Perun Virtual Channels as Payment Infrastructure

[GENERAL] Name and Surname of Main Applicant

Hendrik Amler

[GENERAL] Email address of Main Applicant

hendrik@perun.network

Additional Applicants

Jan Bormet, Norbert Dzikowski, Sebastian Faust

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

6

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language.

No

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

Yes

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.” in this field.

PAB: https://github.com/input-output-hk/plutus-apps

Our proposal involves leveraging the capabilities of the Plutus Application Backend (PAB) to host contract endpoints, providing seamless interaction between our backend and the contract.

[GENERAL] Will your project outputs be fully Open Source?

Yes

[GENERAL] If NO, please describe which outputs are not going to be open source. If YES, please write “Project will be fully open source.” in this field.

Project will be fully open source.

[METADATA] Category of Proposal

Dev Tools, API or Library

[METADATA] SDG rating

SDG goals:

Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.

Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.

SDG subgoals:

Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.

Achieve higher levels of economic productivity through diversification, technological upgrading and innovation, including through a focus on high-value added and labour-intensive sectors.

Develop quality, reliable, sustainable and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all.

Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets.

[IMPACT] Please describe your proposed solution.

The Perun Channel Network is a proposed solution that aims to address the scalability limitations of the Cardano network by implementing a lightning network-like system. Channels allow for off-chain transactions to be made between parties, allowing for high volumes of small transactions to be processed quickly and at a low cost. We already implemented a Perun payment channel backend in F8. The Perun Channel Network aims to become a payment processing infrastructure on Cardano network by introducing a highly performant decentralized network of virtual channels. This is especially useful for micropayments and high-frequency dApps. This proposal deals with making (existing) Perun channel backends for Cardano virtual-channel-ready. Virtual channels make it possible to open indirect channels between parties which currently have no channels between them. This grant will allow users, companies and communities to create fully functional virtual channel networks independently. A future proposal will extend on virtual channels to support multiple hubs and have a truly decentralized network approach by connecting individual virtual channels over different hubs.

Scope

The scope of the Perun Channel Network project includes the development and implementation of a network-like system (virtual channels) for the Cardano blockchain network as an extension to the existing open-source Payment Channel backend developed as part of Catalyst F8: Cardano scaling solutions. The proposal will involve the following steps:

• Research and development of the Perun Virtual Channel protocol on utxo-chains including the extension of the existing Perun smart contracts.
• Implementation of the Perun Virtual Channels on the Cardano blockchain.
• Testing and optimization of Perun Virtual Channels to ensure its functionality and scalability.
• Making the project tangible: Development of documentation and educational materials to help users understand and utilize the Perun Virtual Channels, including guides and tutorials.
• Community engagement and outreach to promote the adoption and usage of the Perun Virtual Channels on the Cardano network.

Overview of the Perun L2 technology

Perun protocol: The Perun channel protocol is an instance of a state channel protocol that results from a series of renowned research papers (EUROCRYPT, CCS, S&P). The protocol allows a fixed group of participants to open a channel between each other such that the deposited funds can then be transferred within the group with a local consensus at zero cost and nearly zero latency using off-chain transactions. The Perun protocol guarantees the security of the funds at all times. If a dispute arises (for example, one party goes offline) the protocol provides a way for honest participants to receive a payout according to the most recently agreed off-chain state.

Custom transaction logic: The Perun protocol also allows for imposing arbitrary logic on a channel so that transactions can be made even without full off-chain consensus. For example, this allows for realizing atomic off-chain swaps with complex transaction logic.

Cross-chain transactions: Due to the local consensus mechanism, the Perun protocol can be extended to supporting cross-chain channels, where the deposited assets may lie on different blockchain networks (e.g., ETH and ADA). Implementing this functionality is work in progress but we eventually plan to bring it to all supported blockchain backends.

Implementation: The Go-Perun library implements the Perun protocol in an abstract sense so that it can be used with arbitrary blockchain backends given an implementation of the corresponding backend module.

Virtual Channels: The main focus of this proposal lies on the virtual channel technology. A virtual channel is a channel that is established off-chain, resulting in great scalability, minimum delays and fees. It allows connecting parties that do already have an open ledger channel with the same intermediary (Hub). The idea is that if the parties have an open ledger channel to the same intermediary (Hub), then a virtual channel between the parties can be established through transactions in the open ledger channels. This is much more efficient compared to opening a channel via slow and costly on-chain transactions. Our papers [1, 2] describe how to realize virtual channels on a single network. 

