Designing a Security Token Blockchain.

Design choices series (2): Direct Settlement, Fork & Pool resistance.

Jump to series 1: Permissioned vs Permissionless.

Jump to series 3: privacy.

Introduction

This is the second article in a multi-part series where we deep-dive into the design choices behind the Dusk Network. In this article we explain why we are designing for direct settlement finality, fork, and pool resistance.

Consensus Mechanism

The first article in the series talked about our choice for a public and permissionless blockchain. This decision allows anyone to take part in the consensus, and prescribes how nodes check and audit transactional data before storing it. Today we discuss the consensus’ architecture on a high level, and how design choices impact the time it takes for transactions to complete, how disagreements are settled, and how nodes can participate in the consensus. These decisions relate to regulatory directives and legal requirements, and whilst they are technical in nature they directly impact the compliance and usability of a protocol.

Defining Settlement Finality, Forks and Pooling

Settlement finality

In the context of blockchain technology, settlement finality is an abstract measure of time required for a transaction or block to become statistically irreversible. Effectively, it describes the time required after which a transaction cannot be undone.

Fork

A fork is either caused by an asynchronous network connection, adversarial attack or a software upgrade. When a blockchain forks it splits into two branches. Forks can be performed intentionally, as well as unintentionally, in which case they are often undesired.

Pooling

Pooling or resource centralization describes the act of individual (smaller) nodes banding together to aggregate resources. Generally, pooling is promoted through economic incentives embedded on a protocol and therefore multiple smaller players seek to maximize their returns via pooling.

How our consensus mechanism (SBA★) tackles these issues

Dusk Network is used to register, issue and trade digital securities. This means that the blockchain needs to function as a financial market infrastructure (FMI) that settles the trades of financial instruments, as well as substitute an accounting ledger, or shareholder registry.

Bitcoin and other platforms utilize a flavor of the Proof-of-Work (PoW) consensus to secure the blockchain, meaning that the probability of a block remaining in the main chain increases as more blocks get added on top (hence why most services require a depth of 6 blocks before confirming a Bitcoin transaction and achieving settlement finality). Finality of settlement ensures that transactions made over payment networks are completed and not subject to reversal even if the parties to the transaction go bankrupt or fail.

Real-time settlement finality is a requirement for institutional investors. PoW fails to provide this as there is legal uncertainty about when, at how many blocks, a transaction becomes final and takes several minutes for a transaction to confirm. Therefore, we took to classic BFT (Byzantine Fault-Tolerant) protocols that have the interesting property that blocks cannot be orphaned after being added to the chain. Orphaned blocks are valid blocks (containing valid transactions) which are not part of the main chain. They can be caused by an adversarial attack with the goal to reverse transactions. As a result, by not allowing for orphaned blocks settlement is directly final.

SBA★ is designed to facilitate real-time settlement finality and has built-in resistance against all possible causes of forks, not just block orphaning. It does this by preserving consistency rather than availability.

Resisting forks is a very important feature that avoids the blockchain (representing the securities shareholder registry) from splitting in two. A fork causes highly unwanted side-effects and uncertainty for shareholders who need one single-point-of-truth. After all, you cannot just create an additional share registry out of thin air, and double the amount of outstanding shares.

When it comes to blockchain governance, disagreement on software upgrades can also cause tensions that lead to power structures rallying against each other for prolonged periods of time. Seen in other blockchains that allow for pooling this behavior ultimately leads to a select few that control all of the resources to push their agenda. To counter this, the Dusk Network has pool resistance built into SBA★ through unique economic incentives that reward the individual but provide economic disadvantage for those seeking to centralize power.

Summary

During the inception of the Dusk Network, it’s been our priority to create an ecosystem that is accessible by anyone, truly lowering the barrier to enter the financial industry, and replace intermediaries effectively with technology. We are creating a blockchain that will become the backbone of a fairer financial industry, by allowing anyone to participate in the consensus, no matter their size. Where monopolistic power structures are disincentivized, forks are prevented, and trades are settled instantaneously.

In our next series, we will touch on the rationale behind designing for privacy. With subsequent articles covering our programmable smart contracts and why we chose to create a controllable standard.

Dusk — Technology for Securities

Dusk streamlines the issuance of digital securities and automates trading compliance with the world’s first programmable and confidential securities.