Chia Network Investment Report | Deep Dive

Chia Network Investment Report | Deep Dive

Review Date: August 4, 2021 |

Project Overview

Chia Network believes cryptocurrencies should be more secure and easier to use than cash, so they created a network where people can validate transactions without expensive ASIC miners or single-use hardware that leads to high energy consumption. Incorporated in August 2017 to improve existing blockchain and smart contract platforms, Chia network aims to build the first enterprise-grade digital money.

Using a new consensus mechanism based upon Nakamoto’s original design, Chia Networks’ proprietary consensus, “Proof of Space and Time” replaces energy-intensive “Proofs of Work.” Expanding rapidly since its launch in Q1 of 2021, the parabolic growth of the Chia network has led to shortages of high-capacity HDDs in the retail and distribution channels.

Project Description

At the heart of most cryptocurrencies is a mining process in which miners compete to add a new block by verifying transactions and adding them to a public ledger. Through this power-intensive process, miners compute complex algorithmic problems to calculate the right hash number. Whoever finds this block with the right hash then adds that block to the existing chain while simultaneously collecting a small reward for the mined currency. While distributed ledger technologies like Bitcoin and Ethereum offer new mechanisms of creating a deflationary medium of exchange, the development of these currencies poses a critical problem. By 2021, BTC alone will use approximately 5% of the world’s electricity. On top of these concerning statistics, these massive mining operations source their power in immoral ways – often sourced through bribery, blackmail, and theft.

As the world continues to realize the potential of blockchain technologies, the level of power consumption will become unsustainable. Besides environmental and energy concerns, bitcoin and other cryptocurrencies that require a PoW system to be generated forgot the decentralization aspect they initially strived for, as the mining process for these systems favors miners who pool their resources together.

Offering a unique solution to the environmental and decentralization concerns, Chia network introduces a new blockchain where users on the network generate hashes stored on unused portions of their hard disk drives. When a block is about to be generated in Chia’s network, its hash is compared to the ones generated prior and the user with the closest hash secures the block.

By harnessing unused storage power that is available to the masses, Chia will use a Proof of Space and time-proof that effectively creates a cryptocurrency that is far less wasteful, more decentralized, and ultimately more secure, effectively creating the next chapter of digital assets.

Chia is an attempt to improve on Proof of Work-based blockchains with a new consensus algorithm “Proof of Space and Time”. Instead of consuming massive amounts of electricity and wasteful single-purpose ASIC hardware to validate transactions, PoST leverages under-utilized disk space that already exists in the world today. Expanding on Bitcoin’s experiment, Chia sets out to restructure cryptography and ultimately propel the field to new heights, joining giants like “Merkle, Rivest, Hellman, and others” by inventing and refining new methods to progress the next chapter of cryptocurrencies.¹

Unique Value Proposition

Chia Network was formed to drive the adoption of Chia and to provide greater utility, trust, and transparency in how resources are used to create this new generation of digital currencies. Like all new promising technologies, we overestimate the impact of digital currencies and blockchains in the short run and underestimate it in the long run.

By creating this revolutionary currency, Bitcoin has paved the way – playing a similar role to early internet service providers who created the worldwide web we know today. After looking into Bitcoin, one can see the potential trajectory and implications of its technologies, which are more subtle, powerful, and fascinating than any other medium of exchange or store of value in history. Satoshi’s new proof of work consensus proved that a globally shared currency powered by a ledger can be trusted with no centralized authority or control. However, as this vision of a more democratic currency became more well known – the CPU industry which had excess supplies for computers worldwide ultimately met overwhelming demand, leading to a worldwide shortage of specialized single-use hardware and cheap electricity.

On top of this negative externality, Bitcoin also suffered a blow to one of its key principles as the specialized mining hardware became increasingly owned and operated by a minority of large entities in purpose-built data warehouses in cities with the cheapest electricity.

Chia sets out to make another attempt at creating a secure, decentralized, and transparent currency to ultimately stand on the shoulders of cryptographic giants like Merkle, Rivest, Hellman, and others to create a new standard of cryptography.

