Brief of NuCypher Economics
NuCypher is a decentralized blockchain privacy layer that functions as a key management system. It allows users to share private data on public networks securely and scalable, through the power of Proxy Re-Encryption (PRE).
Traditionally, sharing encrypted data requires the sender to trust the receiver with the decryption key. If the decryption key was leaked in any part of the data sharing process, then anyone with the key can decrypt the files and potentially cause damages. The risk of exposing sensitive data to the public is especially costly to large enterprises. To safeguard their data, companies spend millions of dollars to store information in data lakes housed in their own data centers. One solution to cut cost on data centers is to bring all the data to the cloud. However, enterprises are hesitant to this strategy because they don’t want the cloud service provider to have access to their data.
To address the modern enterprises’ data security concerns, NuCypher provides an encryption layer that enables users to move data storage and data analytics to the cloud securely. Cloud services providers only have access to the encrypted data while the decryption keys are always stored on-premises. PRE technology allows enterprises to delegate access to both internal and external users scalable while retaining complete control of the data; thus, significantly reducing the risk of a data breach.
Proxy Re-Encryption in Action
Proxy Re-Encryption is a type of Public Key Encryption (PKE) that allows a proxy to transform encrypted data from one public key to another while preventing the proxy from learning anything about the data.
In an ordinary PKE system, user Alice would have a public key, pkA, and a secret key, skA. Anyone who knows Alice’s public key can send a message encrypted with pkA which Alice can decrypt with skA. What happens when a data provider sends an encrypted message to Alice, but Alice decide to delegate this message to Bob? Alice has to download and decrypt this message, re-encrypted it with Bob’s public key, pkB, then send the re-encrypted message to Bob. Bob can decrypt the re-encrypted message with his secret key, skB. Bob must repeat what Alice did if he decides to delegate the access to another person. The process works the best for one-to-one communications but is indeed not easily scalable to enterprise use.
The delegation process can be simplified by using PRE, as shown in Figure 1, where Alice only has to create a re-encryption key, rkAB, using skA and pkB, and send it to a proxy. The rkAB cannot be broken down to its components, so there is no risk of exposing the secret key to the network. The proxy will then re-encrypt the message with rkAB, creating m’, and send it to Bob who can decrypt it by using skB. With NuCypher’s PRE protocol, data can be quickly and securely shared between multiple parties. It is scalable for N-to-N communications, thus, ready for enterprise adoption.
NuCypher uses a single-token economic model with a Proof of Stake (PoS) consensus algorithm. Its NuCypher Token (NU) has an initial supply of is 1 billion and a maximum supply of 3.89 billion.
Nodes on the network stake the NU token in exchange for the opportunity of serving the network. The inflationary NU token distributed to the nodes, and the chance of been selected to perform the encryption services are proportionate to each node’s stake on the network. It is worth noting that the sole purpose of the NU is to function as security deposits since users of the network will pay for service fee using Ethereum. NuCypher’s staking model is designed to give NU token low liquidity and encourages nodes to stake NU tokens for as long as they are willing.
Unlike other PoS blockchains we have covered before, NuCypher requires nodes to specify the duration they are willing to stake their tokens. The minimum staking period is one month, and nodes can extend the length of the staking period at any time but cannot decrease it. Based on the number of long-term staking nodes on the network, the initial inflation will be between 50% ARP (if all nodes are one month at a time) to 100% APR (if all nodes commit over one year). Based on the staking conditions just stated, the inflation will decay at an exponential rate, halving between 4 years and 2 years, respectively.
At the early stages, before the network fees generated can meet the threshold of maintaining nodes, nodes are primarily compensated by inflationary NU tokens. As NuCypher matures, the inflation will decrease, and the rewards will be paid by transaction fees, in Ethereum.
On NuCypher, nodes incentives consist of two parts: inflationary NU income and service fee income. Since NuCypher has not yet launched a mainnet, it is hard to estimate the amount of service fee a node can earn. Therefore, we will focus on the income from inflationary NU tokens in the article.
As mentioned before, nodes have to specify a commitment duration before they can proceed to stake. The compensation rate, k, is directly determined by the length of a node’s remaining commitment. The k is calculated using the following formula. Ti is the remaining commitment, T1 is a constant equal to 1 year.
When remaining committed time is less than one year, the compensation rate will gradually decrease from 100% to 54% as it approaches the miner’s preset token unlocking date. Full compensation is paid to nodes if they committed to stake over a year. Those who stake for the minimum requirement of 1 month will only receive approximately 54% of the compensation.
Now that we have nailed down some basic parameters of NuCypher’s inflation characteristics let’s take a look at the node’s income based on some assumed network conditions. Let’s suppose that for the first year, 60% of NU tokens are staked in the system and all nodes stakes for 1+year. As stated before, this assumption will lead to a 100% APR initial inflation which is halving in 2 years. We will cover the situation when the node re-stake the newly earned NU token and when the node does not re-stake. The following table summarizes the first two year’s return of a node that stakes 1 million NU for 36 months. The node receives full compensation for the first two years.
As shown in the table, when nodes re-stake the newly earned NU token, the returns by the end of year two is 343.4% which more than double of earnings without re-staking at 149.1%. However, by re-staking, all the earning will remain locked. Now, let’s take a look at the situation where the node only commits for 2 years.
As we can see, by the end of year 2, the re-staking node would have made 299.2% which is more than double of the node’s return of 138.6% when not re-staking. Furthermore, all tokens are liquid as the node has reached the end of its pre-determined commitment.
The above 2 tables are meant to showcase the income differences when committing different length of time. Interestingly, if a node commits 13 months in the beginning and extends its commitment by one month, every month, then this node can make sure its compensation rate stays at 100%. As long as nodes renew their commitment, this strategy generates returns shown in table 2 without lock-in NU tokens for 3 years at the start.
NuCyphe’s token model is unique to other PoS blockchains in the sense that its NU token is not used as a means to pay for nodes’ services and it is designed to be illiquid. Although the calculated ROI, using the number of tokens earned, is high; it is still too early to tell what the combination of high initial inflation and lack of liquidity will affect the price of NU token in the long run.
Token economics aside, NuCypher’s PRE technology address the pain points of enterprises that wish to take advantage of cloud computing and big data analytics. Other than PRE, the team is working on NuCypher Hadoop which gives users an secured cloud computing access while maintaining high performance. The team is also looking to expand to other parts of the big data industry, like Spark, as well as structured databases, like Oracle and MySQL.
According to a report by IDC, the projected annual spending on public cloud IT services will reach $158 Billion by the end of 2020 with a compound annual growth rate of 17%. With continued innovation and unique insights into the challenges big enterprises are facing when utilizing cloud and big data technology, NuCypher certainly possess a competitive edge in the race for market shares.
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Founded in 2018 with offices across three countries and two continents, InfStones is the world’s leading blockchain infrastructure provider. The company’s core team is composed of senior engineers and business leaders from well-known tech and financial companies across the world.
InfStones is dedicated to bringing down the barriers to connecting with the blockchain, allowing clients to quickly build their applications on a large variety of blockchain networks. Currently, InfStones provides services to institutional clients around the globe, supporting tens of thousands of nodes on more than 50 major blockchains.