Enterprise Blockchain 101: Klaytn and KLAY Explained

Klatyn blockchain enterprise aax

When most people hear the phrase “blockchain”, one of the first things that comes to mind is likely decentralization.

Indeed, most existent distributed ledger technology (DLT) networks nowadays are permissionless and public, meaning that anyone can access them, use the applications within their ecosystem without any restrictions (e.g., geographical), and become validators.

However, blockchains like Bitcoin and Ethereum are not always the best fit for enterprises seeking to move their existing business processes onto a DLT network to improve efficiency and reduce operational expenses.

Instead of a highly decentralized chain, these enterprises are looking for a blockchain network that they can manage easily, that ensures high performance, customizability, high throughput, low transaction fees, and seamless onboarding without sacrificing security.

Today, we will explore Klaytn, an enterprise-grade blockchain that features all these qualities along with additional benefits which offer a convenient way for even the largest conglomerates to run their applications and potentially achieve mass adoption of the technology.

What Is Klaytn and Who Created it?

Klaytn is an enterprise-grade, service-centric distributed ledger technology (DLT) platform that offers a user-friendly blockchain experience for millions of users.

With its mainnet launched in June 2019, Klaytn offers a secure, highly scalable, and speedy blockchain that features instant block finality, a 1-second block time, and the ability to process up to 4,000 transactions per second (TPS). At the same time, it supports both the Ethereum Virtual Machine (EVM) and the execution of smart contracts via Solidity.

According to Klatyn, blockchain technology has not yet reached mass adoption due to multiple challenges market participants have long been struggling with. Many still consider DLT untrustworthy, with limited scalability, high fees, slow responsiveness, low throughput, and uncertain reliability which can drive both end-users and service providers away from the tech.

At the same time, combining peer-to-peer (P2P) transactions, cryptography, and distributed database systems creates a high level of complexity that often leads to sacrificing ease of use and convenience to harness the benefits of innovation.

For these reasons, while it is too expensive for enterprises to acquire the necessary financial and human resources to transition key areas of their business to a blockchain on their own, the lack of user-friendliness of existing solutions makes it hard to attract customers outside the cryptocurrency industry.

Klaytn seeks to solve all these pain points with three distinct offerings:

Interestingly, Klaytn was created by GroundX, a blockchain subsidiary of Kakao, South Korea’s largest mobile platform and internet service provider with 50 million users.

Since its launch, the enterprise-ready blockchain has attracted over 50 service partners and 31 reputable businesses responsible for maintaining the network as validators. Furthermore, in addition to attracting enterprise clients from South Korea and throughout Asia, the project has increased its presence globally.

At the same time, while new functionalities and features are continuously being added to the platform, its ecosystem of blockchain applications is expanding rapidly and ranges from decentralized finance (DeFi) solutions and non-fungible tokens (NFTs) to DLT-powered games.

How Does Klaytn Work?

Since you have now learned the basics about Klaytn let us take a deeper dive into how the enterprise-grade blockchain works by exploring its most important components.

Consensus Mechanism

The consensus mechanism is one of the most critical elements of blockchain networks. And for a valid reason, as it determines the rules for nodes to reach a consensus about validating blocks and transactions within the ecosystem. 

In addition to influencing the level of decentralization, the consensus mechanism also has a direct impact on the security and scalability of the network.

Since Klaytn aims to offer a high-speed and reliable blockchain platform that can easily integrate and run mass-scale applications, top priorities in the design included scalability, throughput, and low latency.

For that reason, Klaytn utilizes Istanbul BFT (IBFT) as its consensus mechanism, which is a variant of the standard Practical Byzantine Fault Tolerance (PBFT) algorithm private chains use to achieve high scalability and efficiency. However, since consensus is only open to a specific, static set of nodes, PBFT, in its untouched form, sacrifices a great degree of decentralization to drastically limit the number of validators on its network in order to achieve high performance. According to the project’s whitepaper (called Position Paper), this is an expensive trade-off, and this is the reason why Klaytn decided to go with IBFT instead.

At the same time, while block time is estimated to take around 1 second, IBFT allows for immediate transaction finality.

While it retains the performance-, stability-, and scalability-related benefits of PBFT, IBFT features a higher level of decentralization (that is still way lower than for Ethereum or Bitcoin, however by allowing nodes to be added or removed from the group of validators at any time.

