Waves — An Incoming Tide

04.09.2018

TL;DR. Ecology:5. Technology:6. Decentralization:5. Valuation:7. Rating:6/10

Introduction

Waves publicly sprung to life with a bitcointalk.org thread by user sasha35625 (Alexander Ivanov) in March 2016 after he and some others left the Nxt ecosystem where they were active earlier. The stated goal with this new blockchain was simple enough: custom token creation, transfer as well as decentralized trading.

An ICO was scheduled to start on April 12th 2016, and end on 31st of May 2016. A total of 100 000 000 tokens were to be issued, where 15 000 000 were reserved for the developer team and for certain bounty programs. An example of such a program was the 1 000 000 tokens reserved for people who followed the official Waves Twitter account, or changed BCT signature. At the day of the ICO start, Charles Hoskinson of IOHK warned people about Waves, pointing to the project's use of Scorex as framework when constructing the blockchain code base. Scorex, a blockchain solution tool built - according to Hoskinson - for educational purposes, was apparently also not well suited for a real-world cryptocurrency. Sasha clarified in the same thread that the code base would be adjusted to fit the needs of Waves. He also clarified some Waves team discrepancies, where Hoskinson accused Waves of listing one of his IOHK company's core developers, BCT user kushti, as a Waves developer. What happened seems to have been miscommunication on kushti's and Sasha's part. All in all, BD Ratings does not see the whole thing as intentional deception from any involved part.

In June 2016, just after the ICO ended (raising about USD 16M), the Waves mainnet launched with Proof of Stake. The client to the public was feeding from full nodes run by the Waves team. It did not yet have full node support. On the first day of 2017, the Waves team announced the launch of a new token created on the Waves blockchain. The main goals of Waves Community Token (WCT) was to foster community activity, to incentivize people to leave funds off centralized exchanges, and to start to try out voting functionality on Waves. The allocation process was set to be pro-rata to all WAVES holders that stored their tokens outside exchanges. In the same update it was revealed that the Waves team had managed to obtained more BTC through airdrops on the Byteball blockchain. BTC tokens on Waves, redeemable in the future when a BTC gateway was operational, were to be distributed pro-rata to WCT holders. Around this time, support for full nodes was released as well, with a minimum amount of Waves needed to create blocks set to 10 000. Later in 2017, that number was reduced to 1 000 WAVES to encourage more decentralization.

The Scorex code base was continuously tweaked to the point on which Sasha predicted that no such code would be left anymore. As a temporary subsidy to miners/stakers, the Waves team made plans to implement a Miners Reward Token. The plan was to have it released continuously to block producers until the network had the transactions needed to sustain high enough fees in each block. In April 2017, the BTC to WAVES gateway was implemented in the lite client. In June that same year, Sasha outlined what Waves 1.0 would look like, and introduced the goal of implementing a PoS adaption of Bitcoin NG. Bitcoin NG is a blockchain protocol suggested by Emin Gun Sirer and Ittay Eyal, two academics at Cornell. The main advantage of the protocol is an increased transaction throughput without giving up decentralization. A month later, a DNS hijacking occured, resulting in the official Waves webpage being compromised. Luckily, important sub-domains were not and so no user lost any money. On the 28th of November, the Waves Client 1.0 was finally released as closed beta. Ever since, the client has had continuous improvements, mainly for the integrated DEX (short for Decentralized Exchange).

Ecology

Despite the fact that the token allocation was much fairer than usual, with 85% of all tokens being reserved for ICO contributors, BD Ratings is still negatively inclined to the different bounty programs that indirectly encourages fake accounts, spam, disloyalty and myopia in general. Many will disagree with this assessment, but good code and user experience coupled with decentralization, wins out in the end. Bitcoin never held 'official' marketing campaigns and is still by far the largest network because network participants value the secure underlying code.

Somewhat related to the unprofessional bounty programs, Sasha took a weird standpoint to allocate ICO funds to possible price manipulation, or as he put it 'to maintain buy walls'. Funds ought to be reserved for bug bounties and paying developers, among other things. To squander them in trading activities seems very stupid. Despite the above blunders, there are also other indications that the Waves team have learned that the market actually rewards good fundamentals in the long run.

Moving on to other ecosystem activity, there was considerable ICO activity on Waves up until the end of 2017. This is testimony to the fact that it is easy to create custom tokens on the Waves blockchain through the integrated templates. When looking at regular transactions per day, it is harder to obtain good data, but sources monitoring general on-chain operations place Waves high on the activity list. The official sub-reddit is active but only slightly. Overall, the relatively low activity on Waves is a mirror image of the general cold cryptocurrency market right now and not of the real fundamentals.

