UTXO alliance: fostering innovation and collaboration across the blockchain space

At the Cardano Summit, IOHK announced a collaboration with Ergo, Nervos, and Topl to create the UTXO alliance. Today, we’re delighted to welcome a new alliance partner – Komodo.

Komodo is an open-source technology provider that offers all-in-one blockchain solutions for developers and enterprises. Komodo works closely with organizations that want to launch branded decentralized exchanges, cross-protocol financial applications, and independent blockchains. Komodo's flagship end-user application AtomicDEX is a non-custodial multi-coin software wallet and atomic swap-powered decentralized exchange rolled into one app. AtomicDEX and its underlying technology – Komodo AtomicDEX API – is compatible with 99% of cryptocurrencies in existence and offers the widest cross-chain, cross-protocol trading support in the entire blockchain industry.

“UTXO blockchains lay the basis and undisputed foundations of today’s blockchain industry. UTXO technology reflects Satoshi Nakamoto’s core vision of ultimate (financial) liberty,” said Komodo business development leader, Kadan Stadelman. “On behalf of Komodo Platform and the AtomicDEX team, I am honored to join the UTXO alliance to uphold and advance this vision. I am certain that together with other alliance members, we will bring this technology to the next level. All for one and one for all.”

The UTXO alliance will facilitate cross-ecosystem initiatives to extend the capabilities of UTXO in terms of smart contract functionality. Teaming up with other blockchain industry projects, the shared objective is to foster and support further research, development, and education across the entire space.

The goal of the UTXO alliance is to drive continuous innovation of the UTXO model in terms of interoperability, scalability (sharding, state channels), and smart contract solutions. Enhancing these solutions and driving key initiatives to build bridges between blockchains powers fair and accessible global finance for everyone. This also establishes a collective effort to enforce the development and functionality of UTXO-based ledgers. Other projects using this model include NEO, Bitcoin, and its derivatives like Bitcoin Cash, Litecoin, and Zcash.

Why UTXO matters

The unspent transaction output (UTXO) accounting model guarantees security, data privacy, and scalability at the core of financial activities. UTXO models foster scalability, as multiple UTXOs can be handled simultaneously, and ensure enhanced security as the overall stake is not aggregated into a single account.

UTXO is a more secure alternative to account-based models (used by Ethereum, for example). Unlike UTXO-based ledgers, account-based blockchains track the overall balance, and the same address is used every time a transaction is made. This is vulnerable to hacks and hinders scalability, as transactions are processed sequentially, rather than in parallel.

Cardano’s extended UTXO (EUTXO) model, for example, supports multi-assets and smart contracts and enables arbitrary logic in the form of scripts. These scripts can be split across different branches enforcing more parallelism and higher scalability.

Alliance member Nervos is developing a permissionless, layer 1, open-source, proof-of-work blockchain protocol focused on creating the foundations for an interoperable universal public network.

“Implementing the ‘separation of duties’ principle, Bitcoin’s visionary UTXO model is naturally more scalable and prone to attacks than the account model,” said Ren Zhang, lead researcher at Nervos. “Many projects sharing this vision provide unique perspectives to extend UTXO’s possibilities. The UTXO alliance enables interoperability and coevolution of its members, providing the world a superset of our advantages.”

Manuel Chakravarty, Lambda scientist and Plutus architect at IOHK added:

The UTXO ledger model, battle-tested by Bitcoin, remains the gold standard for security and scalability. The UTXO alliance is an important step towards ensuring that it will be the gold standard for interoperability, too.

Focusing on interoperability, programmability, and scalability

Centralized finance has been the centerpiece for financial operations for decades. While such a system has served us well enough in general, it still suffers from a reliance on a central authority, exorbitant transaction fees, and unnecessary delays, complexity, and costs in making international payments because of regulatory restrictions. It’s time for change.

Interoperability

Blockchain technology addresses the challenges of centralization by enabling reliable peer-to-peer transactions based on cryptographic proof rather than relying on costly intermediaries. Many blockchain projects have emerged to provide a secure and decentralized environment for financial transactions. These projects vary in terms of consensus algorithms, accounting models, or smart contract applicability focusing on particular use cases (such as finance, data traceability, supply chain management, etc).

Growth is inevitable. However, the speed at which the blockchain landscape matures is challenged by siloed ecosystems and disparate governance rules, technology versions, or functionality support.

As Romain Pellerin, IOHK CTO, said at the Summit:

Mainstream blockchain adoption will pass only through the interconnection of networks, similar to how the Internet was built by the interconnection of intranets and extranets.

So, today, it is important to ensure that the whole industry is driving towards interoperability. Users should be able to transact with each other without being limited to a certain ledger, smart contracts should be supported within different environments, and decentralized applications (DApps) should have cross-platform compatibility. Only such an approach will allow the blockchain industry to reach the full potential of its capabilities, driving further adoption.

