Introduction

Satoshi Nakamoto leveraged cryptography, distributed systems, and game theory to implement the first practical decentralized currency. The Bitcoin protocol [1] demonstrated that it was possible to transfer value digitally without financial intermediaries. Nakamoto and the Bitcoin developer community prioritized security and simplicity exemplified by Bitcoin's scripting language which is designed to minimize potential risks at the cost of restricting programmability, a conscious and contentious trade-off.

Ethereum [2] is an alternative protocol to Bitcoin that provided a "different set of tradeoffs" that allows the development of smart contracts using a Turing-complete programming language. It allowed other protocols to be developed rapidly on top of it by removing the need for each to run on their own blockchains and build a network from scratch. This has lead to the explosion of development in this once nascent space and brought about thousands of decentralized applications or dApps pushing the boundaries of how blockchain technology can be used.

Cryptocurrencies, and the blockchain technology that enable them, hold great promise for remaking the global financial system to be more efficient, transparent, and equitable. The current wave of Decentralized Finance (DeFi) applications such as UniSwap [3], an Automated Market Maker (AMM) protocol, and Aave, a decentralized lending protocol, have already demonstrated this potential and are facilitating billions of dollars in transactions per day with all the aforementioned advantages. Even more impressive is that they have achieved such scale while using a fraction of the resources, such as capital and manpower, compared to their centralized counterparts.

The rise of DeFi, DAOs, NFTs, and other innovations within the crypto space has created strenuous demand that has highlighted the limitations of current blockchain protocols. It became apparent that blockchain technology was lacking in its ability to process the volume of transactions required to become the backbone of a new decentralized financial system. It’s the decentralization itself, the innovation that blockchains demonstrated, that limits their performance. This conflict between scalability and decentralization is known as the Blockchain Trilemma. In practice, users experience this issue in two ways:

High Latency: In payment systems, latency refers to the time between when a transaction is submitted and when the transaction is accepted. Today this usually takes only a few seconds after customers tap their credit card on a point-of-sale terminal which greatly enhances user experience. For cryptocurrencies, latency is dictated by the blockchain’s block time and finality. Block time is the duration for a new block to be produced while finality refers to the state when a block becomes irreversible which can either be probabilistic or absolute. Bitcoin for example has a block time of around 10 minutes and is considered probabilistically irreversible after 6 blocks so its latency is around 1 hour. This might be acceptable for high-value non-real time transactions but is definitely not tolerable for day-to-day type of transactions.

High Fees: Transaction fees for cryptocurrencies are usually a function of the throughput of the network measured in transactions per second or tps. When a blockchain’s tps is low, such as Ethereum's 12 to 20 transactions per second, users will have to outbid each other to have their transactions be prioritized by miners or validators. This fee market is fine when there are not a lot of users in the network but once demand increases, bidding wars would cause the fees to spike making it uneconomical to transact for low value transactions.

These two factors together make a decentralized financial system unusable for those who want to adopt it for their normal day-to-day financial activities. Furthermore, the innovative explosion from fintech companies in recent years has set the bar high for traditional finance (TradFi) in terms of cost and ease of use.

Aside from better user experience afforded by centralization, existing payment providers also benefit from the relative stability of fiat which we often take for granted. This gives economic participants the confidence to transact both in the short-term and the long-term which strengthens fiat's network effects. On the other hand, the volatility of cryptocurrencies is often an incentive for speculation which directly works against adoption by discouraging genuine transactions. This negative feedback loop is another blow to the realization of crypto's vision.

Stablecoins were developed to address this problem by allowing tokens to peg its price to another asset with a more stable value such as the US Dollar. Each stablecoin approach brings varying levels of stability and confidence depending on the transparency and soundness of the mechanisms used to keep the peg.

One promising approach to taming volatility while remaining decentralized is the RToken platform for Reserve. Once launched on the Ethereum network, their protocol would allow anyone to create a stablecoin backed by a basket of on-chain assets. RTokens could also be insured in the case of collateral failure. This is comparable to how our bank deposits are insured by the government up to a certain amount but for Reserve this is all done in a decentralized way. This could be a game changer by giving rise to cryptocurrencies with the stability and confidence required to become a medium of exchange.

With these persistent issues and recent developments in mind, we propose the SPEAR protocol designed to create a stablechain network that aims to circumvent the Blockchain Trilemma and utilize a stablecoin as a native token to eliminate any friction in using cryptocurrencies and to aid in achieving true mass adoption.