Hoping to lead the industry in being the go-to SaaS to support open-source blockchains and smart contract transactions, the protocol aims to sell this service to governments, financial institutions, corporations, and large buyers and sellers of storage. Chia also expects to foster grassroots development of DeFi – DeX, cross-border payments, and new end-user wallet innovations to speed up the development of new applications that have not been invented yet but are only possible with secure, distributed programmable money.

The tools Chia is creating allow these developers to create applications and wallets that are user friendly. In addition, to attract traditional investors and markets to Chia’s proprietary technology, the protocol’s team intends to list most of the equity of Chia on a major stock exchange to strengthen the credibility and regulatory certainty of its software and business amongst governments, financial institutions, and enterprises.

Use Case

As a new blockchain, Chia Network relies upon a new consensus algorithm called “Proof of Space and Time” – this new method of generating and validating a digital asset has powerful implications as it does not consume the significant amount of electricity and single-purpose hardware that Proof of Work consensus requires. Intended to be the first green and eco-friendly alternative to Proof of Work- Chia’s team expects that farming the currency will be more decentralized than PoW and PoS.

To attract both investors and developers, Chia Network intends to sell its software as a service and support other projects by providing an open-source blockchain and smart transaction protocol, called ChiaLisp.

Also adopting a community-driven development of its network, Chia is working on creating its own “decentralized exchange, cross-border payment system, and new wallet innovations to speed up the growth of its network.”² These tools will allow developers to create applications and wallets that are user friendly.

Technology

What is the difference between Chia and other cryptocurrencies?

To overcome the perceived failures of other cryptocurrencies, Chia Network proposes a new blockchain-based on Proof of Space and Time by installing software that generates and stores a collection of cryptographic on numbers on disk plots, individuals will deploy their unused storage space on their hard drive and make money doing it.

By becoming a farmer on the Chia Network, one can harness the power of their plots to see if they have a number that is close to the new challenge number derived from the previous block. This operation of checking for Proof of Space is fast and very efficient – farmers are known to farm a petabyte of data on one Raspberry Pi. A farmer’s probability of winning a block is the percentage of the total space that a farmer has compared to the entire network for each challenge and there are 4608 chances to win a challenge per day on average.

Replacing Proof of Work with Proof of Space

Chia is deploying a proof of space and time consensus mechanism, in which farmers get a single opportunity to extend the desired block. Being syntactically different from Bitcoins mechanism, the PoST mechanism in Chia gives farmers a single opportunity to extend a block. By utilizing storage as a commodity to secure the network, Chia is embodying the properties of Bitcoin that Satoshi had hoped for in idle CPUs. While both CPUs and hard drives are integral to any modern technology, enterprises and end-users have an abundance of storage available compared to the amount they actually use. Understanding these inherent attributes in the industry, Chia believes leveraging these unused hard drives and SSDs will provide the cheapest alternative to create a cryptocurrency and store blockchain data.

Chia Networks proprietary technology is broken down into the following components:

1. Proofs of Space

A proof space protocol has the following necessary parts

• a verifier can send a challenge to a prover, and
• the prover can demonstrate to the verifier that the prover is reserving a specific amount of storage space at that precise time.

To become a participant in the Chia network, individuals have the chance to plot, farm, and verify transactions. To become a farmer, an individual must have at least 100GB of storage space available on their hard drive with no upper limit on storage capacity. The plotting power of a specified user is determined by a k parameter in which space = 780 * k * pow (2, k-10). Currently, an individual using a k32 plot can contribute to the network in around six hours with a fast machine, and approximately 24 hours with a slow machine using a single CPU core and few GBS of memory. Based upon the creation of cryptographic researcher Hellman, the Proof of space construction used in Chia is nested an additional 6 times and contains more practical uses. ³

