What is VeChain?
VeChain is an up-and-coming blockchain that currently exists as an ERC20 smart contract on Ethereum. VeChain plans to be a partially centralized blockchain that uses a “proof-of-authority” system whereby the VeChain Foundation gets to choose who the blockchain’s block producers - all 101 of them - will be. Smart contracts will be supported via the Ethereum Virtual Machine (EVM). VeChain will also have a unique dual asset economic system with VET and Thor Power which I’ll analyze later in this post. On a high level, VET is used to generate Thor Power and Thor Power acts as a stablecoin that pays for blockchain operations.
Arguably, one of the most significant aspects of this project is its extensive enterprise partnerships. VeChain has positioned itself as a blockchain-based supply chain management solution, and has fortified its positioning via a powerful partnership with DNV GL. What is DNV GL? A global quality assurance and risk management company that has supported VeChain by providing access to customers in the Italian wine industry as well as the Chinese tobacco industry. Other VeChain partnerships include BMW, Healthcare Co. Ltd, Kuehne & Nagel, and more.
How does VeChain work?
VeChain is a proof-of-authority blockchain. Which means the VeChain Foundation vets block producers and gives them the authority to produce blocks. If you think this sounds like a pretty centralized system, you’re not wrong. Even though there are 101 different block producers in the system, they’re all selected by a single organization -- the VeChain Foundation. This introduces all sorts of questions since the Foundation will essentially have full control of the blockchain. I’ll elaborate on this further in the Project Concerns section below.
As expected, increased blockchain centralization results in increased performance. VeChain has claimed that its blockchain is able to handle up to 10,000 transactions per second. This is an exceptional transaction throughput when compared to Bitcoin and Ethereum, which are both under 50 transactions per second.
Other benefits of VeChain’s substantial centralization include more stable blockchain governance and a lower risk of forks. With one centralized entity controlling the blockchain’s development direction, disputes within the community are quickly resolved. Additionally, since the Foundation controls who the block producers are, there’s virtually no risk of a hard fork.
VeChain’s cryptoeconomics - Thor Power
In order to stabilize costs of using its blockchain, VeChain has introduced a unique economic system dubbed “Thor Power.” Thor Power is a separate asset on the VeChain blockchain that has a dynamic supply to keep prices stable. Thor Power is needed to pay for all blockchain operations including transaction fees and smart contract execution fees. Presumably, the Thor Power used to pay for blockchain operations is burned. How do users acquire Thor Power? By either owning VET to generate Thor Power or through buying it on the open market.
As previously mentioned, Thor Power’s supply is dynamic. Although it’s currently unclear how the balancing system will work, VeChain’s plan is to adjust the rate of Thor Power generation whenever there’s an imbalance between supply and demand. You can think of Thor Power as VeChain’s native stablecoin, which is analogous to Steem’s Steem-Backed Dollar.
Every VET will have a base amount of Thor Power generation. Wallets with a certain amount of VET can qualify for different tiers of VeChain economic nodes. Economic nodes generate Thor Power at a higher rate, with higher tiers generating more Thor Power. Current economic node tiers include the VeThor X Node (6k VET), Strength Node (10k VET), Strength X Node (16k VET), Thunder Node (50k VET), Thunder X Node (56k VET), Mjolnir Node (150k VET), and Mjolnir X Node (156k VET).
VeChain block producers will operate what’s known as Thrudheim Masternodes. Thrudheim Masternodes are classified as “Authority Nodes” and will have the highest rate of Thor Power generation.
It’s important to note that the price of Thor Power is currently unknown and this could determine how profitable it is holding VET to generate and sell Thor Power.
VeChain plans to introduce smart contracts to its blockchain using the EVM. This is strategic since because it allows existing Ethereum smart contracts to easily be moved onto VeChain’s blockchain. What will be interesting to see is how VeChain adapts its Thor Power system to the EVM’s gas system.
