DESCRIPTION OF BUSINESS
Public blockchains suffer from several shortcomings derived from the design choices underlying their infrastructure. Some of the most predominant such shortcomings are speed, validation times, scalability and security. On the other hand, there are other features less pressing in the need for their implementation but still desirable, such as privacy, interoperability, composability and enterprise appeal. As an answer to these problems, Aleph Zero is debuting a solution featuring its native token, $AZERO.
The team at Aleph Zero ventured out to build a Layer-1 distributed ledger infrastructure that could address these shortcomings and offer unique features to its users. Aleph Zero is building a privacy-enhancing public blockchain based on an original peer-reviewed Directed Acyclic Graph (DAG) consensus protocol (a Proof-of-Stake blockchain) and integration with the Substrate framework. The project ecosystem consists of three products:
- The infrastructure layer.
- Liminal, the privacy layer.
- The Common wallet, a Decentralized Exchange (DEX), and a Dark Pool.
The network’s native token, $AZERO, provides several utilities to the holders. The AZERO token supply is not finite due to its inflationary rewards mechanism.
The project is located in Switzerland, one of the friendliest blockchain and crypto jurisdictions in the world.
Aleph Zero boasts a world-class team of scientists and experienced professionals. The team is further strengthened by over 30 different partners (investors and industry bodies).
At present, however, the project is far from being fully functional and decentralized. Hence, its success depends on reaching the milestones in its roadmap.
Our researchers gave Aleph Zero a final rating of 57.90%. The breakdown of this rating is available at the end of this report.
PRODUCT & COMPANY DESCRIPTION
Aleph Zero is a privacy-enhancing blockchain platform based on a Directed Acyclic Graph (DAG) algorithm. Aleph’s blockchain incorporates private smart-contracts and combines a unique peer-reviewed consensus protocol with a privacy framework based on ZK-SNARKs cryptography and a Secure Multi-Party Computation (sMPC) cryptographic protocol using the Substrate stack.
Cardinal Cryptography (CC) conducted the initial project incubation and the scientific work relating to the project’s core concepts. The project, launched in 2018, is now managed and operated by Aleph Zero Foundation registered in Switzerland along with CC.
Aleph Zero’s protocol is unique in that it focuses on privacy-preserving distributed ledger technology (DLT) development. The project seeks to offer solutions for current infrastructure shortcomings that are tiered in multiple industries such as ESG, automotive, the Internet-of-Things (IoT) and healthcare. The platform’s notable features include:
- High speed.
- The ability to scale.
- A set of privacy-enhancing features.
Use cases. Source: Aleph Zero.
The Aleph Zero ecosystem consists of three products:
- Aleph Zero Infrastructure Layer.
Aleph Zero is a Layer-1 public blockchain based on a Proof-of-Stake consensus mechanism powered by an original asynchronous and Byzantine fault tolerant DAG-based consensus protocol (AlephBFT). The AlephBFT is integrated with the Substrate stack with a view to gain wider adoption. To get a basic understanding of DAGs, we suggest following across to this link.
- Liminal Privacy Layer
Liminal is a native privacy framework that harnesses the benefits of both ZK-SNARKs and Secure Multi-Party Computation. The hybrid solution offered by Limina is a unique proposition in the current market landscape. Liminal could also act as a multi-chain standalone privacy layer for other blockchains bridging to Aleph Zero.
- Common Wallet
Common is a Decentralized Exchange (DEX) and a decentralized Dark Pool aimed at eliminating front-running. Front-running occurs when a transaction is placed in a queue with the knowledge of an upcoming transaction whereby the former transaction benefits at the expense of the latter.
A more technical deep-dive on these mechanics can be found here.
Aleph Zero is attempting to improve upon or address shortcomings in the prevailing blockchain status quo. The project team introduces two key innovations in achieving these goals, namely a novel consensus protocol and a multi-chain privacy framework.
Many Layer-1 platforms strive to optimize their networks for similar features to that of Aleph Zero’s, and Aleph Zero is not alone in this journey.
Aleph Zero has published a Business Whitepaper outlining essential topics relevant to the project. The paper is reasonably detailed and most suited to an audience with some DLT/blockchain understanding level. We note that none of the documents discuss the tokenomics of the project. Interested readers have to gather bits and pieces of information in different blog posts and third-party websites. A platform whitepaper is not currently available although the business paper points to it as an upcoming paper.