For example, an individual with a storage capacity of 100GB can plot a file that contains seven tables of random data in which each entry table contains a pair of integers between 0 and 2^k, called “x-values”. By collecting 64 of these x values, a proof space relationship is created with an underlying mathematical relationship. Hoping to earn the potential reward for the next plot that is required, a prover then initializes his 100GB of storage, signaling they are reading to receive a challenge and create a proof. A unique aspect of Chia’s proprietary software is the fact that this method of creating currencies is completely non-interactive, meaning “no registration or online connection is required to create a plot and nothing is created on-chain until a block reward is won.”⁴

To farm the native currency, a farmer must accept a sequence of challenges to prove that they have truly set aside a defined amount of storage necessary to plot. Once they plot, they can check their plots and compare them to winning ones – submitting any winning proofs to the network for final verification.

Each time a challenge occurs, a lookup table with 256 “x-values” is used as an input and the output is proof. The farmer then responds by checking the corresponding values in table 7 and if they have the required x-value, then they would be inclined to check the remaining values in tables 2-6. This entire process takes approximately 640ms using Chia’s proprietary software, assuming a slow HDD with a 10ms seek time.

Because most proofs generated using the process are not good enough to be submitted for verification, Chia optimizes this process by only checking one branch of the tree, which results in two x-values depending on the challenge. By doing so, the network can then hash the x-values generated into a 256-bit string to determine whether the proof is good. This increases the complexity of the plot size by requiring a certain number of x-value iterations before a plot can be added to the blockchain and the complete Proof of Space ecosystem.

According to the founder Bram Cohen, “Chia users have successfully been farming multiple PiB of storage on a single Raspberry Pi, there is no reason to use SSDs since the speed is not relevant for farming”. ⁵ Ultimately, to verify the network a farmer has to first successfully create a proof of space powered by storage plots, only then can the proof be submitted to the network for verification by performing a few hashes and making comparisons between the x-values in the proof.

Note: the proof is a list of 64 x-values, where each x-value is k bits long. For a hard drive with approximately 100 GiB of storage, the required amount of data to plot is very minimal. Although the Chia Network is lightning fast, verification in their proof of space consensus mechanism falls short in competing with the speed of Ethereum and Solidity.

2. Proofs of Time

Another proprietary concept introduced by the team at Chia network, a proof of time, or a verifiable delay function, provides the network with a proof that acts as a sequential function when a specific action is executed a certain number of times.

Proof Of Time consists of the following mechanisms:

Verifiable: In essence, this means that after performing the necessary computations, a prover can create a small proof of the specified plot in a short time, and the verifier can verify this proof without having to redo the entire hash function.

Delay: translates to the amount of real time the prover spent to compute the hash function.

Function: always deterministic, computing a VDF on an input x always yields the necessary y.

By being a “sequential” mechanism, any attempt to speed up the process would be worthless. With this real-time mechanism intertwined in the development of proof of space, PoT ensures that block times are more consistent and increases the overall security of the blockchain.

In summary: Proof of Space in parallel with Proof of Time powers the Chia blockchain to be a secure and decentralized one. By requiring a specific amount of time to pass between blocks, Chia’s approach to generating blocks and securing the network dramatically minimizes the amount of electricity wasted compared to Bitcoin.

3. ChiaLisp: Chia Networks programming language:

Similar to the programming language Solidity, pioneered by Ethereum, Chialisp is an innovative programming language which aims to be more powerful, secure, and easier to audit than comparable blockchain languages in the market.

With its own on-chain smart contract development environment, Chia will provide cryptocurrency projects with the security, transparency, and ease of use that blockchain projects look for.

Designed with security and simplicity first, applications running on Chialisp are intended to have functionality appropriate for banking, payments, and financial applications. The core functionality of the programming language provides developers with “financial controls, payments clearing and settlement, and the managing of issuance of assets”.⁶ Enabling users to customize custody and clearing arrangements, Chialisp safeguards native assets on Chia from accidental loss, theft, or hacking with various tolerance levels in an auditable manner.

According to the protocols business paper, the successful launch of the Alpha Testnet in December 2019 introduced several smart coins and wallets available to specific developers and deployers of Chia.

