Block reward function in Jax.Network

by Iurii Shyshatskyi, Chief Scientist at Jax.Network

Jan 4 · 5 min read

In this post, we will discuss rewards for mining in JaxNetwork. The reward scheme used in it differs from the one used in Bitcoin. We will discuss the motivation behind this approach and its advantages.

Casual payment systems are often controlled by a central authority who manages the content of the account database and approves transactions. Blockchain technology brought innovation to this field. In contrast to the conventional approach, transactions on the blockchain are processed in a decentralized fashion by a distributed network of validators.

However, these validators need an incentive to properly fulfill their work. Therefore, in Bitcoin and many other cryptocurrencies, block producers are often rewarded with transaction fees and block rewards.

A block reward is a subsidy paid to the block produced with newly minted coins. Typically, the block reward constitutes the majority of a miner’s revenue. The backbone of this incentive scheme is a mechanism that regulates the coin issuance rate and supports steady block production.

Bitcoin and other major blockchains use a simple scheme in which block rewards are fixed during every epoch and the block rate is stabilized by a specific difficulty adjustment algorithm. In Bitcoin, after the end of the 210,000 block epoch, block rewards are halved. This scheme defines a transparent monetary system and became the gold standard for many cryptocurrencies.

This simple and straightforward scheme was well accepted by the general public. People often contrast it with discretionary monetary operations set up by central banks, allowing for money creation or destruction almost willy-nilly, undermining the predictability of money supply, especially in times of crisis. In contrast, coin issuance in Bitcoin is predictable and steadfast.

Moreover, Bitcoin’s coin creation policy has another celebrated feature. The halving mechanism sets a cap on its total supply and gives Bitcoin the property of being scarce. As a result, many Bitcoin enthusiasts call Bitcoin “digital gold”.

However, Bitcoin’s monetary policy is imperfect. Academic research indicates that Bitcoin’s security will be under threat after several halvings when block rewards will shrink below an acceptable level. Raphael Auer has described this problem as a “security trilemma for Bitcoin” in his article in Coindesk.

Another big problem is the inherent volatility of Bitcoin. It is well known that the price of Bitcoin in US dollars can rise 4 times and then fall down back within one year. This property makes Bitcoin an inconvenient medium of exchange for many businesses and many use cases. As a result, we observe ever-increasing interest in stablecoins and DeFi projects.

Unlike the majority of blockchain projects, JaxNetwork is about to abandon the “fixed block reward” scheme that was introduced in Bitcoin. The primary goal of this shift is to create a basis for the cryptocurrency that could fulfill the role of a global decentralized payment ecosystem superior to Bitcoin.

In JaxNetwork there are two native tokens: JaxNet coin and Jax coin. JaxNet coins are mined and used on the Beacon chain. They are issued according to the “fixed block reward” rule similar to Bitcoin. The economics of this token is very similar to Bitcoin and we will discuss it in our next post.

Jax coins “live” on shard chains in JaxNetwork. The block reward in shard chains is not fixed and calculated through the formula:

where D is a block difficulty, K is adjustment coefficient due to technological progress and N is a “merged mining number”. More details could be found in our whitepaper.

Roughly speaking, it’s proportional to the block difficulty. The block difficulty represents the average number of nonces that should be ground by miners before they find a low hash that is good enough to sign the block. Still, mining a block is a sort of lottery. What is important here is that the expected reward of the miner is equal to the expected amount of work that they execute.

We have found that this reward scheme is very useful for sharded blockchain networks, such as JaxNetwork. In particular, it helps to set a balance between strong nodes with broad network bandwidth and weak nodes. In JaxNetwork, the miner’s expected aggregate block rewards do not depend on the number of shards that he merge-mines. So if his network bandwidth is insufficient to perform merge-mining across all shards he can reduce his workload by mining only a fraction of shards.

We want to highlight that other sharded blockchain networks don’t have this property. Weak nodes there still have nearly the same network traffic as a full node. Some projects mask this problem by compromising security or setting hidden penalties and risks for weak nodes, as we have discussed in one of our articles. JaxNetwork is about to be the first to resolve this problem.

Meanwhile, the block reward function in JaxNetwork has another valuable property. It reduces the coin price volatility which potentially leads to it being stable. It won’t be a stablecoin that attempts to peg its market value to the US dollar or any other fiat currency. However, the market value of JAX could be more reasonable and stable than the price of most fiat tokens.

This stability is achieved through a simple mechanism. If the price of JAX goes up then miners are incentivized to mint more coins by running their old mining rigs and purchasing of more electricity to run said rigs. If the price of JAX goes down then miners turn off their old rigs and reduce coin issuance.

However, this tokenomics and relative price stability have some drawbacks. Many people invest in crypto assets in order to get high returns as the price of the tokens grows. However, such growth is impossible in the context of stable coins. Nevertheless, JaxNet tokens which “live” on the Beacon Chain have deflationary economics and might be interesting for early adopters.

Recent developments on the crypto coin market have shown a clear demand for so-called stablecoins and DeFi solutions that could manage them. However, these stablecoins are only partially backed by crypto assets. Often DeFi solutions are not as secure and decentralized as blockchains which manage “original crypto-assets”.

JAX coins could be a good alternative to stablecoins. We believe they could become a stable and reliable medium of exchange.

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Bitcoin 2.0: BTC merge-mined scalable stablecoin