History of QTUM
The birth of Bitcoin in 2009 led to the development of a global decentralized system that could be used for value transfer. The benefit of developing such a network was that parties on both sides of the transaction could transfer value without the need to develop trust between one another. Following Bitcoin came various other blockchain projects that were committed to developing platforms for the execution of smart contracts and development of decentralized apps or Dapps. One such platform is Ethereum. While these decentralized platforms, Bitcoin and Ethereum, are of great use in their own fields, the fact that the UTXO (Unspent Transaction Output) model of Bitcoin and the account model of Ethereum are not compatible with each other with the interoperability not being strong. The Proof of Work (PoW) consensus mechanism too is very expensive and harmful for the environment.
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In response to the above-mentioned problems and due to the lack of any decentralized platform that has the ability to connect the real world, the Qtum (pronounced as “Quantum”) Chain Development team decided to develop new software that combines the different specialties of Bitcoin and Ethereum in a bid to lure developers onto its platform. Using the UTXO model of Bitcoin and developing a platform that provides Ethereum’s Virtual Machine to the developers, Qtum was able to get the best of both worlds.
Similar to Ethereum, Qtum also has its own cryptocurrency called QTUM that is used to reward those who maintain the network and also for transaction purposes. One of the major reasons why Qtum could be the next big thing is how it has secured its network with the Proof of Stake (PoS) consensus mechanism on its platform. This article covers the different features of Qtum and more specifically its PoS protocol.
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Introduction to Qtum
Registered as a not for profit organization in Singapore, the Qtum Foundation developed and launched Qtum in October 2017. The company attracted most of its funding from eleven angel investors, with initial discussions and reviews seeing it raise over $1 million. With those funds, the project’s founders created the testnet and started early implementation. Before its launch, Qtum Foundation held an Initial Coin Offering (ICO) in 2017 where it sold over $10 million worth of it’s tokens in just 90 minutes after launching. In five days, Qtum raised a total amount of approximately 11,100 BTC and 77,000 ETH, which totalled around $15.7 million in value, in exchange for 51 million QTUM tokens being distributed to the public. Another 29 million tokens were allocated to community initiatives concerning business development, research, education, and market expansion. The remaining 20 million was withheld by the founders, early backers, and development team.
According to the white paper that was published by the Qtum Foundation, Qtum is a UTXO based smart contract system with a PoS consensus model. Till date, Bitcoin is considered to be the most secure blockchain in the space because of the UTXO model that it follows. This is the reason why Qtum decided to use this model in its blockchain network. UTXO in simple terms means that it adds unspent coins from transactions back into the wallet of the user or the person who had made the transaction. This model that is used in place of the traditional banking model is more favourable for secured and trustless peer to peer transactions.
Furthermore, it was seen that blockchain technology has got various applications other than being a peer to peer payment network. The launch of Ethereum and the ability to develop Dapps on its platform led to the beginning of the smart contract era. The Qtum foundation decided to create an abstraction layer called the Account Abstraction Layer or AAL to allow the Ethereum Virtual Machine to exist on Qtum’s blockchain. This layer translates the Bitcoin UTXO output into an account style data that is readable by Ethereum. Using Ethereum’s Virtual Machine was a very important move because Ethereum has a large base amongst Dapp developers. Without it, Qtum could not be used to develop and execute smart contracts. The development of Qtum helped in the solving of the interoperability problem of Bitcoin and Ethereum that had existed for a long time. An important aspect related to Qtum and Bitcoin on the interoperability of the two networks is Segregated Witness or SegWit.
Qtum therefore uses the UTXO core concept of Bitcoin and runs Dapps on a machine running the EVM. It is used as a platform that makes its blockchain more accessible for companies who want to build and deploy Dapps. The Dapps which are compatible with all the major blockchain ecosystems can then be deployed on mobile devices. Qtum is therefore a great tool for any developer who wishes to develop Dapps for real world applications.
Let us now discuss QTUM before moving onto the consensus mechanism of Qtum.
QTUM – The Token
Similar to ETH which is the cryptocurrency of Ethereum, QTUM is the cryptocurrency of Qtum. The QTUM token was launched in March, 2017 and it raised $15 million within five days. While the tokens were sold for $0.30 only, they soon rose to $10 and pretty much remained at that level for the entire year. Infact, QTUM saw its all time high during the 2017-2018 rally at $103.45. As on August 25, 2020, with a market capitalization of $369 million, QTUM is ranked 45th on CoinMarketCap and is priced at $3.82.
It plays a major role in the development and maintenance of Qtum’s network. It is used for making payments, investing and also staking. For payments, QTUM is used to pay the transaction fees for the execution of smart contracts on Qtum’s blockchain. We will be discussing more about staking in a short while.
The protocol of Qtum allows for the minting of new tokens for every new block produced. Similar to Bitcoin, the supply of QTUM is limited and the block reward keeps halving after roughly four years.
Watch the lecture on QTUM’s currency layer and the role of Smart Contracts:
Let us now discuss the Proof of Stake consensus mechanism of Qtum.
Proof of Stake (PoS) and Qtum
Unlike Bitcoin and Ethereum that use the PoW consensus mechanism, Qtum uses the PoS consensus algorithm. There are many reasons why Qtum chose PoS over PoW mechanism. Firstly, using the PoW mechanism means that all the nodes compete with each other to mine a block. This often leads to collaboration among nodes to form a mining pool which may lead to centralization in the network. Mining in that case is not as decentralized as we thought it would be. Many nodes even use high level, expensive hardware called ASICs to compete with other nodes. Many members in the network who cannot afford such high level hardware then exit it causing security issues. The PoW is also not at all environmentally friendly as a lot of resources are used to increase the computing power in the network. This computing power is used by nodes only for mining purposes. Even if you own the most expensive hardware like your peers, it does not guarantee how many blocks you will be able to mine at the end of the day.
