Full Testimony of Avalanche Founder: We Are Standing on the Edge of a New Era

Original: 《Dr. Emin Gün Sirer to testify before the US House of Representatives Financial Services Committee》

Compiled by: 0xAyA, Odaily

Dr. Emin Gun Sirer, founder and CEO of Ava Labs, attended the digital asset hearing of the US House of Representatives Financial Services Committee held in the early morning of June 14, Beijing time.

Before the meeting began, the committee released his written testimony, which can be referenced in English here. The full translation by Odaily Planet Daily is as follows:

Promoting Responsible Growth of Blockchain Technology

Chairman McHenry, Ranking Member Waters, and esteemed members of the US House of Representatives Financial Services Committee.

It is an honor to be here with you today. I appreciate the opportunity to discuss blockchain technology, its innovative applications, its impact on the economy, and how to understand the use cases supported by blockchain from the perspective of a computer scientist. Understanding these key concepts can help formulate a wise regulatory framework to ensure that this technology thrives across the United States. The committee has received several testimonies regarding blockchain, but they have primarily come from lawyers and business professionals. Therefore, I hope this testimony provides you with a valuable overview of blockchain and tokenization from a technical and computer science perspective. I will focus on the ability of blockchain to transform society by making digital services more efficient, reliable, and accessible.

Our shared goal is that the United States should be committed to promoting the free, safe, and responsible adoption of blockchain technology and its many applications, so that as a nation, the United States and its citizens can reap significant economic benefits from the growth brought by blockchain technology.

My Background

I am the founder and CEO of Ava Labs, a software company established in 2018, headquartered in Brooklyn, New York, dedicated to digitizing global assets.

Ava Labs is a software company that builds and helps implement technology on the Avalanche public blockchain and other blockchain ecosystems. We have developed some of the most significant recent technological innovations in blockchain, including the most significant consensus protocol breakthrough since Bitcoin.

Before founding Ava Labs, I served as a professor of computer science at Cornell University for nearly 20 years, focusing on improving the scalability, performance, and security of blockchain. During this time, I consulted with various agencies and departments of the US government on multiple issues. I have made significant contributions in several areas of computer science, including distributed systems, operating systems, and networks, with dozens of peer-reviewed papers published (in addition, I am one of the most cited authors in the blockchain field after Satoshi Nakamoto). I received the CAREER Award from the National Science Foundation and served on the DARPA ISAT Committee. I am also a member of the Commodity Futures Trading Commission (CFTC) Technology Advisory Committee. But perhaps what I am most proud of is co-writing a satirical piece on blockchain with John Oliver. (Odaily Note: Professor Emin Gun Sirer participated in recording John Oliver's comedy show.)

The Big Picture

We are experiencing an unprecedented period of technological advancement and transformation.

The computer revolution has driven this trend, initially with mainframes and later with personal computers. However, these early systems were limited by their "independent architecture," only able to process local data and perform local computations. While they improved the efficiency of existing tasks, they could not generate a multiplier effect due to a lack of network connectivity.

The emergence of the internet and the subsequent World Wide Web marked a critical shift from isolated local computing to global-scale computing. Architecturally, we transitioned from independent computers to a "client-server architecture," enabling us to connect to remote services operated by others to leverage their programs and functionalities. This new paradigm gave rise to digital services catering to the entire world, creating millions of jobs and solidifying the United States' position as a global economic leader. Blockchain represents the next stage in the evolution of networked computer systems.

Today, client-server systems powering the web rely on peer-to-peer technology to connect clients to servers, while blockchain facilitates many-to-many communication through a shared ledger. This allows multiple computers to collaborate, reach consensus, and act in unison. Blockchain technology enables us to build shared services within a network. In turn, this makes it possible to develop unique, secure digital assets, more efficient financial service systems, tamper-proof supply chain tracking, digital identity solutions, transparent voting systems, and many other innovative applications. By leveraging blockchain technology and its created digital uniqueness, we can redefine trust, ownership, commerce, entertainment, and communication, ultimately changing how we interact with digital systems and each other.

The implications of this breakthrough are profound. Blockchain technology enables us to create systems that lower costs, increase efficiency, and give us better control over our digital lives and virtual worlds. Furthermore, we can establish new types of markets, entirely new digital goods and services, empowering individuals and communities to drive economic growth and social impact. Advances in blockchain technology will lead to leaps forward, just like the internet itself, as they will improve the internet itself. This technology creates a new public good: a shared ledger that can be used for a wide range of applications. As we enter the era of customizable blockchains and smart contracts, the optimization of this software will further enhance and improve the existing capabilities of the technology while ensuring compliance with relevant regulations.

Blockchain and Smart Contracts: Cross-Application Impact

Blockchain addresses a long-standing challenge in computer science: enabling multiple computers globally to reach consensus on a piece of data and its larger dataset.