Supply chain management
Supply chain management is the flagship application for VeChain.
In order to bootstrap VeChain’s supply chain management capabilities, VeChain will be manufacturing its own RFID and NFC chips that’ll be attached to products to track their passage through the supply chain. VeChain will manufacture several different types of chips suited for different products and supply chains. Some chips will have microsensors in order to detect environmental conditions like temperature and humidity whereas others will be simpler.
RFID and NFC chips will be attached to products in order to securely track them on the blockchain. Each chip will have a private and public key pair. The blockchain will store the public key as well as a hash of any data associated with the product. This data could include environmental data, as mentioned before, or data around the passage of the product through the supply chain. While the blockchain will only store a hash of a product’s data, the actual data will be stored in CHAOS, a decentralized data encryption and storage solution developed by VeChain.
VeChain plans to introduce applications to allow anyone with a product and its associated RFID/NFC chip to fetch the product’s data. For example, a consumer could scan a hand bag’s RFID/NFC chip in order to see its passage through the supply chain and verify that the product was properly handled before they purchased it.
VeChain has many open technical questions
One big concern I have with VeChain is the fact that there are several outstanding technical questions for the project. The team has provided few technical details into how its blockchain will work and since the project is entirely closed source, it’s nearly impossible for anyone to find out. There are open questions around how the blockchain will defend against adverse conditions (e.g. when a block producer unexpectedly goes offline or when a block producer is a malicious actor). And there are questions around what the blockchain’s architecture will look like (e.g. how is the EVM adapted to run on VeChain’s blockchain?).
The team behind VeChain
The VeChain project is based in China and the company is an offshoot of the Shanghai-based Blockchain-as-a-Service (BaaS) company called BitSE. VeChain’s cofounder and CEO, Sunny Lu, was formerly COO at BitSE. Before BitSE, he held executive positions in Louis Vuitton China. VeChain has been in the works for more than two years now and is part of PricewaterhouseCoppers (PwC) China’s incubation program.
VeChain also has a really strong advisory board which includes FENBUSHI Capital founder Bo Shen, Jim Breyer, an American billionaire venture capitalist who’s been super bullish on VeChain, and BitOcean CEO Ning Nan, among others.
VeChain’s enterprise partnerships
Sunny Lu with Luca Crisciotti, CEO of DNV GL
As previously mentioned, VeChain is a blockchain project with one of the most extensive enterprise partnerships to date. However, it’s important to note that the details surrounding many of these partnerships are vague and it’s unclear how these partnerships will benefit from the long term value of VET.
Some key partnerships include:
- PwC China - VeChain is a portfolio company of PwC China’s incubation program.
- DNV GL - a global quality assurance and risk management company. The company has extensive ties with VeChain and has so far connected VeChain with the Italian wine industry and the Chinese tobacco industry.
- Italian wine industry - My Story is an off-the-shelf blockchain based digital assurance solution for the food and beverage industry developed by DNV GL and VeChain. The first customers of My Story are Italian wine producers, Michele Chiarlo, Ricci Curbastro, Ruffino and Torrevento. These wine producers will feature the My Story label on their wine bottles, which will contain VeChain hardware tags, by the end of the year.
- National Research Consulting Center (NRCC) - DNV GL has connected VeChain to China’s NRCC. VeChain will work directly with NRCC to develop blockchain solutions for the State Tobacco Monopoly Administration and the China National Tobacco Corporation. Source.
- Gui’an New Area - Gui’an New Area is a new economic-development zone in China that was recently granted the same government administrative level as the Pudong New Area, of which Shanghai is a part of. As such, expect China to pour significant resources to develop the Gui’an New Area in the near future. A few months ago, VeChain announced that the company was mandated to be the blockchain technology partner of the government of Gui’an. Source.
- BMW - BMW is the most recent enterprise partnership announced by VeChain. Details around the partnership are scarce, but it’s likely related to supply chain management.