1. White paper: https://perun.network/wp-content/uploads/Perun2.0.pdf (with references to the scientific papers)
2. Main scientific paper “Perun: Virtual Payment Hubs over Cryptocurrencies”: Published at IEEE S&P 2019, https://ieeexplore.ieee.org/document/8835315, Open access: https://eprint.iacr.org/2017/635

The current state of the Perun Channel Framework 

• Many backends (EVM chains, Polkadot, Cardano, Nervos, Hyperledger Fabric, Internet Computer)
• App Channel integration on Polkadot and EVM chains
• EVM compatible Cross-Chain Channels (non-EVM compatibility in planning)
• Many corporations with industry partners, blockchain foundations and web3 startups

[IMPACT] How does your proposed solution address the challenge and what benefits will this bring to the Cardano ecosystem?

In our proposed approach, we tackle existing outlined challenges by:

1. Scalability research & solutions: Expanding Payment Channel Networks to facilitate swift, secure off-chain transactions for anyone engaging with the Cardano network. The speed, diminished transaction costs, and inherent security from the Cardano blockchain are a few advantages that Perun Channels bring to the table.
2. Node & SPO tools & software: Launching a Go SDK via our Perun SDK, which introduces a fresh method for interfacing with Cardano using the Go programming language. This expansion allows Cardano to tap into additional developer communities and furnishes an abstract layer for sophisticated payment applications on Cardano.
3. Blockchain interoperability: Providing a blockchain-agnostic Perun Channel Framework that encourages interoperability between Cardano and other blockchains compatible with Perun.

Our focus on these strategic areas positions us to enhance the growth and prosperity of the Cardano ecosystem. We aim to equip developers with the necessary research-backed infrastructure and software, allowing them to create innovative applications and bolster the overarching infrastructure.

[IMPACT] How do you intend to measure the success of your project?

We handle the overall planning and tracking of the proposed project in our Github (https://github.com/perun-network/perun-cardano-contract and https://github.com/perun-network/perun-cardano-backend). Due to already running our fund 8 funded project in a similar fashion, we are well familiar with the Catalyst Coordinator and acquainted with the relevant reporting processes. We are further tracking our progress as follows:

KPI Progress and Success Measurement for our activities

KPI 0: The delivered code is open-source and available under the Apache 2.0 license. (Y/N)

KPI 1: The delivered code is fully tested. (test coverage > 70%)

KPI 2: Progress of development as outlined above (0-100%) (must be 100%)

KPI 3: Provide documentation for interacting with our channel network (Y/N)

KPI 4: The delivered code has passed at least 1 code review (Y/N)

KPI 5: Community interaction

KPI 5.1: Number of unanswered Questions in our Discord Channel for Cardano Support (Target 0)

KPI 5.2: Number of Likes on Cardano-Related blog posts in the last month (target > 200)

KPI 6: Provide demo code and a demo video (Y/N)

What does success for this project look like?

Our Definition of Done and our success criteria by the end of the project are derived from the above-listed KPI measurement:

• Having a well-documented and clean open-source code as a delivery. (Y, test coverage > 70%)
• Progress of activities as outlined above (must be 100%)
• Number of major partners and interacting projects/initiatives (3+).
• Passing code review (Y)
• Community interaction through at least two blog posts (2 or more)
• Provide a demo video as well as example code for developers (Y)

[IMPACT] Please describe your plans to share the outputs and results of your project?

Besides the KPIs listed above, we intend to regularly update our communities using social media channels, podcasts and interviews. Part of our community outreach strategy is the systematic screening for community-integrated media (for reference, check out Nervos #Hashingitout podcast or the ICP gallery post).

In particular, we aim to implement the outputs of this proposal in a collaboration with a Cardano application or functionality to increase the traction and impact of our solution. Further, we plan to uphold the friendly exchange with our colleagues at Hydra and to keep our eyes and minds open for opportunities of cooperation.

[CAPABILITY/ FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability?

Relevant Experience

PolyCrypt has been developing off-chain protocols and frameworks since 2018. Our research lead, Sebastian Faust (Prof. for Computer Science at TU Darmstadt, Germany), is a co-inventor of state channels, Proof of Space, and the CommiTEE sidechain.