These initial use cases of Chialisp showcase the depth of these “smart coins”, providing features such as multi- signature support, atomic swaps, slow paper wallets, digital identity wallets, and coloured coins.

On an enterprise level, the expected use-cases for Chialisp and smart coins in general is the ability for US based hedge funds to leverage these coins to manage subscription ownership and have investors present a digital identity that verifies their citizenship, financial qualifications, and place of origin/AML statues – all tied back to Chia Networks blockchain. In addition, a government entity can also use Chia to issue their domestic currency back by a stable coin to anyone who completes the required KYC DiD (digital identity certificate).

4. Colored Coin: What Are They?

Similar to ERC-20 tokens on the Ethereum network, “coloured coins” allow developers, financial institutions, corporations, and governments to issue on-chain assets and inherit the powerful capabilities of Chia Network’s blockchain by globally decentralizing and securing their network through the Proof of Time and Space mechanism.

In Chia all coins comprise of three things:

• a reference to its parent so you know its origin
• a program called the puzzle, which controls how the coins can be spent
• an amount which state’s the values this coin holds

When creating a coloured coin, each one has a unique identifier which is unforgettable, meaning no extra value can be added to or removed from the coins after their creation. This type of network for new tokens enables individuals and corporations to build their own token and peg it to an asset of their choosing. For example, one can peg an arbitrary token and tie it to real-world assets like cars or books or financial assets like stocks. According to Bram Cohen, “Ephemeral coloured coins combined with Chia’s native exchange capability and partially completed transactions of arbitrary complexity are superior building blocks for the arbitrage applications and transactions that DeFi projects are attempting to build.”⁷

Coloured coins also have real-world applications pertaining to other industries like the gift card industry, debt/equity issuance markets, and any other asset issuance which requires tracking and management.

Because Chialisp is a generalized development language and open-sourced environment, these example functionalities can be mixed and matched for specific use cases. Developers can create new and currently unimagined capabilities with the toolset that Chialisp provides without needing changes to Chia Network’s protocol or environment while Chialisp will deliver security and auditability of those controls and applications.

Other applications included in ChiaLisp are aggregated below:

1. Multi-Sig and Atomic Swaps: Considered to be the building blocks for more sophisticated smart contract transactions, Multi-Sig and atomic swaps are core to many protocols and custody arrangements. Both of these mechanisms allow corporations to require two out of three unique signers to spend money out of a designated wallet or to complete a trade of any type.
2. DiD wallets: Allows individuals and companies to add identity and permissioning on top of a permissionless blockchain. By enabling these digital identity wallets, users can pseudonymously delegate control of their identity to family or a legal counsel in a way that can be recovered by both parties – creating a new type of trust/trustee relationships in digital inheritance. In addition to personal uses, DiD wallets also enable issuers of an asset on Chia Network’s blockchain to require end users to complete required processes, like KYC/AML to receive equity, subscription, or a government backed stable coin.
3. Rate Limited Wallets: Grants individuals the right to limit the spend of certain coins over a specified time. With the ability to restrict spending limits to 1/52nd of the funds equity in each week, this feature provides security if wallets are stolen or compromised by a third party.
4. Slow Paper Wallets: A well-known best practice in the cryptocurrency community is to keep a paper wallet of your wallets in case your hardware is lost or stolen. Realizing the multiple vulnerabilities this puts you in, Chia implemented a slow paper wallet that allows you to store a smart transaction that is capable of deploying a time delayed process to recover your funds in a hot wallet without use of a private key.

Token Utility

Chia, the native token of Chia Network, serves two primary functions:

1. a medium of exchange and store of value that is equitably distributed and deflationary
2. smart contract capabilities that use Proof of Space and Time to secure the network, Chia comes with a number of features built in from the beginning that increase trust and safety for users.

Tokenomics

Nature of Token Supply:

The creation and allocation of Chia is distributed in a way that pays respect to Bitcoin and the legacy it created- the initial distribution of Chia on the date of mainnet launch will be 21 million coins. Erring on the side of caution, the company also plans to have an excess of coins in a strategic reserve holding owned by Chia. In hopes of someday taking the protocol public, Chia is managing this reserve to distribute excess Chia, if any, in a fair way to shareholders using traditional corporate methods.

