Our Investment in Nervos
Today we’re excited to announce our investment in Nervos, the strongest permissionless, scalable public blockchain that we believe has ever been launched in China. The Nervos blockchain pioneers an entirely new concept: a layer-1 blockchain built for layer-2.
Nervos’s new architecture allows for the easy integration of highly-scalable layer-2 solutions without trading off security or decentralization. Nervos sees the same thing we do — the future of scaling blockchains will not happen on layer-1 alone. Scalability requires a multi-tiered approach where applications can control their own destiny, and Nervos is designed for that from the ground up.
That said, many smart contract platforms, even if successful, have a tough time accruing real value as investments. We believe the Nervos CKB token model threads this needle. Even if the primary use case for the platform is in enabling layer-2 or user-defined token transactions, we expect CKBs to accrue value due to Nervos’s clever cryptoeconomic design.
After President Xi’s announcement endorsing blockchain in China, we believe it is now inevitable that a dominant smart-contract platform will emerge in the East. So far, almost all of the technology projects launched in China have been weaker than their western counterparts. But the Nervos team bucks that trend, being one of the most talented crypto-native teams that we have seen, and they have already attracted a strong network of developers and followers around the world.
The Nervos Story
Nervos was originally conceived by a small group of crypto-native Chinese developers: Jan Xie, a core Ethereum dev, Daneil Lv, CTO and co-founder of imToken (the largest Ethereum wallet in the world), Kevin Wang, an entrepreneur who was formerly a dev at IBM, and Terry Tai, who’s been a cryptocurrency startup dev since 2014. They first implemented their ideas for blockchain design into a permissioned blockchain product called CITA, which has now become one of the leading enterprise blockchain products in China. Despite their excitement for public blockchains like Ethereum, they realized that Ethereum was not able to handle the throughput that a world-scale platform demanded.
While other teams have sought to scale through layer-1 blockchains directly, Jan and his team believed that a new protocol tailor-made for layer-2 solutions would serve as a better substrate for a decentralized financial system. With this approach in mind, Nervos was born.
How Nervos Works
There are several innovations that distinguish Nervos from other layer-1 blockchains. For one, Nervos is designed from the ground up to be a multi-tiered network. At its base sits the Nervos blockchain, a high-throughput Proof of Work (PoW) chain that provides high security and decentralization to all upstream layer-2s. The Nervos team themselves created a layer-2 framework called Axon, which allows developers to easily deploy high-performance layer-2 systems. These layer-2 chains can be Turing complete with their own choice of virtual machine and consensus protocol.
The native token, CKB, serves as a storage token that both pays for gas (like in Ethereum), but is also staked directly to pay for storage. This is one of the most clever aspects of the Nervos design. If you want to store data on Ethereum, such as an ERC-20 token distribution, that is currently paid for only once at the time of insertion. There’s a proposal to charge “state rent,” by which contracts like tokens which take up space on the blockchain will have to pay for data over time or get evicted from the blockchain. This makes for a pretty bad user and developer experience.
CKB solves the state rent problem beautifully by requiring CKB to be locked up in order to store data on the blockchain. This effectively serves the same function as state rent because all CKB are slowly being inflated over time, imposing an indirect cost on users who lock up their CKB to store data on-chain. But what about those who are not storing their data? To protect them from inflation, Nervos provides a special smart contract known as the NervosDAO which receives a part of the secondary issuance, protecting all CKB in the NervosDAO from inflation. As such, the NervosDAO functions like holding a treasury bond; instead of being inflated away like cash holders, holding your CKB in the NervosDAO allows you to hold for the long-term while maintaining your ownership in the network.
There are many other interesting design choices in Nervos, such as their PoW function, their virtual machine, and their approach to representing state and user-defined tokens. The full Nervos CKB and position papers are available here. These papers explain the details of the Nervos consensus scheme, data storage model, token economics, and more.
Our Investment
With President Xi’s recent announcement calling for immediate investment into China’s national blockchain strategy, we believe that the Nervos team is well positioned to lead the development of a robust smart-contract platform. While much of the early interest in China has been on enterprise blockchains, we believe they will eventually converge on the power of public, open blockchain platforms. With time, the stronger form of a technology almost always wins, and public blockchains are the “strong form” of blockchain technology.
Unlike many other projects in crypto, the Nervos team has consistently been executing, building, and shipping in pursuit of their vision. The Nervos network is fully open-source with a live mainnet that launched in early November 2019. The team has shown great promise, with a large and growing community of developers, applications, and partners.
We have many long-term partners who share this view. Nervos has partnered with China Merchants Bank International, Huobi, and Sequoia China, and with global crypto funds like ourselves, Polychain, Multicoin, and 1kx. This gives Nervos a strong foundation for continued growth and development in China and around the globe.
We at Dragonfly plan to continue to help the Nervos team and network by driving new partnership opportunities linking the East and West and supporting applications building atop the Nervos platform. We are humbled at the chance to back the Nervos team, and look forward to supporting the Nervos network as it continues to grow.