If we look at the PoS consensus mechanism, it makes mining completely virtual and there is no need for nodes to actually compete with each other to add blocks to the blockchain. Instead all the nodes cooperate with one another to ensure that the network is stable. Let us now try to understand how PoS works and how it works in Qtum. All the validators lock up or put their tokens on stake before starting the process of validating the blocks. Once the block gets validated and appended, the validators get their rewards. The frequency with which they validate blocks to receive rewards is proportional to the amount staked by that validator. The more tokens you stake on the network, the higher is the value of assets you have invested and the greater is the probability that you are not a malicious user on the network. Thus greater is the probability of you receiving the reward.
Under PoS too there are different types of algorithms. While EOS uses Delegated Proof of Stake (DPoS), Algorand uses pure PoS. To know more about the Proof of Stake consensus mechanism, click here. Also, some PoS networks require no minimum stakes while others like DASH have PoS and PoW working in tandem.
One of the major features of Qtum’s smart contract solution is implementing PoS in place of PoW as currently used on the Bitcoin and Ethereum blockchains. A major hurdle standing in the way for the widespread adoption of smart contract-based Dapps is their inability to be managed by a light client. A light client may be defined as a node on the blockchain network that does not keep a full history of the blockchain. Instead, every time you log on, it only traces back a few of the most recent blocks in the chain to verify transactions. An example of a light client could be a mobile phone.
Although light clients have not been acknowledged in conjunction with smart contract management, creating, deploying, and altering a smart contract would require you to run a full node of the network. In cases where you had slow connections, low storage, or used a mobile phone, smart contracts could not be available.
Qtum changed that and opened the door for smart contract management from your mobile phone or on a new computer within a quick time frame. This is possible because Qtum uses UTXO technology that enables simple payment verification or SPV. This enables light clients to verify transactions easily and with no need to run a full node. Infact, you could even run a smart contract from your mobile in a few taps, thus bringing the disruptive technology of blockchain to mobile applications.
Qtum is built on PoS Version 3 which is an improved version of 1 and 2. This type of Proof of Stake (PoSv3) is built for UTXO based blockchains. Let us discuss more about them here.
Unlike PoW, where each node fights to get a target hash value for the block, POSv3 has a kernel hash, which is composed of several pieces of data that are not readily modifiable in the current block. The second transaction of Qtum is called the coinstake transaction whereas the first transaction is called the empty coinbase. The coinstake transaction as mentioned above, has some specific rules it must follow. Moreover, each block must have exactly one staking transaction. The block timestamp must have the bottom four bits set to 0 so that the blocktime can only be represented in 16-second intervals. Finally, each UTXO can be used only once in every 500 blocks which approximates 24 hours to produce a staking transaction.
The PoS system has a kernel hash which is built on the following data :
- Previous block’s “stake modifier” (hash of previous transaction in PoS blocks and previous block’s stake modifier).
- Timestamp from “prevout” transaction (the transaction output that is spent by the first vin of the staking transaction).
- The hash of the prevout transaction.
- The output number of the prevout (ie, which output of the transaction is spent by the staking transaction).
- Current block time, with the bottom 4 bits set to 0 to reduce granularity. This is the only thing that changes during the staking process.
Source : Official blog page of Qtum
A prevout transaction is the UTXO that is used to create a staking transaction. The only way in which we can change the current kernel hash (to mine a block) is by changing the UTXO that you are using to create the block or change the current block time.
Another important aspect that has been changed in the mining process is the difficulty involved in the process. The PoS difficulty comes out to be twice as easy to achieve when you stake 2 coins as compared to just 1 coin. This is important because otherwise people would be encouraged to create tiny UTXOs for staking which would unnecessarily increase the size of the blockchain and ultimately affect the maintenance of the blockchain due to increased demand for resources. Not to forget, this will spam the network which will lead to compromising the security of the network.
To learn more about Proof of Stake, you could read this blog post by Jordan Earls.
As of August 25, 2020, Qtum is soon going to offer its users an offline staking protocol which is currently under testnet and which will be joining the mainnet at approximately 7:15 pm GMT on August 28 with a hard fork at block 680,000. No new coins will be created through the hard fork. The offline staking function, an update to the current consensus protocol, will eliminate the need for the Qtum users to maintain an online full node independently. Users will then be able to delegate their QTUM to any super staker node to stake and obtain their staking rewards. Another interesting news is that users who wish to operate as super staker nodes only need to go through a simple configuration process and maintain the full nodes online to provide staking services.
The offline staking delegation is achieved through smart contracts. Using the smart contract, the delegating user is only sending their address to the super staker. No fund is locked up during the stalking procedure and delegating users still own their assets.
With an already unique product design and with new developments happening on the Qtum blockchain, it is believed that Qtum could be one of the most exciting projects in the blockchain space. The ability to use Bitcoin’s UTXO model and Ethereum’s EVM shows that the platform can be secure, unique and scalable, all at the same time. With the recent development in the offline staking protocol, more and more people will be able to participate in the network thus helping in its scaling. It will be very interesting to see how the launch of offline staking affects the growth of the project.