As a currency that is mineable to average individuals, farming rewards of Chia is directly patterned after Bitcoins rewards schedule

• 64Chia will be created every ten minutes for the first three years after launch

• 32Chia will be created every ten minutes in years 4-6

• 16Chia will be created every ten minutes in 7-9 years

• 8Chia will be created every ten minutes in years 10-12

• 4Chia will be created every ten minutes for every year after year twelve.

With a trailing emission schedule built in, Chia is subject to the following emissions schedule Post-Launch:

Note: To ensure the adoption of Chia in both traditional markets and decentralized ones, the company believes the best way to “govern” their strategic reserves is to adopt the well tested 400 year old technology of filing Chia under a joint stock corporation to adhere to current corporate governance best practices. When the time is right, the company plans to list the equity of Chia

Network’s strategic reserve on a national stock exchange, giving it exposure to a variety of investors. Unlike proof of stake blockchains like Ethereum however, these individuals have no influence on the governance of, or validation of the Chia blockchain.

Token Supply

Chia currently has a circulating supply of 865,641, approximately a 3rd of its projected amount according to its 1st-year emission schedule.

Liquidity

Currently, Chia tokens have a daily trading volume of $30,495,747 million and a market cap of about $174,401,040 million. This gives Chia tokens a liquidity ratio of 17%, meaning that tokens are very liquid and owning Chia is less of a risk than other cryptocurrencies with similar market cap sizes.

Audits

Audited by Leastauthority on June 1, 2021, an excerpt from the audit: “Our review of the Chia Coloured coin implementation began with a close study of Chialisp, which helped in gaining an appreciation of its subtleties and nuances.

We found that Chialisp is an efficient and functional language, which is demonstrated by its brevity and a limited amount of pre-defined primitives. As a result, grasping the language was less complex than understanding other widely used Turing-complete languages that sometimes introduce additional complexity.”⁸

Exchanges

Chia is currently being traded on 20+ Exchanges, including: Huobi, Gate.io, OkEx, CoinEx and DigiFinex.

Company History

Team- The protocol currently has 36 employees working on it, with the majority of them being software engineers.

Leadership

Bram Cohen: Before creating the Chia network, Bram Cohen invented BitTorrent, one of the most well-known cryptocurrency projects to date.
Gene Hoffman: As a serial entrepreneur and former CEO of many companies, Hoffman has built and scaled companies in enterprise software and Saas, consumer subscriptions, cryptography, and software development. Raising over $150,000,000 in public and private markets.

Competition

As of now Chia networks competition are the following protocols/networks:

1. Bitcoin
2. Ethereum
3. Solana
4. Signum

Early Investors

Founded in 2017, Chia network has been under development and entirely inaccessible to public and private investors. After the successful release of its mainnet and the deployment of the Chia network, the team decided it was time to get top tier venture capital firms on board – becoming one of the largest funding rounds in blockchain history thus far with $61 Million dollars raised, with Andreesen Horowitz and Richmond Global Ventures leading the round.

Other notable investors include: Naval Ravikant (CEO of Angelist), Greylock partners, Trueventures, Slow Ventures, Galaxy investment group, Stillmark, DCM Ventures and MetaStable.

Website Authenticity

The website is very informative and provides both developers and potential investors with enough information on the potential use-case of Chia and it’s unique position in the blockchain industry.

The entirety of this investment report consists of extracted information from Chia’s business paper, and green paper.

Community Size

The Chia community is a big one.