Furthermore, while Klaytn utilizes IBFT to reach private consensus, its trust model features what the project calls “public disclosure.” Here, while a small group of consensus nodes (CNs) is responsible for reaching a consensus in a private network via IBFT, a much larger public network surrounds CNs where permissionless endpoint nodes (ENs) openly access and verify the results of block generation.

As a result, while CNs in the private network are responsible for providing the scalability, throughput, and speed for Klaytn, ENs in the public network ensure the transparency and security of the enterprise-ready blockchain.

Blockchain Architecture and Service Chains

The Klaytn blockchain utilizes an exciting architecture in which multiple P2P subnetworks of nodes work together to validate blocks as well as execute value transfers and smart contracts.

In its simplest form, Klaytn’s ecosystem consists of three different types of subnetworks:

  1. Core Cell Network (CCN): Consisting of core cells (CCs), CCN is responsible for verifying and executing the transactions that are submitted via endpoint nodes (ENs), along with creating and propagating blocks throughout the Klaytn network. Core cells utilize a layered architecture, with each core cell composed of a single consensus node (CN) and two proxy nodes (PNs).
  2. Endpoint Node Network (ENN): ENNs’ main duties include creating transactions, handling API requests, and processing the data-related requests from service chains.
  3. Service Chain Network (SCN): Service chains are vital for Klaytn, as they are responsible for running the applications of enterprises. Operated independently by bApps, service chains are connected to the Klaytn network via ENNs to handle data requests together.

Service chains operate in a similar way as parachains on the interoperability-focused chain Polkadot. While they are tailored to suit the individual needs of bApp operators, SCNs connect to the Klaytn main chain for different purposes, such as data anchoring (to provide increased security to users by leveraging the main chain to validate blocks on the SCN) or interchain value transfers via bridges between the subnetworks.

For that reason, just like in Polkadot’s case, service chains benefit from the added security of the main chain while taking advantage of high customizability to suit individual needs.

In addition, Klaytn also operates an off-chain proxy called Enterprise Proxy (EP) that is responsible for communicating with the main blockchain on behalf of service providers hosting bApps in the ecosystem.

This feature is important for enterprise clients as it handles all the managerial complexities of blockchain communication, such as running smart contracts requested by a transaction, transaction preprocessing, and necessitated data injection. In other words, EP is an add-on service that makes blockchain integration as easy and seamless as possible for enterprises by providing the necessary assets and tools – all without sacrificing any degree of decentralization.

Governance

As mentioned earlier, as Klaytn is a hybrid blockchain that primarily serves enterprise customers, it is less decentralized than public and permissionless chains like Bitcoin or Ethereum to ensure a high-performance environment and a seamless user experience for its clients.

Klaytn’s governance is rather centralized, consisting of the contributor enterprises that have helped build the platform with the project. For that reason, Klaytn believes that they are the most qualified entities within the ecosystem to handle the enterprise-ready blockchain’s governance.

These members are part of the Klaytn Governance Council, which is best described as the blockchain solution’s ultimate governing body that has the primary goal of facilitating long-term growth for Klaytn.

While the IBFT consensus mechanism allows validators to be added to the network dynamically over time, Klaytn only considers trusted entities as both existing and future members of its governing council to ensure the platform’s trustworthiness even in its initial stages. For that reason, a candidate has to stake a minimum of 5 million native KLAY tokens and must undergo a strict qualification review to become a new member.

In exchange for supporting the ecosystem – deciding on technical, economic, and governing-rule-related matters –, 34% of KLAY block generation rewards and transaction fees are distributed to council members in a scheme called the Klaytn Council Governance Reward.

In terms of voting, each member has one vote, which it can utilize to influence the project’s future without the fear of one entity gaining increased authority over the network by securing significantly more voting power than the others.

Currently, Klaytn features 31 consensus nodes within its network, all operated by a wide range of reputable enterprises representing various industries. Examples include DeFi provider and DAI issuer MakerDAO, the crypto exchange Binance, Worldpay, LG Electronics, and Kakao itself.

