Syscoin Provides Regulatory Compliance in a Decentralized Ecosystem

How Syscoin was designed to thrive in a world that requires both decentralization and regulatory compliance.

Ripples

When the Syscoin project was initiated in 2013, the developers knew that navigating the turbulent decentralized ledger industry would be no easy task. They anticipated that minor issues in the technology would cause ripples that would eventually make major waves, requiring real solutions before the industry could progress. Systems needed to be robustly designed and made compliant with regulations for the ecosystem to survive.

Our view of regulatory compliance has always been more than simply serving proof for the tax collector, or minimizing illicit use of the technology. It means ensuring that development leads to the adoption of industry standards and effective guidelines.

Our Design

SYS economics are similar to Ethereum's EIP-1559. SYS are gas tokens that power payments, and gas fees are burned. This decision introduces a fundamental factor of economic incentive, balanced with sufficient coin emissions to ensure the world has enough SYS to take advantage of Syscoin's utility indefinitely, all without pushing the system towards being highly speculative. Uses that are, or will be, enabled by Syscoin include smart city initiatives harnessing Business Logic and Digital Identities, and token-based systems such as loyalty points, stablecoins and asset-backed tokens.

Proof of work and merged-mining with Bitcoin was chosen to secure the blockchain, along with efficient decentralized finality supplied by masternode quorums which create chainlocks. Once the sharding and proof-of-stake fads are over, more projects will seek to connect to Bitcoin to use its global power for the security of their own networks; either as sidechains, federated chains, or merge-mined chains such as Syscoin. Syscoin’s block size was designed based on thorough analysis of the requirements to achieve a fee market that will serve global levels of user demand, in conjunction with other technologies that prevent the system becoming overloaded when used at capacity.

Bitcoin

Today, industry participants can see firsthand that competition for blocks creates a fee market that makes micro transactions completely impractical. With this in mind, the Lightning Network paper states Bitcoin needs over 100MB per block of bandwidth to function as a court system while using payment channel tech. This means it isn’t possible for Bitcoin to scale to global population levels with its current design, even if use of the blockchain itself was limited to dispute cases. Bitcoin’s block size was designated as 1MB so that data can easily propagate globally over many types of networks via a wide range of devices.

How we Solve some of these Issues

Latency is a major issue when dealing with consensus over asynchronous networks. At the time of Bitcoin’s design, in order for it to function and grow, it could not function as a global payments solution. However, over time network technology has improved and the cost of hardware has decreased. Latency and attack vectors have also decreased, enabling Syscoin to implement a design that serves up to 40MB of block bandwidth per minute. The debate over this block size is almost as old as Bitcoin itself. It led to forks such as Bitcoin Cash, Bitcoin SV, among others.

The idea of increasing block size to reduce fee rate and serve more people remains to this day. The fundamental design of a blockchain serves analogous to a court system, not as a transaction processor. A description of blockchains as courts can be found here. Syscoin researchers spent years solving this problem, and developed a method to scale to mass adoption - in such a way that users aren’t paying exponentially more than they would using centralized alternatives. That solution is Syscoin’s proprietary Z-DAG technology.

Bitcoin's Future

Bitcoin is transitioning from being considered a system for global payments to one of global settlements. A network on which aggregations happen off-chain, and settlements within various enterprises and institutions settle on-chain, to enable trustless transactions between businesses. Economist Saifedean Ammous covers this concept in the introduction to his book The Bitcoin Standard. This leaves a large market open for systems where retail payments are best served peer-to-peer through the direct use of blockchain; or where smart contracts must execute within a smart city context, autonomously governed by consensus systems.

Syscoin Fills the Gap

Z-DAG enables the reality of global scalable court systems governing off-chain payments. While payment channel technology remains an essential part of this, Z-DAG is also a fundamental requirement. When payments are moved off-chain to other layers, it affects the availability and resilience of such systems and their capacity to meet global requirements. This can be countered by providing a “fallback” - enabling use of the on-chain court to handle business by paying a higher fee. However, in nearly all cases this scenario eliminates the convenience and cost effectiveness of payment systems. Z-DAG provides fast, low-cost payments during moments when the Lightning Network is unavailable, while keeping the majority of payments off-chain and meeting or exceeding the liveness of existing centralized rails such as VISA. Z-DAG serves as an ideal resilience backup without sacrificing transaction scaling and decentralization at a global level.

Masternode Power

Syscoin protocol includes a masternode-based validator network to boost the overall utility of the platform. As described by the whitepaper and the Whiteblock performance report, its particular flavor of masternodes help with the dissemination and resilience of transactions across the network, even in the face of a large percentage of bad nodes. With accurate foresight, Dash’s privacy features were omitted early in development by the developers to avoid compliance issues when regulators decided to clamp-down on public privacy and encryption systems. That time has come.

Compliance

Syscoin’s development team recently enabled on-chain transaction compliance as defined in SIP-0002, a strategic feature well suited for a regulatory environment. When asset issuers opt in to this feature they are able to ensure their tokens and systems are used in a compliant way. By offering a compliance feature, we have opened the door for businesses to gain the benefits of decentralized technology (such as cryptographically verified non-custodial ownership on a highly secure public blockchain (merge-mined with Bitcoin), lower infrastructure costs, and less overall liability) without running the risk of failing to comply with local financial regulations.

Syscoin Foundation and Blockchain Foundry

In 2018 members of the Syscoin community registered and established a non-profit foundation responsible for overseeing the protocol’s direction, without corporate agenda creeping into design. This is called the Syscoin Foundation.

In 2016, four of the project’s original founders formed a public corporation, Blockchain Foundry, which, operating as a business registered in Toronto, Canada, is traded on the CSE and adheres strictly to Canadian business legislation. The company is external to the Syscoin protocol but develops and enhances it, creating change requests which are then debated and voted on by the Syscoin Foundation in consideration of whether those features are compliant for industry best-practices, and maintain the decentralization necessary to best serve the wider market. Syscoin Foundation ensures the membership of its board maintains a minority of individuals representing Blockchain Foundry in order to avoid the aforementioned corporate steering. All of these organizations were brought to life with compliance in mind.

In the future, users of Syscoin’s decentralized business systems can reap all of the advantages offered by blockchain technology, while sleeping soundly in the knowledge that their business is compliant, and the regulators won’t be knocking on their door one day.