What may be considered the main application built on Waves currently, is it's DEX. The Waves team was early in the game of DEX:es, and BD Ratings has tried it. Trading is conducted virtually in real-time due to centralized matching nodes, while the underlying Bitcoin NG algorithm makes very quick settlement possible. The experience as a whole is similar to that of centralized exchanges that stores the tokens for you - a freedom that you don't have to give up when using the Waves DEX. Since the Waves team is also collaborating with certain banks, the DEX even has trading pairs with USD and EUR. This DEX will be even more interesting in the future as smart contracts (and thus atomic swaps) makes fully decentralized trading possible.

Grade: 5

Reasons: Mainnet launched. Working DEX. Community activity (on- and off chain). Bad marketing decisions.

Technology

The adoption of a modified version of Bitcoin-NG is according to BD Ratings purely a net positive. Not only does it increase transaction throughput massively without any obvious centralization trade-off. It also is an important signal that the developer team respects the academic work conducted by the Cornell team that already proved their competence multiple times with for example the Bitcoin Selfish Mining problem or the call for a DAO moratoriumbefore the catastrophic hack. The implementation of the Bitcoin-NG based consensus algorithm made Waves possibly the worlds fastest 'decentralized' blockchain with up to 100 txs/s.

A security audit of Waves was performed in 2017 by Kudelski Security. This report found some issues with the code, but none high or critical. Security audits are essential to professional blockchain projects. When looking at the GitHub activity, the development progress is high and consistent from a number of core developers. Mainnet has not had any serious code base related incident yet, despite being fully open source and thus open for attacks on potential weaknesses.

One aspect of Waves that BD Ratings is skeptical about is that all 100M tokens was issued immediately. Miners/full nodes that actually carry the network forward, need to be properly incentivized through fees or subsidies in the form of block rewards. Having a cap of 100M tokens already from the start seems like more of a marketing aspect, to attract investors that are staring at zero inflation. The Waves team, to incentivize miners, had to issue MRT tokens in a quite complicated scheme with buy-backs and token burns. It would have been better to have this issuance in the form of WAVES and over time.

Grade: 6

Reasons: Security audit. Adopts academic research. Faulty miner incentive scheme.

Decentralization

Sasha, the main founder of Waves, outlined his philosophy on why Waves was needed in an early blog post back in 2016. In it, he showed a large dose of skepticism to permissioned blockchains. Having understood the utility of focusing on public blockchains due to its possible decentralization properties shows that Waves at least in theory was constructed with this philosophy in mind. On the other hand, Sasha is the CEO of Waves Platform AG, a for-profit company based in Switzerland. This constellation is a phenomenon generally shunned among hardcore decentralization proponents. Yet, if no patents or closed code is involved, the centralization threat might not be credible. BD Ratings will observe future decisions over how the Waves blockchain ought to be developed, and how this fits with what we know about the governance in general. There are plans to utilize voting tokens to help govern the development of the platform, and it is probably a good idea to test out. So far, no clear evidence of centralized interference has surfaced.

The above-average decentralization focus is reflected in the DEX development as well. As soon as atomic swaps have been tested and implemented on Waves, some centralized aspects of the main client's DEX can be mitigated, namely the cryptocurrency gateways. Crypto-to-crypto trading can then be conducted in a decentralized manner through atomic swaps, where possibly the only issue would be how matcher nodes are setup. BD Ratings is not sure what the plan is for those, but it is at least known that anyone can spin up such nodes.

As a further testimony to some understanding of decentralization, the developer team of Waves 'only' obtained around 10% of all Waves tokens after the ICO. It is certainly better than many other highly valued projects. A too high number would obviously pose a threat to the integrity of Waves since it is PoS based.

Grade: 5

Reasons: Low token concentration. General philosophy of decentralization.

Valuation

Valuation is Waves' strongest part right now. It is a blockchain that on the whole is solid, both with regards to ecology (working DEX, active community), technology (working mainnet with consensus based on Bitcoin-NG) and decentralization (relatively fair token allocation). At time of writing, a WAVES token is traded for USD 2.31, meaning total marketcap is USD 231M (or number 41 on CMC). This is only ~0.2% of the valuation of Bitcoin, which is a bit too low.

Should a high economic activity move to the Waves blockchain, total fees would possibly be enough to properly incentivize miners over the long run. If on top of this the blockchain was remarkably decentralized, this combined with the fact that no new WAVES are issued would open up for considerably higher prices as investors would buy WAVES to store value.

Grade: 7

Reasons: Ok fundamentals with no clear Achilles heel. Relatively low valuation.

Disclaimer: The writer owns WAVES.