While it may seem somewhat obscure at first glance, this is a crucial cornerstone for solving complex problems that traditional internet systems struggle to address, such as creating assets with digital uniqueness, tracking their ownership, and securely executing business and other processes. In this way, this technology does not require reliance on humans or intermediaries to achieve its security properties; in fact, it often provides strong integrity guarantees even in the event of (partial) system failures.

Let me be clear: the ability to leverage distributed or decentralized networks is attractive for many reasons unrelated to securities laws, financial services regulations, or the laws and rules governing other areas of business, entertainment, and communication. Distributed networks are more resilient, secure, auditable, and available for builders.

Blockchain builders are not aiming to develop this technology to evade laws and rules but to solve computer science problems. Compared to the client-server model, the potential applications of blockchain technology are broad and diverse, many of which were previously expensive or unachievable. Below, I will discuss some key applications and innovations enabled by blockchain.

Blockchain is Rapidly Evolving

In the 14 years since Satoshi Nakamoto introduced Bitcoin to the world, blockchain technology has evolved rapidly. The Bitcoin blockchain pioneered a consensus mechanism—a way for participating computers to agree on data—commonly and inaccurately referred to as "proof of work."

Bitcoin has demonstrated to the world that public, permissionless blockchains are possible. The theme of consensus in computer science literature is known as "Byzantine fault tolerance," and research on such systems has been funded by the National Science Foundation and DARPA for decades, involving hundreds of scholars, including myself. Bitcoin solved this problem and proved to the world that this technology can create and maintain digital assets and establish and transfer their ownership.

Bitcoin has endured countless attacks over its 14-year history while remaining stable and accessible, without a central authority or control entity maintaining its operation. In contrast, even the best client-server services built by Microsoft, Google, Amazon, and Facebook have experienced numerous outages during the same period. Computer scientists have not stopped there. Subsequent blockchain technologies have expanded this core functionality. Notably, Ethereum introduced the concept of smart contracts, which are automatically executed programs coded on the blockchain. Smart contracts can facilitate various applications, including currently popular peer-to-peer lending, social networks, digital collectibles (such as NFTs), and in-game items, as well as digitizing traditional physical assets on a single chain governed by a unified set of rules.

The latest breakthrough in blockchain architecture is known as multi-chain blockchain. In these systems, developers can create chains with custom rule sets, execution environments, and governance mechanisms.

This customization not only unlocks use cases that were previously impossible on a single rule-set blockchain but also isolates traffic and data into environments built specifically for particular tasks or applications. Examples of these systems include Avalanche and Cosmos, which can create dedicated blockchains, sometimes referred to as subnets or application chains, that can be designed to meet compliance requirements. For instance, SK Planet in South Korea recently created a dedicated blockchain on Avalanche that attracted over 58,000 fully verified customers in just a few days. Additionally, Ava Labs is collaborating with Wall Street firms to create a dedicated institutional blockchain. Through multi-chain architecture, operators can have complete control over who can access the chain, who protects the chain, what tokens (if any) are used as transaction fees, and more.

There is a prevailing trend here. Blockchain technology is rapidly evolving, naturally moving towards greater flexibility and security. In other words, many complex problems are being solved through code.

From these developments, we can draw a clear lesson: policymakers should clearly define goals based on the specific implementations of technology (i.e., the activities for which it is used) and leave the mechanisms for achieving those goals to experts. As we can customize the implementation of blockchains, it is now easier than ever to regulate the implementation rather than the technology itself, achieving regulatory neutrality.

Regulating the World of Tokens

Blockchain is a technology that can build resilient and fault-tolerant applications. In fact, they are open programmable platforms that users can interact with as if they were public resources. This powerful construct naturally gives rise to many different types of applications, leading to tokenization, which is the creation of digital representations of rights, assets, and other things.

Not all tokens are equal in implementation and function; they must be treated differently based on their nature. Tokens cannot simply be categorized under a single set of rules, as they vary widely in functionality and characteristics. A good analogy is paper; we regulate the rights, assets, or things created based on the text, numbers, and images on the page.

Types of Tokens Include but Are Not Limited To:

• Real-world assets: Tokens can directly or indirectly represent traditional assets. For example, land ownership can be tokenized, with each token corresponding to a uniquely identifiable parcel of land. In many cases, real-world assets are already regulated, and digitizing them into blockchain format should not lead to entirely new regulations.

• Virtual goods: Tokens can represent digital artworks, collectibles, game skins, etc. The functionality and forms of these items also vary. They can range from simple non-programmable images (a common use of NFTs) to complex assets (some assets used in games) that can directly encode various functions and characteristics within the asset.