Twitter: ~71,000 Followers

Telegram: Not Advertised

Instagram: ~7000 followers

Reddit: ~45,000 followers

Discord: ~4000 Followers

Non-Crypto Mainstream Press

Yahoo Finance:

https://finance.yahoo.com/news/chia-network-153251783. html

Company Scandals

Cypress Newspaper:

https://cyprus-mail.com/2021/06/26/why-chia-isnt-as- green-a-coin-it-claims-to-be/

Verdict

With a vision to restructure the cryptocurrency sector and transition it to a greener alternative, Chia Network could provide DeFi and the blockchain space in general, a new smart contract ecosystem where protocols can continue to flourish with complete security. Led by Bram Cohen, creator of BitTorrent, the protocol is not short on talent to expand the Chia ecosystem exponentially.

Backed by Andreesen Horowitz, SlowVentures and galaxy investment group, Chia Network has the potential to become the go-to blockchain platform for developers, financial institutions and governments.

Although Chia did not truly decentralize their ecosystem by taking the company public, they did strategically grab the attention of traditional markets by revealing their plans to have a public offering later this year.

With a current liquidity ratio of 17%, Chia is less prone to dramatic price swings and liquidity issues – meaning individuals can easily redeem the coin for fiat. After evaluating the project in entirety, the Token Metrics team scored Chia Network objectively, and the results were the following:

Fundamental Score – 90%

Competition – 3/10	Team – 15/15
Community – 4/5	Web Design – 4/5
Good Use-Case – 20/20	Investors – 15/15
Token Distribution- 7/10	Tokenomics – 9/10
Audit – 7/10	ROI Potential – 6/10

Technology Score – 85%

Pros

• Developed by an industry veteran who already created a top 100 cryptocurrency project
• Implements a new proof mechanism called “Proof of Space and Time” which aims to provide a greener alternative to Proof of Work and Proof of Stake
• Smart contract ecosystem with its own programmable language called “Chialisp”

Cons

• Being late to the blockchain game, Chia has stiff competition with massive network effects to compete against
• Half of block rewards during the lifetime of Chia go to the development of the team/ company – this is different from BTC and other coins where 100% of the coins are distributed via mining. There is a lot of potential with Chia’s approach, but as the first cryptocurrency protocol that is attempting to go public there could be inherit externalities uncalculated for.

Risk-averse Strategy

One way to accumulate Chia is to begin plotting on your own hard drive, however as of today many individuals who start farming Chia do not receive any form of rewards till 5-10 months of plotting. At $200 each with a 21million circulating supply, Chia has the potential of reaching prices of $5000+. If one is a true believer in the project, accumulating Chia near trend lines might pay off handsomely in the future.

Risk-Seeking Strategy

• Accumulate Chia by creating as many plots as possible, this gives an individual a better chance at actually solving a hash function.
• Provide liquidity across exchanges/dex’s (currently 17% liquid)
• Accumulate by buying it near/at trend lines

Conclusion

Aiming to revolutionize the way we mitigate the negative externalities of Bitcoin, Chia has the potential to create the go-to ecosystem for DeFi projects and developers.With their proprietary technologies, including proof of space and time, ChiaLisp and other technological contributions to the field, they are sure to attract a significant amount of projects. Regardless, one should always be cautious and remember that cryptocurrencies are only a decade- old invention. AKA there are no sure bets.

References

1. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021.
2. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021.
3. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021.
4. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28,2021.
5. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021
6. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021.
7. Cohen, Bram. “Business Whitepaper- Chia.” Accessed July 28, 2021
8. Authority, Least. “Chia Audit – Least Authority.” Https://leastauthority.com/blog/audit-of-chia-networks- coloured-coins-implementation/. Accessed July 28, 2021.

Disclaimer

Token Metrics Media LLC is a regular publication of information, analysis and commentary focused especially on blockchain technology and business, cryptocurrency, blockchain-based tokens, market trends, and trading strategies.

Token Metrics Media LLC does not provide individually tailored investment advice and does not take a subscriber’s or anyone’s personal circumstances into consideration when discussing investments; nor is Token Metrics Media LLC registered as an investment adviser or broker-dealer in any jurisdiction.

Information contained herein is not an offer or solicitation to buy, hold or sell any security. The Token Metrics team have advised and invested in many blockchain companies. A complete list of their advisory roles and current holdings can be viewed here: https://tokenmetrics.com/disclosures/