Exploring Chia Network (XCH)
CoinMarketCap Academy delves into the Chia Network (XCH), a blockchain solution that prioritizes energy efficiency and aims to offer a more decentralized and secure platform for smart transactions. Chia Network is a cryptocurrency and blockchain system established in 2017 by Bram Cohen, who is also the creator of BitTorrent, a well-known file-sharing service. The project has garnered financial support from prominent venture capital firms in the crypto space, including Andreessen Horowitz, Galaxy Digital, and Naval Ravikant.
Chia’s Unique Blockchain Technology
Chia asserts that its blockchain technology is as secure as Bitcoin’s, yet it consumes significantly less energy, thanks to its innovative consensus mechanism. The platform has introduced groundbreaking cryptographic technologies such as BLS Signatures and Verifiable Delay Functions, launching its proof-of-time feature in 2019. The first beta version of Chia’s blockchain was released in 2020, with its mainnet officially going live in March 2021.
Understanding Chia’s Layer 1 Blockchain
At its essence, Chia Network operates as a layer 1 blockchain that enhances the existing proof-of-stake (PoS) and proof-of-work (PoW) systems by incorporating a unique proof-of-space consensus model alongside proof-of-time. This combination aims to deliver robust security without sacrificing efficiency. The blockchain is capable of executing multiple functions, including processing financial transactions using XCH, running applications coded in its proprietary smart contract language known as Chialisp, and minting new XCH tokens.
Securing the Network
The Chia Network relies on a multitude of nodes that disseminate new transactions and blocks throughout the network, ensuring its security. These nodes can also engage in “farming,” which entails storing substantial data files known as plots. These plots, consisting of random information, are central to Chia’s proof-of-space consensus mechanism. Similar to how PoW miners perform computational tasks, nodes solve challenges using these plots, which serve as their entry into the block reward lottery—the more storage capacity a node contributes, the greater its chances of receiving rewards.
The Role of Timelord Nodes
Timelord nodes play a critical role in the network by broadcasting time proofs every nine seconds. They are notified when incomplete blocks are submitted to the network and subsequently generate a proof of time using a verifiable delay function (VDF). Essentially, these nodes announce which farmers have won the lottery for the block rewards. When a farmer is successful, they can select the most lucrative transactions from the mempool to include in a new block and share it with the network. This mechanism not only ensures accurate time stamping but also enables Chia Network to handle a higher volume of transactions per second compared to PoW blockchains like Ethereum, which require constant synchronization among nodes.
Chia’s Distinct Features
Chia Network sets itself apart from traditional blockchains, such as Bitcoin, with several innovative features. One of the standout elements is Chialisp, its custom smart contract programming language, which powers the ChiaLisp Virtual Machine, akin to Ethereum’s Virtual Machine (EVM). Utilizing a coin set model similar to Bitcoin’s unspent transaction model, Chialisp effectively tracks the blockchain state and prevents double spending. Chia emphasizes that its coin set model offers heightened security compared to Ethereum’s account model, reduces maximum extractable value (MEV), and ensures complete auditability of its code.
Energy Efficiency and Decentralization
The combination of proof-of-time and proof-of-space consensus mechanisms makes Chia a more energy-efficient alternative than PoW systems. It allows anyone with an internet connection and available disk space to participate as a node, which Chia claims contributes to its status as one of the most decentralized networks globally, with a vast number of nodes working to secure it. Furthermore, pool operators within Chia have a limited role in only distributing rewards, eliminating the potential for miner collusion. For each block won, the farmer is awarded 12.5% of the rewards, while the pool operator receives the remainder, which discourages any detrimental competition among pool operators.
Funding and Future Development
Chia did not conduct an initial coin offering (ICO) but successfully raised funds through private rounds. While investors did not receive tokens directly, they have the option to redeem a share of the network’s strategic reserve. This pre-mined reserve of 21 million XCH is earmarked for long-term investments in the network’s development. Chia’s plans for utilizing this reserve include lending XCH to enhance liquidity, offering additional farming incentives, providing grants to developers and initiatives, potential share buybacks upon going public, and possibly using XCH as dividends after the public listing.
Block Reward Halving Schedule
Chia Network has implemented a halving schedule for its block rewards to incentivize node security for the network. The reward structure is as follows: from 2021 to 2024, 2 XCH per block; from 2025 to 2027, 1 XCH per block; from 2028 to 2030, 0.5 XCH per block; and from 2031 to 2033, 0.25 XCH per block. After 2034, the network will continue to generate 0.125 XCH indefinitely. Mining rewards are split between the farmer and a pool reward, with the farmer receiving 1/8th of the total value and the remainder allocated to the public key specified for the winning plot.
Current Market Performance
As of mid-March 2022, Chia Network (XCH) is trading at approximately $66, a significant drop from its peak of $1,934.51 reached in May 2021. The 24-hour trading volume across exchanges stands at about $8.3 million, and its fully diluted market cap is just shy of $1.5 billion. Chia Network’s innovative consensus mechanism bears resemblance to that of Solana, and if its framework can be validated on a larger scale, it may attract interest from corporate clients that the platform appears to target.
Market Sentiment and Future Outlook
Despite Chia’s promising technology, its XCH token has seen a drastic decline of 95% from its all-time high, indicating investor skepticism regarding the project’s value proposition. The prolonged period of trading below $200 hints at a fundamental distrust rather than a temporary market dip. One potential factor for this skepticism could be Chia’s governance model, which places authority in the hands of its executive board and aims for a public listing while tokenizing the network. This approach may lead some investors to question the economic viability of mining XCH, particularly in a space where decentralized governance holds significant value.
Potential for Community Engagement
However, if Chia Network can enhance its communication regarding its use case and foster stronger community backing—potentially by revising its governance model—the price of XCH could see a turnaround. Moreover, Chia has recently introduced its first native peer-to-peer (P2P) exchange within the Chia wallet and established a partnership with Stably to launch the first dollar-pegged stablecoin on its platform. Given Chia’s fundamentally sound offering, it may be premature to dismiss its long-term potential, despite the unpredictable nature of the cryptocurrency market.