• On-demand payments: Public blockchains constitute shared computing resources that must be allocated efficiently. Tokens are the perfect mechanism for measuring resource consumption and prioritizing important activities. These tokens are sometimes referred to as "fuel tokens." For example, BTC is the fuel token for the Bitcoin blockchain, ETH is the fuel token for Ethereum, AVAX is the fuel token for Avalanche, and so on. Without fuel or transaction fees, a single user or group of users could potentially monopolize the blockchain, similar to a denial-of-service attack, rendering the blockchain unusable.

The above list covers a wide range of categories…

However, this is just a snapshot of what is currently happening and what may happen. I encourage you to refer to our "Owl Explains" educational program for more information.

As a primary principle, determining the regulatory framework must start from and be based on the functions and characteristics of tokens, rather than the technology used to create them. At Ava Labs, we refer to this as reasonable token classification. Let me reiterate: tokenization is not created to evade laws. It is a natural product of blockchain technology, an improvement over traditional systems, just as computer databases are an improvement over paper filing cabinets.

In addition to reasonable token classification, regulations involving tokens must be formulated in a way that can be enforced at a level with the necessary information. Just as we do not expect internet routers to verify the authenticity of content sent on social media applications, we cannot impose regulatory burdens on technical aspects that have no understanding of on-chain content or operations. These platforms already provide features like locking and transfer restrictions that can help enforce these limitations.

Enhancing Market Efficiency, Transparency, and Oversight

Blockchain and smart contracts can serve as the foundation for a more transparent and efficient financial system, allowing all participants to enjoy a level playing field, including regulators, who can gain clearer insights into the behavior and activities of all market participants. Privacy remains an important component of any system. Developing these new ways of providing and regulating financial services should incorporate personal privacy protections. These improvements can only be fostered through the support and collaboration of regulators and decision-makers, providing reasonable laws and regulations to promote the responsible growth of these technologies.

How is this achieved in practice? A perfect example is the credibility of exchanges.

Last year, several cryptocurrency exchanges collapsed, particularly FTX. Please do not misunderstand: these failures are not failures of blockchain technology, but failures of traditional custodians in protecting user deposits. No major decentralized exchange has been affected by similar failures. Blockchain technology is designed to eliminate reliance on centralized intermediaries that may jeopardize user funds, market integrity, and other characteristics necessary for the proper functioning of systems.

In addition to on-chain custody and trading, a recent breakthrough innovation known as enclaves allows new markets to strictly limit even the behavior of market owners and operators. This innovation can exclude undesirable behaviors such as front-running, stop-loss hunting, and privacy violations that threaten market integrity. Ava Labs' own Enclave Markets is a pioneer of this innovation, which we refer to as fully encrypted exchanges.

Another example is the lending sector, which showcases the benefits of on-chain activities compared to activities with centralized parties. Last year, some off-chain lending institutions and borrowers faced significant failures, while major on-chain lending platforms remained largely unaffected during market turmoil. Because they rely on over-collateralization and automated systems, these protocols can flexibly respond to liquidation and collateral call requirements during sharp market downturns. While there is no panacea, the evidence so far suggests that decentralized networks perform better under stress compared to centralized trading counterparts. These results align with the expectations of blockchain design.

Stablecoins as Digital Portals to the Dollar

Stablecoins, primarily pegged to the dollar, have seen widespread development globally as they offer a better way to hold dollars. Stablecoins not only enhance user experience (by increasing the speed of fund transfers and reducing costs) but also meet the growing demand for stablecoin dollars in regions facing economic uncertainty and local currency overissuance.

By transforming the dollar's value retention capability into an accessible product outside the United States, stablecoins help individuals protect their savings from local currency value fluctuations and theft by criminals and other bad actors.

With appropriate regulation, the potential of stablecoins can be realized, leading to responsible growth of stablecoins through new technologies and configurations.

Blockchain Can Accelerate Recovery from Climate Disasters Through Insurance

Given the emerging property insurance crisis triggered by increasingly frequent and extreme climate events. California's largest property insurer, State Farm, announced it would no longer provide insurance due to high wildfire risks. Insurers in Texas, Florida, Colorado, and Louisiana are also facing similar pressures to either stop providing insurance, raise rates, or seek backup measures to resolve bankruptcies.

In this situation, who will American communities rely on to safeguard their housing and economic future? If the insurance industry consolidates, leading to the bankruptcy of small regional insurers, how will this risk be managed?

Utilizing smart contracts and the Avalanche network, the Lemonade Foundation currently provides insurance to over 7,000 farmers who previously could only access unaffordable high premiums or products with long, cross-season payout delays. These premiums were economically unfeasible for the organization because these processes are now compressed into manual work within a smart contract. Another example is in 2019, when the US government completed the accounting for Hurricane Katrina payouts, a process that took a full 14 years after the catastrophic impact in 2005. Delays were partly due to the difficulty of reaching consensus among the many stakeholders involved in the process.