We have already successfully completed our project “Perun Channels for Cardano” in F8 (https://cardano.ideascale.com/c/idea/400079) and therefore have gained considerable expertise developing software for the Cardano ecosystem. More specifically:

• Payment Channel contracts repo: https://github.com/perun-network/perun-cardano-contract
• Perun Backend for Cardano repo: https://github.com/perun-network/perun-cardano-backend
• Wallet server: https://github.com/perun-network/perun-cardano-wallet
• Cardano Devnet environment to test Perun Channels: https://github.com/perun-network/cardano-devnet
• Perun Closeout Demo Video:

https://youtu.be/0VzGBaFo6Gk

• Perun Cardano Townhall presentation:

https://youtu.be/1R2_K1AQcfw?t=654

Further, we have experience working with a variety of different blockchain ecosystems and have successfully completed similar projects for ecosystems such as:

• Ethereum: (https://github.com/hyperledger-labs/perun-eth-backend), 
• Polkadot (https://github.com/perun-network/perun-polkadot-backend), 
• Internet Computer (https://github.com/perun-network/perun-icp-backend) 
• and other chains for example eUTXO based chains such as Nervos (https://github.com/perun-network/perun-ckb-backend)

[CAPABILITY/ FEASIBILITY] What are the main goals for the project and how will you validate if your approach is feasible?

In our past project, we have developed a Payment Channel Smart Contract compatible with Cardano's Babbage era. It allows multiple parties to conduct unlimited off-chain payments securely. We have also integrated it into our Perun framework go-perun, providing a streamlined go-SDK for Cardano's Perun channels.

By implementing the following extensions during this project, we aim to significantly enhance the efficiency and scalability of the Cardano network, making it more robust and versatile for a wide range of applications.

• Researching an eUTXO-compatible virtual channel extension protocol for Cardano: In the world of blockchains, there are two primary models - the account/balance model and the UTXO (Unspent Transaction Output) model. Cardano uses an extended version of UTXO model, known as the eUTXO (extended UTXO) model. We plan to research and develop a protocol that extends virtual channels to be compatible with Cardano's eUTXO model. This extension protocol will streamline the process of funding and settling transactions, making it faster and more efficient.
• Protocol extension for funding and settlement logic and formalization, including a security argumentation: We aim to extend the protocol to include the necessary mechanisms for funding and settlement of transactions in the context of virtual channels. The "settlement logic" here refers to the rules and procedures that dictate how transactions are concluded, while the "funding logic" refers to how these transactions are initially financed. Furthermore, we'll formally define the protocol and provide argumentation to verify its security, ensuring that it is safe to use and resistant to attacks.
• Adding support for sub channels for Perun Contracts on Cardano: Perun contracts are smart contracts used to create and manage payment and state channels on the Cardano blockchain. A key feature we're planning to introduce is "sub-channels", which are channels created within existing channels. This recursive settlement logic will allow for the settling of both ledger and sub-channels, providing greater flexibility and efficiency in transaction management. This functionality will be added to the existing Perun contracts on Cardano.
• Adding support for sub-channels for the existing Perun Cardano backend: Along with introducing sub-channels on the contract level, we'll also add support for them on the backend. This means that the underlying software that powers the Cardano network will be updated to recognize and properly manage these sub-channels.

[CAPABILITY/ FEASIBILITY] Please provide a detailed breakdown of your project’s milestones and each of the main tasks or activities to reach the milestone plus the expected timeline for the delivery.

Milestone 1: Protocol Extension (2 months)

In the first part of the work package we will develop a virtual channel protocol extension for our previously developed Perun Channel Protocol on Cardano. In the second part of the work package the protocol will be formalized and a security argumentation will be given. Virtual channels between users can be established completely off-chain minimizing on-chain interactions to an absolute minimum resulting in great scalability, minimum delays and fees.

Tasks:

• Task 1: Research on eUTXO compatible virtual channel extension protocol for Cardano
• Subtask 1.1 Research protocol extension for the funding and settlement logic (0,5 month)
• Subtask 1.2 Protocol formalization and security argumentation (1,5 month)

Milestone 2: Cardano Virtual Channel Extension (4 months)

The second work package is split into an on-chain part where we will extend the existing Perun contracts on Cardano to support sub-channels as well as an off-chain part where will implement the support for sub-channels to the existing Perun Cardano backend.