In addition, the project’s technology is based on peer-reviewed research in consensus protocols (a novel BFT mechanism) and Threshold Signatures. The AlephBFT Technical Whitepaper discusses the elements of the novel consensus protocol, which is an improved version of HoneyBadger BFT. Secondly, the Threshold ECDSA Whitepaper discusses the decentralized custody solution’s technical concepts that are central to Liminal and Common, the first products to be implemented on the Aleph Zero platform. The Aleph Zero Foundation has funded (fully or partially) the two research initiatives.
The very first implementation of an Aleph Zero Testnet went live on July 12, 2021, supporting fast native token transfers. However, smart contracts are not yet enabled on this Testnet. A Mainnet launch is slated for the 10th of November, 2021. However, the network’s smart contracts capability will not be available on the Mainnet until tested on the Testnet later. This means that developers will not be able to build on top of Aleph Zero until full functionalities are enabled.
The project’s addressable market is vast and growing. The project addresses several pain points/bottlenecks (e.g., privacy, scalability, security) present in other competing networks. The project also boasts of a strong and growing team. The team has expertise in the essential elements of the product that they are building.
Nonetheless, the product still has to be tested by the market. The network has so far proven to work well in the DevNet and Testnet settings. However, the product has not been battle-tested enough on a Mainnet environment. The project’s selection of the Substrate framework could also permit it to leverage some of the strong features of this network as well as its growing ecosystem. Only at this stage will we see a product’s success or failure. Therefore, from a Product-Market-Fit (PMF) standpoint, we are yet to see conclusive progress from Aleph Zero.
Based on our understanding, there are several success factors for the project. These factors are listed below:
- The nature of the project’s mission can attract highly motivated and enthusiastic users, developers, partners, and companies.
- Substrate has a growing developer community and a growing interoperable ecosystem.
- Large potential market.
- Experienced executive team.
- Solid partnerships.
MARKET CONDITIONS AND COMPETITION
The smart contract platforms market has grown at a rapid pace over the last several years. The total market capitalization of the smart contract platform segment currently stands at around $836 billion (as of 1 November 2021). Although there are over 70 smart-contract platforms in the market, Ethereum has gained a significant market share (61% of the total market cap). Further, it is noted that the ten largest networks account for about 89% of the entire segment’s market cap.
Aleph Zero’s direct competition is with other DAG-based platforms. In this segment, there are a few well-known or low-profile platforms. Fantom and Hedera Hashgraph are the two most prominent at present. IOTA has been around for quite a while, but the project has remained comparatively stagnant. However, recently IOTA announced the beta release of programmable smart contracts on their DevNet. Byteball is another, less well-known competing project.
Other networks are implementing Asynchronous BFT consensus protocols similar to Aleph Zero. For instance, xDai plans to integrate the Honey Badger BFT (HBBFT) consensus layer in the 3rd phase of the roadmap. Helium also has an HBBFT implementation in addition to its proof-of-coverage consensus mechanism.
That said, it is noted that, at a much broader level, Aleph Zero’s competition goes even beyond to include most of the smart contract platforms out there in the market. This universe is intensely competitive and crowded. We are also witnessing other new Layer 1 networks entering the market as well. For example, Concordium and ParallelChain.
Moreover, we expect that the project will also be competing with permissioned blockchains for the enterprise clientele. The dominant enterprise blockchains are Hyperledger and Corda, to name a couple.
How is the project different from its competitors?
Two main features differentiate Aleph Zero from the competition.
- State-of-the-art consensus: The project is using a unique peer-reviewed Asynchronous Byzantine Fault Tolerant (ABFT) consensus mechanism (with hot-seat governance also being a salient feature); and
- A universal privacy layer: Aleph Zero has created a privacy solution called Liminal suitable for other chains. Aleph Zero’s native privacy layer is based on ZKPs and sMPC.
Moreover, we expect that the project will also be competing with permissioned blockchains for the enterprise clientele. The dominant enterprise blockchains are Hyperledger and Corda, to name a couple.
Aleph Zero is an open-source project. The project wants to tap the global developer community by allowing open access to Aleph’s codebase. Nonetheless, currently, contributions to the codebase are committed by the internal developer team (this is understandable since the project is still at an early stage).
Moreover, being a smart contract platform, other projects will have an opportunity to build on top of Aleph Zero in the future. As pointed out, there are a variety of use cases that future developers could focus on. The project also has an enterprise focus. Aleph Zero’s open-source platform will enable enterprises to build decentralized, scalable projects utilizing distributed ledger technology.
Aleph Zero operates on a DAG-based infrastructure layer. Liminal, Aleph Zero’s original privacy framework is based on ZK-SNARKs and takes advantage of Secure Multi-Party Computation (sMPC) concepts, a first-time implementation in the industry. The only other instance, more theoretical, that we find in relation to a ZK-Proofs system using sMPC is an internship project called “Reverie.” A link to an about it article is here.
