For EOS RAM, “There Ain’t No Such Thing as a Free Lunch”

This report is produced by Huobi Research; please cite “Huobi Focal Point” for reference.

Ever since the EOS MainNet launch last month, it’s RAM price has been steadily surging. After coming close to 0.9 EOS/KB on July 3rd, however, the EOS price has crashed to less than 0.5 EOS/KB the next day. What is EOS RAM? What makes its price is so volatile? Through a brief analysis of EOS RAM’s design — analyzing the mechanism that drives its price — we will see why “there ain’t no such thing as a free lunch.” What’s more, Bancor Algorithm and other innovative developments might surprise us, but a well-designed token design is instrumental to their success.

Event Recap

If you have been following the news with regards to EOS, you will definitely notice the discussion on the recent price surge of EOS RAM. We can visualize its price trend in the figure below. As the figure below shows, the price of EOS RAM has reached 0.9 EOS/KB from 0.017 EOS/KB on June 19th. The 50-times change is pretty impressive even to cryptoassets traders who are already accustomed to violent fluctuation in price.

Creating a EOS account requires 4KB RAM. With the EOS RAM price today (EOS=8.8 USD, EOS RAM=0.5 EOS/KB as of July 4th,2018 4pm), creating an EOS account costs about $18. In this sense, running CryptoKitties on the EOS network will cost a whopping $300,000.

What Is EOS RAM? What Is Bancor Algorithm?

EOS plans to become a decentralized operating system. Thus, concepts of Computer Architecture have been used to facilitate the design of EOS.

On EOS, there are three broad classes of computer resources that are consumed by applications: RAM, CPU and bandwidth. RAM will be consumed for data storage, such as storing EOS account information and smart contract information, while bandwidth and CPU are resources for “instantaneous usage”. As such, RAM will need to be purchased directly with EOS, while CPU and Bandwidth are obtained through staking EOS.

Before EOS Dawn 4.0, RAM, CPU and bandwidth were all obtained through staking EOS, and when the resources are no longer needed, users can exchange their resources back into the same amount of EOS they originally staked. However, users were reluctant to convert their RAM back into EOS (due to surge in RAM price), so since EOS Dawn 4.0, RAM has adopted a trading mechanism to incentivize selling unneeded RAM. The price of RAM is dynamically calculated according to the Bancor Algorithm, which considers market supply and demand.

So, what is the Bancor Algorithm then? The Bancor Algorithm was a supranational currency concept proposed by John Maynard Keynes and E.F. Schumacher in 1940–1942. The United Kingdom introduced the idea after WW2 at the Bretton Woods as a unit of account for international trade. However, the idea was ultimately rejected and the US dollar was used as a reserve currency instead, mainly because of the trade surplus and gold reserves the US held after WW2. Yet, the Bancor Algorithm is still relevant to this day. The Bancor Network for example, uses the Bancor Algorithm to set exchange rates between digital assets; Its co-founder Eyal Hertzog was recently invited by Dan Larimer to discuss the application of the Bancor algorithm on EOS.

In the EOS network, the Bancor Algorithm is used to set the price of RAM by considering the current supply of EOS and the current amount of RAM available for purchase. The less RAM available for purchase and the more EOS available in the network, the higher the price of RAM. At the time of purchase, the EOS will first be converted to RAMCORE tokens, and then from RAMCORE tokens to RAM. Thus, the Bancor Algorithm used by EOS is more complicated than the original one; it uses two formulas which can be found here in the code: “contracts/eosio.system/exchange_state.cpp”. (for further explanation, you can check out https://blog.csdn.net/w7849516230/article/details/80836913 and https://eospark.com/ram.html ) The exchange formula for RAMCORE to EOS is given below:

As shown above, E is the amount of EOS that can be exchange for RAMCORE tokens, R is the initial total supply of RAMCORE tokens, C1 is the current EOS supply, T1 is the number of EOS used for purchase, and F is a constant parameter. By rearranging the equation, you can get the conversion formula of RAMCORE and RAM as:

T2 is the amount of RAM to be purchased, C2 is the amount of RAM that can be allocated. Substituting the intermediate variable E yields the relationship between the EOS used for purchase and the amount of RAM that can be redeemed (T2). For a better understanding, the formula can be simplified as:

This shows that the decrease in the supply of RAM (C2) or the increase in the number of EOS (C1) will rapidly increase the price of RAM (by paying the same amount of EOS you receive less RAM).

