The Oracle machine: Aeternity’s perspective on the future of smart contracts, privacy and scalability

April 6, Aeternity public pre-sale has ended demonstrating huge support from the community for this new project with over $5 million collected in ETH and BTC.

ForkLog had an opportunity to get some insights of why Aeternity supporters are so excited about the project at recent BlockchainUA conference Kyiv. The project has been presented by its CEO and founder Yanislav Malahov during the Product Stage line-up. Below is the quick recap of his presentation.

Yanislav ‘Yani’ Malahov, early cryptoenthusiast and founder of Aeternity

What is Aeternity?

“Aeternity is a new blockchain for scalable smart contracts interfacing with real world data,” defined Malahov the inherent purpose of the project.

The world population numbering about 7.4 billion people needs a lot of transactions and a magnitude more will be needed if we count in the rising tide of new Internet of Things devices being created every day, explained Malahov. However, the existing blockchain infrastructure cannot keep up with the speed things around us are developing, and that’s why it is so important that new developments actually happen:

“Currently there are so many blockchains and let’s say smart contract or app, dapp projects which receive a lot of funding, but the existing blockchain technology really does not scale. It’s like trying to build Youtube in 2000. It’s just too early.”

The project is being designed to tackle such important issues as smart contract scalability and interconnection of digital and physical realities. These will be solved by moving the smart contracts into state channels while introducing the distributed oracles right into the consensus on the blockchain.

Yanislav also allowed the audience to take a peek behind the scenes. Apparently the project was initially started by a team of three – Yanislav Malahov, Zack Hess and Jack Peterson, all being veterans of blockchain industry with extensive experience in the field, with other team members joining afterwards. In the past Yanislav designed and built several software cryptowallets and claims to be one of the early masterminds behind Ethereum. Zack worked at Augur, a decentralized prediction market built on Ethereum blockchain, while Jack contributed to Synereo.

State Channels

The main technology enabling smart contacts secured by blockchain to achieve massive throughput is aptly named state channels.

“State channels are trustless off-chain transactions. Usually when you do a state channel transaction or even run a smart contract – so we can arbitrarily state updates inside a state channel – you would not write to the blockchain. We strongly believe this is the only way we can scale the blockchain technology while keeping the trustless properties as well as enhancing the privacy,” explained Yanislav.

Essentially, this technology allows to carry out conditional transactions between parties inside state channels, without involving the entire blockchain. The state channels technology is similar to one used in Lightning Network of Bitcoin, although smart contract functional has been added. This means that users will be able not only to transact in a regular way, but also to code all sorts of rules and conditions right into the channel as well as to keep track of contract’s current state off-chain.

Only in case of disagreement between parties, the blockchain gets involved as a decentralized arbiter in order to resolve it:

“Usually there’s no disagreement here between the counterparties. In case there IS a disagreement or in the worst case the counterparty disappears, you take your last signed state as well as the contract which is kinda locked into the state channel and publish it to the blockchain. Then the blockchain network enforces this smart contract and comes to the same agreement or the same conclusion as if everything was on-chain from the beginning. This is the way how we achieve higher scalability as well as higher privacy. Even in case the execution of a smart contract goes on the blockchain then only the part which is necessary for the execution would need to be published.”

As an allegory of modern blockchains Malahov suggested the audience to imagine a bureaucratic system where a copy of every paper contract ever signed has to be physically stored by everybody involved in the system. Clearly such system would have serious scalability issues. Aeternity blockchain, on the other hand, will be mostly involved only in enforcement of disputed contracts.

Comparison between on-chain and off-chain smart contracts

With state channels the on-chain settlement will be needed only in case of disagreement between counterparties. That’s why we can say that the general blockchain will act just as a decentralized cryptocourt. Besides increasing privacy and decentralization, it also allows for simultaneous execution of different contracts thus effectively increasing the transaction throughput. Another implication of this kind of architecture is that the contract’s code becomes easier to program while also drastically simplifying the core blockchain.


Another core innovation of Aeternity blockchain is its own oracle system design. Oracles allow the blockchain to receive real world data so that smart contracts can interact with it.

“One thing here to mention is that this system works with everything that is public and of public interest. It does not really work with things that are in between parties privately. For example, it would not really work for car insurance, because the public is not really interested in a single car. But it will definitely work with betting or using the price of gold from a public exchange or creating synthetic assets using the oracles. Prediction markets are another really nice application which we want to build on top of Aeternity and also to make them a part of the governance system.” – Yanislav Malahov, founder

What oracles can be used for?

There are other projects building decentralized oracles on the blockchain, however, Aeternity team approach is a little bit different. Other teams have their oracle systems as smart contracts of sorts, which means users have to pay for two consensus layers: the consensus about the inside blockchain parameters and the consensus about the state of the outside world. This also becomes another attack vector as malicious actor will aim for more vulnerable layer in order to exploit the system. That’s why Aeternity hosts its oracles on-chain, uniting both consensus layers into one.

Consensus and Governance

When it comes to consensus, Aeternity will be going with good old Proof-of-Work. That said, Yanislav claims alternative PoW implementation will allow his project to avoid problems currently vexing bitcoin and even introduce viable smartphone mining.

“With Bitcoin we have seen that hardware got optimized for SHA256 hashing algorithm but with Aeternity we have the Cuckoo Cycle by John Tromp (who is also our advisor). We essentially do it the other way around, we optimize the mining algorithm which is not hashing anymore. It’s a graph algorithm that fits perfectly for standard hardware which everybody has in their pockets as well as at home. This way we want to be the most decentralized blockchain in existence,” Malahov said

Governance mechanisms will also have an interesting twist. Instead of voting users will bet, putting a certain amount of their money on the line.

“All the information from the world get distilled to a single number between 0 and 1 which will determine the likelihood that a certain parameter, e.g. the blocksize, the price of certain OP_CODES or the price of execution of smart contracts, is determined in a correct way. We have seen in Ethereum that several hardforks will be necessary in order to update the price of OP_CODES and with the blocksize, for example in Bitcoin, it’s not necessary to keep these things hardcoded. We can use the governance mechanism, we can use betting, or prediction markets in order to achieve here the correct decision which is beneficial for the future development of the blockchain, which is also beneficial for the value of the systems and of tokens.” – Yanislav Malahov, founder.

Long road to Aeternity

The project is still in early stages of development but already has a testnet running. Codebase can be easily accessed on GitHub, compiled and tested by all those curious to conduct a deeper research. Development of the Oracle machine is going to be the team’s next big endeavour, in the meantime wallets for AE pre-tokens are going live and bounty campaign is underway. Along with the traditional bounties Aeternity introduced wiki bounties and even contests for the creative crowd. The team maintains presence on most online media outlets, but the simplest way to join the community is via subscribing to Aeternity telegram channel.

Tentative mainnet launch date is approximated for Q1 2018.

by Eugene Muratov & Konstantin Golubev