Crypto-economics Design for a Preservation Focused Layer 1 Blockchain

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The Nervos Network’s economics research team is happy to announce the release of Nervos RFC-0015(Request for Comments): The Crypto-economics Design of the Nervos Common Knowledge Base.

Most of the current crypto-economics designs model the public blockchain as a decentralized transaction processing system. Crypto-economics design in this context tends to focus on providing incentives and punishments for the consensus process — ensuring that participating nodes verify transactions, reach consensus and advance the blockchain.

However, public blockchains are also decentralized value preservation platforms. In the case of Bitcoin, its blockchain can be seen as a preservation platform of monetary value; in the case of Ethereum, its blockchain can be seen as a value preservation platform of crypto-assets and application states.

The preservation use case introduces the dimension of time to the mechanism design exercise. Not only do we incentivize participants to all behave honestly and reach consensus, we have to study the system’s economic sustainability over time; not only do we design a transaction fee scheme to compensate consensus nodes based on moment-in-time resource consumption with computation and bandwidth, but we have to be mindful of the overtime cost of state storage, as well.

We believe the introduction of state storage-based economics model is crucial to a sustainable preservation platform and holds the key to a sustainable economic design independent of transaction demand.

Many problems that crypto-economics designers face can find parallels in the economic research of the commons. For example, the security of a multi-asset smart contract platform can be seen as a public good for its entire ecosystem including all token projects on it. Currently, platforms put the burden of maintaining the “security commons” only on holders of platform tokens through ongoing issuance and dilution. The holders of asset tokens get to ride this security for free. Similarly, there’s also the “decentralization commons” that benefit everyone in the ecosystem but will be abused by rational players who maximize their own benefits, unless constraints are put in place.

Currently leading smart contract platforms can socialize the cost of maintaining the commons through their monetary premium (the excess over the price of intrinsic value, often from being treated as money). However, this is not sustainable, as monetary premium could be attacked by competition, better interoperability, especially with the rise of layer 2 cross-chain solutions. To be sustainable, we believe that smart contract platforms have to design their crypto-economics for preservation and to be store of value.

The Nervos Common Knowledge Base is designed to be a sustainable, preservation focused smart contract platform, as the layer 1 protocol for the Nervos Network. The native token of the Common Knowledge Base is designed to represent rights to occupy the state storage over time. Its utility primarily resembles estate as a preservation platform but also functions as money (to transfer value) and fuel (to pay for computation). The protocol constraints state storage growth through its monetary policy, and collect state rent through a “targeted inflation” scheme from state users.

Please follow this link for the complete RFC of the crypto-economic model. The RFC repository contains proposals and standards for Nervos Network. We’d like to take an open and community-driven approach for protocol design and improvements.

I’d like to thank the entire Nervos economics research team, and in particular our advisors Jiasun Li, David Zou and Xiaotie Deng for their invaluable contribution to this research.

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