Scalability is listed as one of the core features of Aleph Zero. The scalability subsection of the project’s website explains that Aleph Zero’s peer-reviewed consensus protocol (AlephBFT) achieved 89,600 TPS in a decentralized test setting of 112 AWS nodes located across five continents. The Business Whitepaper of the project mentions 100,000 TPS in a test environment with 112 nodes located across five continents.
Blockchain is essential for Aleph Zero’s project. It is a decentralized Directed Acyclic Graph (DAG)-based platform with a large, rotating, random committee. The goal of Aleph Zero is to offer superior features over other blockchains. Further, smart contract capabilities and compatibility with other blockchains mean that the Aleph blockchain is central to its platform.
We also note a likelihood that Aleph Zero is categorized as a Distributed Ledger Technology (DLT) platform rather than a blockchain by market participants. This DLT vs blockchain argument is a discussion that we do not plan to delve into in this report. For anyone interested in this topic, this link provides a good starting point. This blog post from Aleph Zero also discussed the theoretical difference between a DAG and a Blockchain.
Aleph Zero uses a novel, peer-reviewed consensus protocol called AlephBFT. AlephBFT is a L1 consensus protocol that powers the public Proof-of-Stake (PoS) blockchain. Initially, it was built on Golang; however, with the Aleph 2.0 upgrade, it has been integrated with Rust and Substrate. The peer-reviewed technical paper states that the novel protocol was developed “on the grounds of the well-established field of Asynchronous Byzantine Fault Tolerant (ABFT) systems.” This consensus protocol is quite different from other types of consensus protocols. It uses a Directed Acyclic Graph (DAG) architecture.
Additionally, it is Byzantine Fault Tolerant (BFT), but it is asynchronous in contrast to other BFT protocols. The novel algorithm is also based on modified proof-of-stake models.
Aleph Zero is a Proof-of-Stake public blockchain with private smart contracts built from the first principles. It combined an original consensus protocol with a privacy framework based on ZK-SNARKs and sMPC with the Substrate stack. Aleph Zero is a consensus protocol –but quite different from the ones most used in the market. First, it uses a Directed Acyclic Graph (DAG) architecture. Here, the transactions in blocks aren’t connected to others linearly. They rather flow in one direction, but with multiple branches.
The Aleph Zero team announced that it partnered with Trail of Bits to perform a focused security review of the AlephBFT protocol and its integration with the Substrate framework. However, an audit report was not publicly available for review.
The project has recently modified its roadmap from a time-bound plan to a 6-phased process. The roadmap is divided into three main sections: Completed (phase 1 and 2), Progress, and Next. This means that the project team will not be under pressure to meet deadlines in terms of its development roadmap.
Roadmap Phases In Progress. Source: Aleph Zero
Roadmap for the future. Source: Aleph Zero
The Aleph Zero team involves 20 people, all of them highly skilled in different fields like math, computer science, and finance. Some of the team members’ previous accomplishments include the ACM ICPC World Finals, a first prize in an International Mathematics Competition, and a Simons-Berkeley Research Fellowship. The team members have also gained business experience working for firms like IBM, ABB, Stellar, Codewise, Capgemini, ING Bank, Admind Agency, TIBCO Software, and Riverbed Technology.
These kinds of skills are essential to deliver a successful project. Some core members of the team are:
Matthew Niemerg, Co-founder & President, also functions as the CEO of Cardinal Cryptography. He was a technical advisor to many projects, including OneLedger Technology, Helix Cognitive Computing and Minterest DeFi. Matthew holds a PhD in Mathematics.
Adam Gągol functions as the Co-founder & CTO. He’s a co-author of the key research reports that have been instrumental in the Aleph Zero project. Adam holds a PhD in Mathematics.
Antoni Zolciak, Co-Founder & COO/CMO of Aleph Zero, who brings over 10 years of experience as a technology marketer with well-known names like ING, Samsung, Sony, Olympus, and Nikon. (Linkedin)
Michal Swietek, Co-founder & CPO is also a Mathematics PhD holder.
Joeri van Geelen is an advisor to Minterest and Prysm Group on business aspects and a founding partner at Building Blocks Group. He appeared at numerous Technology Conferences as a speaker. He also has a strong background in mentoring FinTech and blockchain startup teams.
Max Torres, a seasoned finance professional, was the Finance Director for Aleph Zero before being appointed as an Advisor. His role involves assisting Aleph Zero with determining high-level market trends. Max is 0x Labs’ Head of Finance. He is an alumnus of the University of San Francisco.
