Incentives: from Mining to Metering
Incentives — We all need them and we all use them. From how you are remunerated for your time to the ice cream you give your kids to reward them for good behaviour; distributed ledgers are no exception. Since there is no central party governing the network of a distributed ledger, we rely upon the participants to provide services to keep the show on the road, and no one does this for free.
Different distributed ledgers will need different incentives to reward participants providing services to the network. More than one economic model is expected to emerge in order to server the different applications of a distributed ledger technology.
In the beginning, there was Bitcoin
One of the primary services in a distributed ledger is verifying transactions. There are two sides to rewarding verification. Firstly, you must incentivise participants to verify transactions. Secondly, you have to ensure those verifying do not manipulate for their own gain. You must build trust in the verifiers.
Nakamoto’s bitcoin network solved this by introducing proof of work. Participants race to verify transactions. The winning miners are rewarded with the transaction fee. This “proof of work” method worked well because the network rewards the winning miner with the fee but only once the rest of the network has reached consensus will they receive this. Therefore, the miners are incentivised to run the network fairly, cultivating trust between distrusting parties.
There are however, several disadvantages to this proof of work model — it is not green, it is also slow and pricey. Much has been written on the disadvantages of proof of work.
Disadvantages aside, the proof of work model is not suitable for all distributed ledgers. The verification method in bitcoin requires the miners to verify the entire chain of transactions back to their origins. This method is therefore not suitable for distributed ledgers which are designed to avoid global consensus and provide confidentiality of transactions to participants.
For Goodness Stake
An alternative method of verification, is proof of stake. This method incentivises participants to verify transactions for a transaction fee. To incentivise verifiers to not manipulate, or falsify transactions, you have to put your money where your mouth is and hold a deposit, or stake, in the network’s currency. Any dirty business and you devalue your stake. In a PoS network, the participants with the highest stake in the network are chosen to verify transactions by other participants because they have the most to lose.
DASH was one of the first PoS networks where ‘MasterNodes’ are used to verify transactions. Participants are promoted to MasterNodes by holding a material deposit of DASH. Ethereum is working to migrate from a PoW to PoS method.
Lovely Rita, meter maid
Corda introduced us to notaries to verify the transactions. Building on this, Cordite introduces the concept of Metering Notaries. Metering notaries verify the transaction and sends an invoice to the party originating the transaction including the notary’s fees, much like a gas or electric utility company does. The transacting party can accept or dispute these invoices. They can pay the invoice using Cordite DGL tokens. Metering notaries should be able to refuse to verify transactions for parties that do not pay their invoices.
Metering fees are collected in a Cordite DAO (aka Digital Mutual) and distributed back to the metering notaries. This provides the ability for pools of metering notaries to operate where they share the fees and the DAO provides governance over the metering notary pool in order to allow the metering pool to evolve over time. The DAO itself may also take a share of the fees in order to provide services
Metering Notaries have their own transactions verified by a guardian notary. The guardian notaries can also be run as Metering Notaries to create two inter-locked sets of metering notaries checking each other’s transactions in a de-centralised model. Depending on preference or application, you can adopt a variety of pricing models for your Dapp. It allows organisations with differing economic needs and applications to adapt respectably.
The key point here, is that Metering Notaries represent an elegant and versatile method to provide the necessary incentives while maintaining the benefits of de-centralisation.