In 2012, Superstorm Sandy damaged nearly 500,000 homes, causing approximately $50 billion in losses. The same gaps in insurance payouts stifled urgent recovery efforts along the entire East Coast. Families who had been paying premiums for years received only meager payouts to rebuild their lives. By the time their lawsuits led to action and more payouts, the damage had been done, leaving scars on the community. A blockchain-based distributed ledger can greatly simplify such processes, and our company is working with Deloitte to develop and implement this technology under FEMA contracts.

Supply Chain and Combating Counterfeiting

Global supply chains face challenges such as rapidly growing demand for goods and pressures from the pandemic, including threats to our most critical security infrastructure. When supply chains experience issues, problems can become particularly tricky, and if fraud is involved, the situation worsens. Blockchain and smart contracts can help ensure and verify the security of supply chains across various global industries.

Blockchain can manage supply chains, providing a reliable and transparent record of product origins and authenticity. De Beers' Tracr platform demonstrates how to manage the diamond supply chain, while other deployments cover areas ranging from luxury goods to concert tickets. Blockchain can be a crucial tool in combating counterfeiting of medical supplies, pharmaceuticals, food products, and consumer technology, which directly impact our communities and your constituents.

Upcoming Technological Improvements

While there have been some publicly reported exploits of smart contracts, this field has significantly matured since its early days, and new technologies are ready to enhance the security of on-chain assets and applications.

Unlike the fundamental issues inherent in smart contracts and blockchain technology, the potential risks associated with smart contract-based systems primarily focus on implementation flaws, such as poor coding and neglecting to follow best practices, rather than inherent problems. Just as the internet software stack was weak in the 1990s, smart contract programming tools are still in their infancy.

This field has rapidly evolved, forming a thriving area of software threat analysis, certification, and verification services to validate whether smart contracts meet security standards through code audits and other technical means. Additionally, we have seen automated tools used for program verification and model checking, helping to identify vulnerabilities that are difficult for the human eye to detect. These technologies even begin running before program deployment to identify vulnerabilities before they impact anyone.

Finally, new mechanisms have emerged, such as runtime integrity checks, smart contract safety switches, and automatic restrictions on fund flows, to help control the impact of any unexpected errors in real-time. Systems that follow best practices, such as lending platforms and well-designed bridges (like the bridges built by Ava Labs), have circulated billions of dollars in their smart contracts without being compromised.

Given my academic and research background, I am confident that the field will develop stronger technologies to ensure the correctness of smart contract software. One of the spillover effects of this activity will be to enhance the integrity and security of all software, including software unrelated to blockchain.

Technological Competitiveness and the Risks of Inaction

We stand on the brink of a new era, and nurturing and supporting the development of this revolutionary technology is crucial. By doing so, we can unlock its full potential, ensure that the United States remains at the forefront of innovation, drive the development of the next generation of internet technologies, and achieve significant economic growth.

Responsible participants in the blockchain space seek to establish wise laws and regulations that incentivize growth and good behavior, punish bad actors, and elevate users of blockchain networks. The community is ready to provide guidance to decision-makers to achieve these goals. However, without a wise framework and collaboration, the path to losing technological leadership is clear.

The United States won the first wave of the internet revolution precisely because it was able to foster the freedom of responsible innovation. The US must prudently and wisely classify and regulate blockchain applications and tokens while ensuring the free but responsible growth of blockchain technology. Otherwise, any regulatory framework will face two significant paths of failure.

First, the blockchain platforms themselves will be regulated at the protocol level. This is akin to regulating internet protocols, which would doom the fate of information technology and the vibrant internet we have today. Second, tokens and smart contracts created using blockchain will be lumped into homogeneous and incompatible categories. This is akin to regulating social media applications in the same way as consumer healthcare applications. Instead, tokens and smart contracts must be analyzed on a case-by-case basis and regulated cautiously based on their functions and characteristics.

As we move towards a more digital world, benefiting from artificial intelligence, virtual reality, and remote work, we will increasingly rely on digital value transfer and programmability. Blockchain is a clear technological answer to these demands and has significant synergies with the global economy. The addressable market for digitizing global assets and securely transferring value over the internet is greater than the sum of all existing asset values. Failing to recognize the power of blockchain technology—whether due to a lack of understanding or misconceptions about the technology—will have catastrophic consequences. The inability to swiftly provide a wise regulatory framework will not only stifle economic growth but also make it easier for bad actors to engage in illegal activities.

Finally, we must remember that just as there are good people dedicated to public service, there are also good people committed to building technologies that improve lives. By working together, we can lay the foundation for trustworthy, efficient, self-executing systems that will become the cornerstone of our modern economy.