Michael Guzik has a wealth of experience in the digital assets industry. He headed the blockchain practice for PwC in Switzerland for a little over three years. Among other notable roles, Michael was a senior advisor to SIX Digital Exchange. His current roles involve CEO at CLST, an institutional lending and borrowing application for stablecoins and cryptocurrencies, and Founder and Board Member Board Member Kore Technologies, a digital asset infrastructure provider.
Alex Strzesniewski has spent over six years in the blockchain and crypto space. He left CoinDeal as its Chief Operating Officer and founded AngelBlock. Apart from being an advisor to Aleph Zero, he is also an advisor to GamerHash.
General Comments on the Team & Advisors
The project is built by a world-class team that aims to reach the mass adoption of Distributed Ledger Technology. The management team plans to have up to 20 in-house Substrate developers, brand and content teams, and an international business development team supported by its own operations department. These steps should assist them to bridge any gaps in the required skills.
During our review period, we did not find evidence of team members having taken part in any previous or current illegal projects or projects that were controversial. We did not find evidence of the Advisors’ involvement in any controversial projects either.
LEGAL AND COMPLIANCE SPECIFICS
We note that two organizations are involved in the development of the Aleph Zero project. The research and development team behind Aleph Zero is Cardinal Cryptography, a Polish entity. However, the project comes under Aleph Zero Foundation (a Swiss-based non-profit).
Being a Swiss-based project Aleph Zero stands to benefit from one of the most active and friendly blockchain and crypto jurisdictions in the world. Switzerland is a very friendly jurisdiction for blockchain and crypto projects. Many projects have been launched from Switzerland, and several tier-one blockchains operate as Swiss-based foundations.
The project has not obtained any other licenses or registrations. As discussed, the project blog discloses that a No-Action letter has been received from FINMA, the Swiss Financial Markets Supervisory Authority. As per the blog report, this means that the legal and regulatory requirements to launch the Aleph Zero Protocol are met.
Aleph Zero has established strategic partnerships and investor relationships with several different parties over the years.
The project partnered with Fractal for KYC and ID verification services during the AZERO token sale. In addition, Aleph Zero has partnered with Chainsecurity to provide added value to projects building on its blockchain. There are other partnerships with several different industry bodies. Namely, CryptoValley, CoinBar, Swiss Asia Crypto Alliance, Swiss-Polish Blockchain Association.
The project has not appointed legal advisors or any team member responsible for legal matters. Presumably, the project retains the services of external legal counsel. However, there is no such evidence in the public domain.
However, the project is likely using an undisclosed legal counsel to handle legal matters.
KYC & AML
The AZERO tokens public sale was only available to anyone who went through the Know-Your-Customer (KYC) process and got verified through it. The project partnered with Fractal to implement this KYC process. The public sale was conducted on the project’s own Contribute Platform. The participants were expected to sign an Early Contributors Agreement (ECA).
The KYC process involved verifying ID, a Liveness Check, a face match check, an AML check, and a Proof of Address.
The project team has obtained a No-Action Letter from the Swiss regulator, FINMA. As quoted by Aleph Zero, FINMA has certified that Aleph Zero’s business model is compliant with Swiss law and has stated that there are no authorization requirements under Swiss financial market law for the issuance of the AZERO Token.
However, a copy of the letter was not available for the public to review.
Some of the Token’s Utilities are:
- Staking and running validator nodes.
- Providing liquidity for the platform’s services.
- Running off-chain workers to perform private computation.
- Voting for chain updates.
AZERO TOKEN OFFERING
The total supply of AZERO tokens is 300 million and it is expected that the Initial Circulating Supply at genesis will be of 180 million AZERO tokens.
Token Allocation. Source: Aleph Zero
The project has allocated 33% of the tokens for its Foundation. The foundation plans to spend most of the tokens (26% or 78 million tokens) on R&D and Business Development. However, we note that in one of the project blog posts, the AZERO token allocation to the Foundation is stated as just 22%. These figures are contradictory to the readers and should be consistent across different communication channels to avoid confusion.
The project raised funds from a group of around 30 different investors. We find that the project has been transparent about the amounts raised during each funding round. However, the number of AZERO tokens allocated across various groups was not detailed.
In the Pre-seed funding round in 2018, the project issued AZERO tokens to the investors at $0.04, whereas the public sale price was $0.10 (150% higher than the pre-seed price).
80% of the team’s tokens will be locked for one year and vested over four years.
The AZERO token supply is not finite. The token is inflationary infinitely with an annual 30 million tokens released as staking rewards.