Therefore, EOS RAM trading uses a market trading model. The price is derived from the Bancor Algorithm, and the platform ensures the liquidity of RAM. This satisfies the original intention of making RAM a scarce resource whose price is based on supply and demand and cannot be influenced by individual speculators. Thus, we think this is a valuable innovative application of Bancor Algorithm.

Why Did the Price Fluctuate So Violently?

Knowing how the price is determined, let’s try to figure out why the price fluctuates so sharply. A direct explanation could be the recent influx of various capital funds into speculative RAM trading. Due to recent market conditions of digital assets, some funds are withdrawing their investments in digital assets and moving to other areas. EOS RAM prices could be affected by this, due to the hoarding of RAM in speculation.

Additionally, Daniel Larimer’s actions have profound impact on the RAM price. Before July 3rd, Larimer wanted the market and the community to influence the price, and did not want to artificially intervene with market operations. However, as prices continued to surge, BM started to consider modifying the Bancor Algorithm, as well as using SSDs to expand the RAM supply. As a result, speculators panicked, and the price of RAM has fallen significantly.

It has also been pointed out that the Bancor Algorithm originally assumed a greater supply of memory — 1 TB in Dawn 4.0 compared to the measly 64GB available today. The total supply was envisioned to increase by 5% annually. According to the Bancor Algorithm, if the demand for RAM remained unchanged, only increasing supply (aka block producers scaling the amount of physical RAM) can solve the problem. However, block producers might also hold RAM, so increasing the amount of physical RAM is a conflict of interest. What’s more, with the continuous development of the ecosystem, the violent fluctuation in price might continue in the future. Therefore, simply increasing the supply of RAM, as detailed previously, is a flawed solution to solving this problem.

The “Deeper” Reasons…

The deeper reasons behind the volatile RAM price are also related to EOS’s own token design. Unlike Bitcoin or Ethereum, there is no transaction fee on the EOS network. On the EOS network, the 21 block producers are in charge of producing blocks, and as reward they will earn block rewards in the form of EOS tokens produced by token inflation every year.

Due to the lack of “gas” feature (i.e. Ethereum), EOS, preventing a large number of meaningless transactions from flooding the network, requires RAM to be directly purchased with EOS. Although the price of RAM is determined completely by market demand and supply, the pricing mechanism has been challenged by the influx of speculators in the RAM market.

On another level, having transaction fees incentivize block producers and discourages users from wasting network resources. Practice has proven that this mechanism works; the name “gas” is vivid representative of the cost of running and trading contracts (especially Turing-Complete contracts).

Thus, transaction fees can be regarded as a pay-per-use model, while RAM bears analogy to a pay-in-front model. Although the specific methods are different, they achieve the same goal as a price mechanism that allocate resources. Therefore, when we consider whether a transaction fee feature is necessary, we should take into consideration of the underlying mechanisms for resource allocation and how the ecosystem works.

Most mainstream Blockchain platforms use transaction fees to maintain the integrity of the ecosystem. For example, on Ethereum, users must pay a certain amount of gas for each transaction. At the same time, however, the transaction fee feature has had a negative impact on user experience and has also limited the growth of the dApp ecosystem.

Solution

Back to the topic, in order to solve the current problem with EOS RAM, rather simply scaling RAM, maybe we should take a closer look at the EOS design and Bancor Algorithm for some inspiration.

The price mechanism of RAM can be understood as such: EOS creates a smart contract for RAM based on the Bancor Algorithm — users use EOS to buy RAM — EOS charges 0.5% for RAM transaction fee. With this in mind, scarcity will drive RAM price into an accelerated path after the available RAM in the EOS network reaches a certain amount.

Therefore, for the growing dApp environment on EOS and a healthy balance of RAM supply and demand, dApps can run on separate side chains, with side chains competing against each other for RAM resources.

Takeaway

For users and developers alike, the EOS RAM story teaches us that “there ain’t no such thing as a free lunch.” For Blockchain platforms, we have to spot potential “weaknesses” in their token designs. What’s more, questions like whether to waive transaction fees require comprehensive consideration of every factor, such as the token’s business logic and specific use cases.

In the short term, the problem of surging RAM price could be alleviated by simply scaling RAM; however, the problem will not be fully addressed unless the community comes up with innovative solutions (such as utilizing side chain technology).

Huobi Research

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Huobi Research of Blockchain Application (Huobi Research) was founded in April 2016 and started research and explorations in various aspects in blockchain area since March 2018. We cover blockchain technology research, industry analysis, application innovation and economic model explorations etc. We aim to establish a research platform and to offer theoretical foundations as well as judgements of trends in blockchain to the public, ultimately promoting the development of the entire industry.

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