Research Pulse #87 10/17/2022

  1. GHO A flexible, decentralized stablecoin
    Authors: Emilio Frangella and Steven Valeri

The below summary is solely an introduction to the GHO technical paper and is intended only to describe the software-based mechanisms for GHO. Nothing in this paper is intended to be an offer or solicitation to mint or otherwise participate in any activity with GHO.
This technical paper describes GHO (pronounced “GO”), a decentralized, over-collateralized crypto-asset intended to maintain a stable value. GHO is minted upon the supply of crypto-assets in excess of the value of GHO to be minted. This is intended as a stabilization mechanism to reduce the impact of any price fluctuations on the value of the underlying collateral during periods of volatility. GHO is created (“minted”) or liquidated (“burned”) by Facilitators. GHO is designed to accrue interest when supplied to a liquidity protocol, and this interest rate is determined by Aave Governance.

Link to Paper

  • Mechanism design in the field of stablecoins continues to be a major topic amongst researchers, especially in the aftermath of UST’s collapse.

  • The issues associated with the design of stablecoins have been formulated as a trilemma, whereby stablecoins can, at most, have two of the following three properties: Capital Efficiency, Decentralization, and Price Stability.

  • This paper discusses a new stablecoin design called GHO, which attempts to provide optimal trade-offs via a combination of dynamic supply, over-collateralization and so-called facilitators.

  1. Reap the Harvest on Blockchain: A Survey of Yield Farming Protocols
    Authors: Jiahua Xu and Yebo Feng

Yield farming represents an immensely popular asset management activity in decentralized finance (DeFi). It involves supplying, borrowing, or staking crypto assets to earn an income in forms of transaction fees, interest, or participation rewards at different DeFi marketplaces. In this systematic survey, we present yield farming protocols as an aggregationlayer constituent of the wider DeFi ecosystem that interact with primitive-layer protocols such as decentralized exchanges (DEXs) and protocols for loanable funds (PLFs). We examine the yield farming mechanism by first studying the operations encoded in the yield farming smart contracts, and then performing stylized, parameterized simulations on various yield farming strategies. We conduct a thorough literature review on related work, and establish a framework for yield farming protocols that takes into account pool structure, accepted token types, and implemented strategies. Using our framework, we characterize major yield aggregators in the market including Yearn Finance, Beefy, and Badger DAO. Moreover, we discuss anecdotal attacks against yield aggregators and generalize a number of risks associated with yield farming.

Link to Paper

  • “Yield-Farming” has become one of the most prevalent strategies implemented by DeFi projects to attract users. Its core tenet is rather simple: the users of a protocol are rewarded with that protocol’s native token for providing liquidity and services.

  • However, as a cryptoeconomic mechanism, little is known about the effectiveness of yield farming, or even the nature of the users engaged in this activity.

  • This paper attempts to shed light on how Yield Farming is implemented across a plethora of protocols and the role of yield aggregators such as Yearn and BadgerDAO.

  1. Notebook: A Zero-Knowledge Identity Infrastructure Layer
    Authors: Nathaniel Masfen-Yan, Solal Afota, Dhruv Mangtani, and Sacha Arroues-Paykin

This technical whitepaper presents Notebook, a novel protocol for Sybil-resistant log-in and credential aggregation that preserves user anonymity. Notebook provides users with a set of fragmented identities with the following properties: with each identity, users can prove they are a human; the identities are detatched from one another; the identities are detatched from the user’s real-world identity; credentials can be aggregated across identities and each human only receives a single set of fragmented identities. This set of properties has many applications in fully anonymous credit scoring and governance. This paper also details an implementation of Notebook using the Circom and Solidity languages on the Ethereum Virtual Machine.

Link to Paper

  • Many crypto-native User Identity and Authentication systems have been proposed over the years, but the pseudonymous nature of blockchain addresses poses considerable privacy issues that have prevented such services from proliferating.

  • Recently, products such as the Ethereum Name Service and Metamask’s User Authenticator have considerably improved the user experience of on-chain authenticators, but the privacy issue remains.

  • This paper introduces an interesting new schema called Notebook which uses Zero-Knowledge Proofs (ZKPs) to implement user authentication in a semi-private and, importantly, highly-efficient manner.

  1. Optimal Incentive Mechanisms for Fair and Equitable Rewards in PoS Blockchains
    Authors: Hadi Sahin, Kemal Akkaya, and Sukumar Ganapati

Blockchain technology that came with the introduction of Bitcoin offers many powerful use-cases while promising the establishment of distributed autonomous organizations (DAOs) that may transform our current understanding of client-server interactions on the cyberspace. They employ distributed consensus mechanisms that were subject to a lot of research in recent years. While most of such research focused on security and performance of consensus protocols, less attention was given to their incentive mechanisms which relate to a critical feature of blockchains. Unfortunately, while blockchains are advocating decentralized operations, they are not egalitarian due to existing incentive mechanisms. Many current consensus protocols inadvertently incentivize centralization of mining power and inequitable participation. This paper explores and evaluates alternative incentive mechanisms for a more decentralized and equitable participation. We first evaluate inequality in existing Proof of Stake (PoS) based incentive mechanisms, then we examine three alternatives in which rewards scheme is more partial to low-stakeholders. Through simulation, we show that two of our alternative mechanisms can reduce inequality and offer an attractive solution for sustainability of blockchain-based applications and DAOs.

Link to Paper

  • The design of Proof-of-Stake (PoS) reward mechanisms is an active research area in the industry and one that has attained substantial levels of interest after The Merge; Ethereum’s transition to PoS.

  • In reality, PoS is an umbrella term used to classify protocols that implement Sybil protection through financial operations, such as the locking up, or staking, of funds.

  • This paper provides interesting background on the different flavors of PoS and especially focuses on how the reward mechanisms employed by these protocols impact wealth distribution in their respective blockchains.

  1. When is Spring coming? A Security Analysis of Avalanche Consensus
    Authors: Ignacio Amores-Sesar, Christian Cachin, and Enrico Tedeschi

Avalanche is a blockchain consensus protocol with exceptionally low latency and high throughput. This has swiftly established the corresponding token as a top-tier cryptocurrency. Avalanche achieves such remarkable metrics by substituting proof of work with a random sampling mechanism. The protocol also differs from Bitcoin, Ethereum, and many others by forming a directed acyclic graph (DAG) instead of a chain. It does not totally order all transactions, establishes a partial order among them, and accepts transactions in the DAG that satisfy specific properties. Such parallelism is widely regarded as a technique that increases the efficiency of consensus.
Despite its success, Avalanche consensus lacks a complete abstract specification and a matching formal analysis. To address this drawback, this work provides first a detailed formulation of Avalanche through pseudocode. This includes features that are omitted from the original whitepaper or are only vaguely explained in the documentation. Second, the paper gives an analysis of the formal properties fulfilled by Avalanche in the sense of a generic broadcast protocol that only orders related transactions. Last but not least, the analysis reveals a vulnerability that affects the liveness of the protocol. A possible solution that addresses the problem is also proposed.

Link to Paper

  • The Avalanche consensus protocol continues to garnish interest by researchers and investors alike, as evidenced by AVAX’s high market capitalization.

  • However, much remains to be formalized about the inner workings of Avalanche and its intrinsic properties as a consensus mechanism.

  • This paper is the first attempt at providing an abstract specification of the Avalanche protocol and a matching formal analysis through pseudo-code.

  • The author’s analysis reviews a relatively serious vulnerability that affects the liveness of the protocol and potential remediation techniques are discussed.