Programmability

The UTXO alliance is also focused on blockchain programmability for the creation of DApps and smart contracts. In fact, the design of new languages is required in order to adapt to the specific transaction and data storage management (Ergo’s and Cardano’s EUTXO, or Nervos’ cell model, for example) of the UTXO model. The founding members of the alliance have developed Antara, CKB-VM, ErgoScript, and Plutus as their smart contract languages. Alliance members are sharing knowledge and collaborating in the development of those technologies to rapidly scale the number of use cases that can be run on UTXO-based blockchains.

Also, those languages are built as domain-specific languages (DSLs) on top of common programming languages including Scala, Haskell, C, JavaScript, Go, Rust, etc. However, in certain cases, those common languages do not offer the security or ease of use that smart contract developers require.

To ensure enhanced security and code verifiability, IOHK has chosen Haskell as the programming language for Plutus smart contracts. It is the most widely used functional programming language for application development. Haskell is simple, secure, and formally verified. In terms of adoption, it is suitable for a wide range of financial use cases, while allowing to move funds rapidly, get the right results, and ensure scalability. This programming style fits well within the UTXO model with regard to state distribution and parallelization for enhanced scalability.

Nervos is also working on alternative provably secure programming options that use RISK-V compilers to support common programming languages with CKB-VM. Topl, on the other hand, has been working on a chain program engine proof of concept, which is basically an abstraction layer on top of the UTXO model that allows working with shared state execution environments. It uses a pointer registry and a series of UTXOs (represented as atomic data elements in ledger state -i.e., boxes-) to reconstruct an execution context for evaluating program method call transactions.

Taking into consideration different development efforts, the UTXO alliance will be exploring the best-case scenarios to create a unified smart contract ecosystem where a variety of programming languages can be compiled and used on different blockchain platforms. This will be instrumental in ensuring better interoperability between blockchains.

Scalability

As a network grows, it is also important to take into account its scalability capability in terms of transaction processing and throughput. The UTXO model is different from the account-based one, as it functions based on the local state, and thus requires a different programming approach.

These two models have different properties and offer a different set of trade-offs, different pros and cons. The UTXO model ensures determinism, predictability and scalability by managing local states (the local portions of the overall graph of transactions) while the account model facilitates the development of use cases that rely on the global state (the whole graph of transactions needs to be processed before validation).

Hence, the UTXO model offers valuable properties of ensuring the execution of transactions and contracts prior to their submission on the chain with no surprises in terms of fees or validation. Also, the UTXO model can provide better scalability as it is simpler to shard a graph of transactions by definition by dividing into a set of sub-graphs.

It is also easier to detach a particular transaction or set of transactions (that transport data, scripts and assets) to continue activity off-chain before coming back with a result on-chain which ensures scalability by off-loading activities from the mainchain. IOHK, for example, has developed Hydra state channel solutions that increase the system throughput and allow running multiple operations in parallel without compromising scalability. You can find out more about scalability by reading about concurrency on Cardano and the Hydra approach.

Combining forces for the common goal

The UTXO alliance collaborates to advance the UTXO model while developing a universal UTXO standard. It aims to provide ada holders, cryptocurrency users, enterprises, and the developer community with a range of solutions that do not lock them into a single standard. For this, the alliance will be conducting academic research and releasing a number of papers that underpin secure and scalable smart contract development based on the UTXO model.

While interoperability is key, it is also crucial to provide blockchain solutions for increased funds security, scalability of transaction processing, and, of course, extended functionality granted by smart contracts.

Alliance member Topl has developed a blockchain built to be an impact monetization engine. James Aman, Topl founder and CTO said: “Extended UTXOs enable novel methods of computation in DLT systems that bridge the gap between hard-coded protocol behavior and smart contracts. EUTXOs enable users to engage in complex interactions while retaining full local verifiability even from light clients.”

To enable the possibility of utilizing various features in a blockchain-agnostic way, the alliance is committed to addressing such instrumental questions as:

• how to seamlessly transfer data between different blockchain environments
• what is the ideal size of data to be used in transactions
• what should be the speed of data processing
• the transaction cost, etc.

Thus, the alliance focuses on the mechanism that enables seamless and secure transactions between different blockchains to foster the greater adoption of blockchain technology. This will also drive the development of solid DApps and DeFi solutions.

Alex Chepurnoy, the co-founder of alliance member Ergo, added: “While it is well-known that UTXOs are better for blockchain scalability and simpler off-chain protocols, the extended UTXO model also allows for novel on-chain DeFi constructions with interesting properties.”

This is only the beginning, and we are currently looking into collaborations with more ecosystems to pioneer improvements of the UTXO model, investigate how the common knowledge and technology stack can improve scalability properties, and contribute to open-source research. We’ll keep you posted as the alliance grows.

Visit the UTXO alliance website to find out more, join the alliance or contribute to the research.