Managed Blockchain Based Cryptocurrencies with Consensus Enforced Rules and Transparency Peter Mell National Institute of Standards and Technology Gaithersburg, Maryland 20899 Email: [email protected] Abstract—Blockchain based cryptocurrencies are usually un- the area of managed cryptocurrencies2. We refer to a currency managed, distributed, consensus-based systems in which no single as ‘managed’ if there exists an owner that can exert control entity has control. Managed cryptocurrencies can be imple- over the currency. Managed currencies include electronic rep- mented using private blockchains but are fundamentally different as the owners have complete control to do arbitrary activity resentations of fat currencies as well as virtual world and in- without transparency (since they control the mining). In this work game currencies. In the cryptocurrency realm, they are often we explore a hybrid approach where a managed cryptocurrency referred to as ‘permissioned blockchains’ (examples include is maintained through distributed consensus based methods. Multichain [12] and Ripple). With managed currencies, the The currency administrator can perform ongoing management identity of individuals is often, but not necessarily, linked to functions while the consensus methods enforce the rules of the cryptocurrency and provide transparency for all management the accounts (e.g., as when someone opens a bank checking actions. This enables the introduction of money management account). Furthermore, the managing entity usually reserves features common in fat currencies but where the managing entity the right to control the money supply (i.e., they can print cannot perform arbitrary actions and transparency is enforced. money). And law enforcement related functions may include We thus eliminate the need for users to trust the currency freezing or confscating assets. Managed cryptocurrencies can administrator but also to enable the administrator to manage the cryptocurrency. We demonstrate how to implement our approach be implemented with private blockchains using tools such through modest modifcations to the implicit Bitcoin specifcation, as Multichain. However, in such implementations the owners however, our approach can be applied to most any blockchain have complete control to perform arbitrary activity without based cryptocurrency using a variety of consensus methods. transparency. This is because the owners authorize (and thus Index Terms—cryptocurrency, blockchain, managed, trust control) the servers maintaining the blockchain. In our research we explore a hybrid approach where we I. INTRODUCTION merge strengths of open consensus based cryptocurrencies Blockchain based cryptocurrencies are usually unmanaged, with features often found in managed currencies. In doing distributed, consensus-based systems in which no single entity so we design not a particular cryptocurrency, but instead a has control [1]. They use open consensus based approaches fexible architecture that allows for different implementations. that allow anyone to participate in maintaining the blockchain, From the open consensus approach we leverage the ability of even retaining their anonymity. Such systems remove the need the mining community to enforce the rules of the currency for a third party in fnancial transactions and eliminate the and to enforce transparency, where all transactions are pub- double spending problem (where the same digital cash is licly viewable. In this way the managing entity of the cryp- spent multiple times) [2]. This lack of a need for a trusted tocurrency cannot perform arbitrary actions, but only those third party is supposed to result in reduced transaction fees explicitly allowed in the cryptocurrency design and all such over non-cryptocurrency based systems (e.g., credit cards), management actions are publicly recorded in the blockchain. enabling effcient micropayments [3]. Recently however, lim- From the managed currencies, we leverage concepts such as itations with some cryptocurrencies on transaction throughput the ability of the currency administrator to create funds, tie has caused transaction fees to be high. Lastly, such systems user identity to accounts, freeze/confscate funds (e.g., due to generally provide a level of anonymity where individuals are illegal activity), and set the block awards for miners. This last not linked to accounts and where it is trivial for an individual feature indirectly enables the currency administrator to control to produce and use new accounts. Examples of such systems the electricity consumption of the consensus mechanism (since include Bitcoin [4], Ethereum [5], Bitcoin Cash [6], Litecoin fewer miners will participate if the rewards are lower). Energy [7], Cardano [8], NEM [9], Dash [10]1. consumption has often been cited as a major problem with In this work, we consider how to bring many of the consensus ’proof-of-work’ systems; in 2014 Bitcoin mining advantages of such open consensus based cryptocurrencies to consumed as much electricity as Ireland [13]. Since our approach is an architecture, the creator of any 1Any mention of commercial products is for information only; it does not imply recommendation or endorsement. The blockchain based cryptocurren- cies listed are the ones with the largest market capitalization in descending 2Note that managed cryptocurrencies also use consensus methods but they order as of 2017-12-29 according to [11]. are not open to public participation. particular managed cryptocurrency instance can choose which all management actions be transparent to the users. features to include or exclude. Our architecture is fexible such Key to this approach are our solutions for maintaining a that it can be used to implement open consensus environments balace of power. The consensus based methods must ensure like Bitcoin as well as closed controlled environments achiev- that the currency administrator (who owns the root currency able with systems like Multichain. However, our approach is manager node) abides by the stated rules of the cryptocur- not intended for that purpose. Our area of interest is where the rency and enforces transparency of all management actions. architecture is used to create hybrid approaches that combine However, the participants in the consensus methods should not the strengths (and weaknesses) of both. Note that we are not be able to take control away from the currency administrator advocating any particular approach in this work and our goal nor exclude any management transactions from entering the is not to propose the creation of any specifc cryptocurrency. blockchain. Rather, we explore here the technological foundations that can In summary, open consensus based unmanaged cryptocur- enable the merging of the managed cryptocurrency idea with rencies provide signifcant new benefts over previous elec- an open consensus based architecture and explore the resultant tronic cash efforts. They eliminate the need for trusted third strengths and weaknesses. parties by eliminating the double spending problem, remove To enable management of the currency, we propose us- the need for a dedicated and centralized infrastructure, and ing a genesis transaction. All blockchains have a genesis allow for the possibility of very low transaction fees thus en- block which is the frst block, but this genesis transaction abling inexpensive micro-transactions 4. However, this model is a frst transaction from which all subsequent transactions is unsuitable for managed cryptocurrencies because it is are authorized. The genesis transaction authorizes a special completely controlled by whomever joins the cryptocurrency root account that has the currency manager role and that network to maintain the blockchain (an open and anonymous will be controlled by the currency administrator (the entity group). Previous efforts to support managed cryptocurrencies issuing the cryptocurrency). Our tagging of accounts with have used permission-based blockchains where the administra- roles is key to our architecture. Accounts with the currency tors can control all access to the blockchain, ability of users manager role can confgure the currency to have different to issue transactions, and ability of miners to maintain the properties through defning policy (e.g., adjusting the roles blockchain. This is a powerful and effcient paradigm for many implemented and mining rewards). Also, these accounts can use cases. However, the user base must have complete trust in issue transactions to create other accounts with different roles, the currency administrator. In our work, we are attempting to in a hierarchical fashion with accounts closer to the root eliminate the need for users to trust the currency administrator being more authoritative. The possible roles include currency but also to enable the administrator to manage the cryptocur- manager, central banker, law enforcement, user, and account rency. At the same time, we are attempting to incorporate the manager. The central bankers can create and delete funds. Law many benefts achieved by unmanaged cryptocurrencies while enforcement can freeze account and confscate funds (e.g., for mitigating the weaknesses (especially in the area of power fraudulently gained funds being sent to terrorist organizations consumption in maintaining the blockchain). [14])3. Users can perform monetary transactions without the The main deliverable this paper is a novel architecture need for a trusted third party. And account managers can create for maintaining a managed