Marketing and ecosystem allocation plans for the project mainly involve team building and assigning budgets for their grants program. The team does not discuss approximate funding allocations for these purposes.
Currently, there is no mechanism in place to burn AZERO tokens. However, as discussed in the project’s blog, a future burning mechanism is not disregarded, especially as the ecosystem evolves.
Further, any AZERO tokens left unsold at the public sale stage will be offered to an early community for purchase. There was no clear communication from the team on the number of subscriptions received in the public sale. Based on Telegram communications, it is likely that the total offering might have not been subscribed by the public.
Across all its funding rounds, Aleph Zero is raising $14.8 million. So far, the project has not launched on its Mainnet. Since Aleph Zero is a Layer-1 network, the project needs to attract other projects to build on top of the network. Furthermore, the adjacent products of the Aleph Zero ecosystem are also currently under development. Therefore, to gain traction, the project would have to spend a significant amount of resources.
Moreover, the competition is intense in the L1 space, and the competitors spend a vast amount of resources on promoting their networks. For instance, Hedera Hashgraph recently announced approximately $5 billion toward the development of their ecosystem.
Therefore we believe that Aleph Zero may have to spend a lot more resources to gain market share.
The project’s documentation did not clearly elaborate on the uses of their funds. A common market practice is to disclose the anticipated areas of use of funds.
The Aleph Zero Foundation holds a significant amount of AZERO tokens. It is expected that at least 50% of these tokens are unlocked at the launch. In the event there was cash-out by the Foundation, the token may face a negative market sentiment.
Supply and Demand Dynamics
AZERO Token Supply
Staking Rewards: AZERO is an inflationary token. Annually, there will be a fixed 30 million tokens released into circulation as staking rewards. This supply of AZERO tokens will be negative from a tokenomics standpoint. Staking Rewards will not kick in until external validators join the network (decisions regarding these dates are not made yet). Rewards are inflationary.
Token unlocking and vesting: Different token holder categories are subject to varying lock-in periods and vesting timelines. It is essential to watch the timelines for such unlocking and vesting periods. These will be inflationary until the initial total supply is totally vested.
AZERO Token Demand
Staking: Once external validators are accepted, there will be demand for staking AZERO by nodes. The staking demand will depend on the APY and its attractiveness against other alternatives.
Utility: AZERO has several utilities in the Aleph Zero ecosystem. For instance, fee discounts on the DEX, as well as discounts using the Liminal bridge and collateral needed for asset wrapping on the privacy layer. This is a generic demand and is directly related to adoption.
SOCIAL MEDIA AND VIRALITY
The project is fairly active on Twitter. The channel has 22.2k followers.
The most accessible and popular channels to communicate with the management are the project’s Discord and Telegram. The management team actively participates in community discussions on varying topics about the project. The channel has about 12.2k followers. The project’s Discord channel gathered 3.8k members so far. Discord link here.
Aleph Zero has 708 followers on LinkedIn. The account is fairly active. The project has presence on Facebook. However, there is no significant following for their page. Currently, there’s around 452 followers in the channel. The page is active.
Several YouTube channels have discussed Aleph Zero. However, none of these videos gathered a large number of views.
There is no ongoing bug bounty program at present.
RISKS TO THE PROJECT
- Funding shortfalls: Aleph Zero is facing a highly competitive industry. As a newcomer, the project may have to spend significant financial resources to gain market share. For instance, several platforms (DAG and EVM-compatible) spend considerable money on ecosystem development. However, it is noted that the Foundation has several different on-chain (staking rewards and transaction fees, off-chain workers, providing liquidity on Common and Liminal) and off-chain revenue streams (custom deployments and maintenance services) to maintain a sustainable revenue model.
- Technological challenges: So far, the Aleph Zero network has achieved its basic features under test scenarios. The mainnet launch is only planned for early November 2021. Mainnet launch will also be restricted initially to AZERO token transfers, and all other capabilities are yet to be tested (for example, smart contracts). Therefore, at this stage, we cannot gauge the real-life functionality and performance of the network.
- Cardinal Cryptography (CC): For the most part, the project’s delivery relies on CC. Any disputes or deviations from current working arrangements could become a roadblock to achieving project goals.
Everything you see in this report is the aggregate result of an extensive research process carried out by a distributed team of researchers and crypto enthusiasts around the world. The process consists of 60 questions divided into three phases. Researchers are called to answer these questions about a project, while providing links or screenshots as evidence to support their answers. For every answer, they also provide a rating from zero to ten. The average of their ratings is detailed below.
Our researchers gave Aleph Zero a final rating of 57.90%.
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