Proof of Contribution and Klaytn Improvement Reserve

In addition to 34% of the block rewards distributed to the Klaytn Governance Council, the project allocates the remaining 54% and 12% of transaction fees and newly issued KLAY to Proof of Contribution (PoC) and the Klaytn Improvement Reserve (KIR), respectively, as incentives.

Proof of Contribution is a mechanism that is designed to compensate all participants that make meaningful contributions within the Klaytn ecosystem, focusing primarily on two entities: service providers and end-users.

According to the project, PoC is vital for the project as its token economy depends on the spontaneous engagement in economic activities of economic entities (which are end-users and service providers at the moment). Participating in such activities collectively establishes an economy of circulating wealth that facilitates the economic growth of the entire Klaytn ecosystem.

For these reasons, Klaytn evaluates the contributions of these economic entities and their impacts on the project’s token economy and distributes PoC rewards to them based on the results of such analysis. While this helps to onboard and facilitate the growth of enterprise clients, the mechanism also provides a way to attract new users and incentivize their contributions.

At the same time, the Klaytn Improvement Reserve is designed to fund research and investment within the ecosystem. As a result, the enterprise-ready blockchain can adapt to new trends and changes more easily and efficiently, ensure the continuous improvement of its technology, and launch projects that contribute to the overall growth of Klaytn.

What Is KLAY and What Happened to its Price?

KLAY is the native token of the Klaytn platform that serves a similar purpose as ETH on Ethereum: to cover all fees related to transactions within the project’s ecosystem. Examples of such include:

  • Sending peer-to-peer value transfers to another user
  • Participating in various decentralized finance (DeFi) activities, such as yield farming, lending, or staking
  • Minting non-fungible tokens (NFTs)
  • Deploying and running smart contracts
  • Launching tokens based on Klaytn’s KIP-7 standard

In addition to the above, KLAY is also utilized to:

  • Incentivize Klaytn Governance Council members to maintain the network
  • Candidates have to stake 5 million KLAY to be considered as future members of the council
  • Compensate service providers and end-users for their contributions via PoC
  • Ensure the continuous development, technology- and application-related research, as well as the ability to adapt to new trends and circumstances by funding the Klaytn Improvement Reserve and distributing its proceeds to various activities

At the time of launching its mainnet, the project issued 10 billion KLAY, from which 2.51 billion coins are in circulation. While the cryptocurrency lacks a maximum supply (just like ETH), 9.6 KLAY is issued at each block, which indicates an annual inflation rate of around 3%. For that reason, the current total supply of KLAY is a little above 10.7 billion tokens.

Now that you know the essentials about KLAY let’s see how the enterprise-ready blockchain’s cryptocurrency has been performing in terms of price.

From April 1, 2020’s $0.11, KLAY increased its value to $0.49 by December 31 to end last year with a 345% ROI. However, the real surge for the coin occurred in 2021, when it surged from $0.50 on January 1 to as high as $4.34 by April 2.

After going through multiple periods of correction and taking a hit from the crypto market crash, later on, KLAY has been on the rise lately. As a result, the digital asset is currently trading at $1.66 (as of October 20), representing a year-to-date ROI of 232%.

Klaytn: a High-Performance Hybrid Blockchain Tailored for Enterprise Crypto Adoption

Enterprises in numerous industries have been increasingly realizing the potential of blockchain technology to improve their business processes, decrease their operational costs, and create more value for their users through innovation.

However, it does matter how the implementation of a DLT network is executed for a business. While high transaction fees hurt their ability to compete with others in attracting new users, complex management and onboarding, as well as a lack of customizability, can create more frictions and problems than operating a service traditionally via centralized servers.

With an enterprise-ready blockchain designed to achieve high speed, reliability, transparency, and security, Klaytn aims to make the transition to blockchain technology as smooth as possible for its business clients.

At the same time, by investing significantly in enhancing the developer, enterprise, and user experience, the project seeks to provide the framework capable of running mass-scale apps and serving millions of users simultaneously.

Suppose Klaytn can deliver on its promises and achieve its goals efficiently. In that case, it can provide something the industry has been long searching for, which is expected to initiate the mass adoption of blockchain technology and crypto.

Although, one thing is sure. Klaytn has already achieved unprecedented progress with its ambitious blockchain project and has secured numerous prominent business partners. For these reasons, it’s safe to conclude that the project is heading in the right direction to fulfill its objectives.

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