the Crypto industry?

Kiran Pachhai: DeFi hype is real. This is something similar to what happened back in 2017 with the ICO craze. 2020 is all about DeFi projects. While there are some legitimate projects that are trying to solve a real problem, for every legitimate DeFi project, there are 9 other projects that are downright scammy or questionable.

Once the DeFi hype dies down, there will likely be another sector that will be brought to the forefront that utilizes blockchain technology. This cycle may continue to exist until there is regulatory clarity around blockchain and cryptocurrency.

As far as challenges, we have been facing the same challenge for the last decade when it comes to blockchain technology and that is the consumer adoption of it. Currently, there are just way too many infrastructure projects being built utilizing blockchain while there are not a lot of applications built with regular everyday users in mind.

This will get better with time but if we can solve this problem of making it so easy for users to use decentralized applications that they don’t even realize they’re using blockchain behind the scenes, I would consider that a success for the entire industry. At that point, we can finally move on to the utility of blockchain projects rather than speculation and hype which is prevalent today.

The purpose of this article is to remove informational asymmetry existing today in our digital markets by performing due diligence by asking the right questions and equipping readers with better opinions to make informed decisions. The material does not constitute any investment, financial, or legal advice. Please do your research before investing in any digital assets or tokens, etc. The writer does not have any vested interest in the company. Interviewer - Ishan Pandey