- And many more…
As mentioned above, VeChain is going to be a highly centralized blockchain. It’s just as centralized, if not more so, than EOS. With EOS, the community votes for block producers with each EOS token entitling a user to one vote. VeChain’s proof-of-authority system, on the other hand, gives the VeChain Foundation the power to pick and choose all block producers. Even if the network is secured by 101 different block producers, everyone of them is beholden to the Foundation.
This high degree of centralization is a double-edged sword. The great thing about it is that VeChain’s blockchain can have super high performance with stable governance and no risk of hard forks. This is very attractive to enterprise customers, who value stability and predictability above all else.
On the flip side, decentralization is what started the entire cryptocurrency movement and is arguably the core value proposition of the technology. Centralization runs the risk of censorship, systemic failure (from a single point of failure), and abuse of power and trust.
Many technical details of the project are unknown
VeChain has provided little in the way of technical details about its blockchain. And since the project is entirely closed source, investors have been left completely in the dark regarding the technical state of VeChain. There are many outstanding technical questions around the project including how offline block producers will be handled, how the system will defend against malicious block producers, how the supply of Thor Power will be controlled, how blockchain fees will be determined, etc.
Unproven token economics, unknown price of Thor Power
VeChain’s Thor Power economic system is unproven. The grand idea behind Thor Power is that it’s a stable asset on VeChain necessary for stabilizing costs to use the blockchain. Creating a stablecoin is not an easy task, and the jury is still out on whether the Thor Power system will work.
Additionally, many people are buying VET with the hopes of generating Thor Power for passive income. However, without understanding where Thor Power’s price will settle, we cannot accurately predict how profitable it’ll be to hold VET. It’s possible that only users with Thunder Nodes and above will make a decent income while everyone else will earn a pittance. This is especially true if the folks currently buying VET plan to earn and sell Thor Power instead of using it.
But in the long run, if VeChain’s blockchain is heavily used, Thor Power generation could be exceedingly profitable.
VeChain is not open source
So there’s low visibility into its development progress. This presents a few problems.
For starters, it’s incredibly difficult for investors to gauge whether the project’s on track to meet key release dates. Investors can only take the team’s word at face value to understand how the project is doing. Secondly, a closed source project is more likely to contain critical bugs since the public cannot audit the code. Finally, it’s highly unusual for cryptocurrency projects to not be open source. Almost every project has stayed true to the open and decentralized spirit of cryptocurrencies and maintained complete transparency with their development progress.
Finally, VeChain has been banned in the past by the largest cryptocurrency subreddit, /r/cryptocurrency, for blatant upvote brigading. For weeks and even months on end, one would see highly upvoted VeChain posts on /r/cryptocurrency until one day it was announced that all mentions of the project were banned from the subreddit for a month. The mods of /r/cryptocurrency later released proof that VeChain’s Telegram mods were actively encouraging users to upvote VeChain-related posts and comments on /r/cryptocurrency.
What I found most concerning about this debacle is the fact that a project targeting enterprise customers, especially one with so many high profile partnerships already, shouldn’t need to market so heavily to retail investors. Yet here we are with certain factions of the project’s leadership encouraging unhealthy short term hype and speculation.
VeChain is one of the most promising blockchain projects to date. Even though the project’s in its early stages, VeChain boasts an extensive list of Fortune 500 enterprise partnerships. VeChain’s investor pool - which includes PwC China, FENBUSHI Capital, and Jim Breyers - coupled with its top tier partnership with DNV GL has set VeChain well on its way to becoming the de facto supply chain cryptocurrency.
Although VeChain’s ecosystem has some strong indicators for future success, it’s still very much an experimental technology that has yet to prove substantial traction with enterprise customers. Until VeChain has shown it works well in production environments, there’ll continue to be significant risks in investing in the project. That said, I believe it’s still a high quality project relative to other cryptocurrency projects in the space.