The Importance of Incentives in Blockchain Network Design

Following an afternoon of jumping off bridges and eating Thai food, Funkenstein and I ran into an evangelist for another cryptocurrency last night at a pub.

We weren’t expecting this.

The fellow walked up on us and spoke of Nano in very high regard.

Before we knew it we were at his apartment, admiring his minimalist household, noticing his government credentials.

At some point he decided to gift us each some Nanos. We complied. We were unsuccessful in getting him to install our wallet or accept some Woodcoins, but Funkenstein did send him an absurdly small amount of BTC.

There's No Such Thing As A Free Trip to Hawaii

An issue that came up was the idea of a “no fee” network, as Nano apparently has. Nano isn’t the only network offering “zero fees.” NEO has the same concept, while Tron and EOS let you lock up some of your funds as a way to pay for transactions.

We had trouble understanding the design of the Nano thing at first. We noticed that both of our transactions claimed a “height” of 1. We assume that means it’s not blockheight, but something else.

We examined the market history of Nano and found that at one point the thing had been up to $30. I sure hope that’s not the price our new friend bought in at.

So in Nano, you can send funds without fees, but who has the incentive to secure it?

Nano has had some serious problems in the past.

Centralization Rears Its Ugly Head Everywhere

As far as centralization goes, the crypto had a ton of its funds hijacked by an exchange called BitGrail. Or something like that. Been some months since I wrote on the subject.

Now, exchange hacks are something that’s bound to happen in this world. One of the issues people in the Nano community have raised is that the developers should hardfork the blockchain to make the BitGrail thieves irrelevant. That’s all well and good until someone actually does it.

A coinbase reward is the amount of a given crypto that someone earns for mining a block. It’s one of the few proven ways to secure a blockchain. You put a bounty on the future of the network, essentially. Monero has what’s called a “long-tail” reward system, where eventually the block reward will be the same forever.

At Woodcoin, we’ve always had a different approach to the supply and reward functions of the network.

We logarithmically lower our block reward every block, rather than every four years, and as a result it will be more than 100 years before the rewards get very small. In just a decade or so, people will be concerned about whether or not the Bitcoin network’s fees can sustain it. Only time will tell that.

The Balance Between User Experience and Usury

But without transaction fees or block rewards, how is a thing to be honestly secure? Especially if it’s the playground of speculators and evangelists, primarily?

Yes, something should be useful, and perhaps Bitcoin is not as useful as it could be.

If a cryptocurrency is not secure then it’s also not valuable, as it can be stolen or changed beyond recognition at any time.

Woodcoin remains experimental, and we’re listening to new ideas we might experiment with.

For example, if you want instant settlement, you should build a token layer on top of a blockchain which allows for it – something like Lightning network without the security flaws.

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