Tasks:

• Task 2Virtual Channel support for the already existing Perun Cardano Backend (centralized infrastructure with single hub)
• Subtask 2.1 On-chain: Add support for sub channels for Perun Contracts on Cardano, support recursive settlement logic (settling of ledger + subchannel) (1,5 months)
• Subtask 2.2 Off-Chain: Add support for sub channels for Cardano backend (2,5 months)

[CAPABILITY/ FEASIBILITY] Please describe the deliverables, outputs and intended outcomes of each milestone.

Milestone 1: Protocol Extension

Deliverables: A paper with a formalization of the virtual channel extension protocol, including a security argumentation.

Outputs: Research findings on a eUTXO compatible virtual channel extension protocol for Cardano.

Outcomes: A formalized, security-assured virtual channel extension protocol for Cardano that minimizes on-chain interactions and improves scalability, delay, and fee performance.

Milestone 2: Cardano Virtual Channel Extension

Deliverables: Sub-channel support for the existing Perun Contracts on Cardano and Cardano backend.

Outputs: The development of on-chain support for sub-channels on Perun Contracts on Cardano and off-chain support for sub-channels on Cardano backend.

Outcomes: Enhanced functionality and flexibility for the existing Perun Cardano Backend, making it capable of supporting sub-channels.

[RESOURCES & VALUE FOR MONEY] Please provide a detailed budget breakdown of the proposed work and resources.

For Milestone 1, Research & Development (R&D) and Project Management (PM) activities are planned. This involves 2 months of Core Developer engagement and 2 months of Researcher engagement, along with 1 month of PM/Marketing effort. The total cost associated with this milestone is 259,876.19 ADA.

Within Milestone 1, Subtask 1.1 is purely R&D work involving 1.5 months of both Core Developer and Researcher time. The cost for this subtask is 407,168.37 ADA. Subtask 1.2, also an R&D task, requires 0.5 months of Core Developer and Researcher involvement, costing 196,335.04 ADA.

Moving to Milestone 2, Development (D) & PM tasks are intended, involving 8 months of Core Developer work and 1 month of PM/Marketing effort. The total cost of this milestone is 417,123.81 ADA.

Under Milestone 2, Subtask 2.1 is a Development task requiring 3 months of Core Developer time, costing 141,428.57 ADA. Subtask 2.2, also a Development task, requires 5 months of Core Developer time and costs 235,714.29 ADA.

In total, the project spans 10 months of Core Developer time and 2 months of Researcher time. The total budget requested for this project is 677,000.00 ADA. In terms of individual costs, the cost per month for a Researcher is 62,804.76 ADA, for a Core Developer is 47,142.86 ADA, and for Project Management/Marketing is 39,980.95 ADA.

The project manager and the marketing manager will not be assigned to individual subtasks but rather will work within the context of the entire project.

[RESOURCES & VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

The Perun Cardano project represents a significant value proposition for the Cardano ecosystem in several crucial ways:

Scalability Boost: The project resolves Cardano's scalability issues by implementing a lightning-like network with Perun channels. This leads to quicker, more efficient transactions and increased network capacity, rendering the project a beneficial investment for the ecosystem.

Cost Efficiency: Perun channels allow for off-chain transactions on Cardano, reducing associated fees and making transactions more affordable. This translates into long-term cost savings for the ecosystem.

Improved User Experience: The project optimizes user interactions with the Cardano blockchain, ensuring rapid transaction confirmations and lower fees, thus elevating user satisfaction and engagement.

Competitive Edge: Implementing Perun channels enhances Cardano's standing in the competitive blockchain space by offering scalable, cost-effective decentralized payment channels.

In summary, the Perun Cardano project offers high value for the investment, enhancing scalability, cost-effectiveness, user experience, and providing a competitive advantage for the Cardano ecosystem.

The costs are based on equivalent to a lower-than-average rate for blockchain developers and researchers in Germany. Additionally, the project's focus on research and development further contributes to the higher cost. Research and development activities often require extensive expertise, resources, and time, leading to increased expenses. The investment in R&D ensures that the project stays at the forefront of innovation and delivers valuable contributions to the field of cryptography.

[IMPORTANT NOTE] The Applicant agreed to Fund10 rules and also that data in the Submission Form and other data provided by the project team during the course of the project will be publicly available.

I Accept