Wanchain Galaxy Consensus Proof of Stake Technical Deep Dive: Pt. 5
Economic Incentive Mechanism
Deep Dive Series:
Part 1: General Overview
Part 2: Random Number Generation
Part 3: Leader Selection Algorithms
Part 4: Delegation Mechanism
Part 5: Economic Incentives
In our previous article, we introduced Galaxy Consensus’s delegation mechanism. The delegation mechanism was designed with several fundamental goals in mind: to allow even small stake holders the chance to participate in consensus, and also to ensure that high performing non-malicious nodes represent the majority of stake in the system. As we all know, a blockchain system is essentially an ecosystem comprised of a network of nodes, and the goal of a consensus protocol is to ensure the normal operation and development of that ecosystem. What, then, is the driving force which ensures the proper functioning of this ecosystem? In short, economic incentives. This article takes a close look at the design principles, consideration, and functioning of Wanchain’s Galaxy Consensus incentive mechanism.
1. The significance of economic incentives
Economic incentives are one of the core elements of Galaxy Consensus. A rational economic incentive mechanism is the fundamental force which suppresses malicious behavior and ensures that consensus nodes operate honestly.
In a narrow sense, the economic incentive mechanism is a basic guarantee for maintaining node operation, ensuring the chain’s safety and liveness.
We know that for blockchain systems, consensus nodes are responsible for packaging transactions, generating blocks, and shouldering the heavy responsibility of chain development. The active and honest participation of consensus nodes is key to ensuring chain safety and liveness. In our consensus design, we have payed close attention to a variety of technical elements, such as leader selection and random number production, which we have explored in earlier articles of this series. The core purpose of each of these designs is to establish a healthy and efficient consensus system. However, after covering all of these mostly technical design elements, we now come to an element which lays in large part outside of the technical realm. That is, why should nodes participate in our protocol at all, how can a rational economic incentives mechanism which promotes the honest participation of nodes be designed? At a basic level, the mechanism should reward nodes for participating in the process of running the consensus protocol. The reward must cover both the cost of maintaining and running the node, and must also provide an additional incentive over the costs to ensure that nodes are motivated to continue their operation. A good economic incentive mechanism encourages nodes to behave honestly by maximizing rewards for honest nodes, while at the same time discouraging malicious behavior. Such an incentives mechanism creates the basic economic environment for the protocol to operate healthily, and ensures the smooth development of the entire system.
Broadly speaking, the economic incentive mechanism is the foundation of the blockchain’s ecosystem and ensures the smooth circulation of value.
Blockchain technology is currently pushing the Internet forward from the Internet of information to the Internet of value. A decentralized system of value was established with the emergence of Bitcoin which removes the definition of value from centralized control to that of a decentralized consensus mechanism.
Only value which can freely circulate is meaningful. The basis for value of the Bitcoin network is the circulation of value. Nodes in the network are rewarding for their bookkeeping work, and their bookkeeping also allows for the circulation of value, thus forming a closed loop. It can be seen then that economic incentives are the driving force of blockchain ecosystems. Economic incentives drive the operation of consensus, consensus ensures the circulation of value, circulation allows for the value to have meaning, and the meaningful value forms the basis of the economic incentives. Economic incentives are therefore the ignition system which play a fundamental role in making the ‘engine’ of the blockchain run.
2. Several basic issues to be considered in economic incentives
We know that a good economic incentive mechanism encourages honesty and curbs malicious behavior. What basic problems must be considered in incentives design? What exact behaviors should be rewarded or discouraged.
> Behaviors which must be incentivized by consensus type:
In systems such as Bitcoin and Ethereum which use Proof of Work (PoW), only miners which perform hashing calculations contribute to consensus. These miners give themselves a certain amount of reward in each of their own proposed blocks. Of course, there are some exceptions. In the development of Ethereum’s consensus, in order to reward those who proposed valid blocks but were not chosen as block producers, the concept of an “uncle block” was put forth. Under this concept, a small reward is given to indicate the recognition of these node’s work. For a detailed explanation, interested readers can refer to Vitalik’s blog.
In systems such as Ouroboros and Dfinity which use Proof of Stake (PoS), we must incentivize not only the nodes which propose blocks, but also the nodes which contribute to the generation of randomness. As we have discussed in our previous article, entropy (randomness) in a PoS protocol is essential for the security of the protocol. The entropy in the protocol must come from a trusted random source, so there needs to be a set of nodes dedicated to generating random numbers. The work of these nodes is an indispensable part of the consensus mechanism, so these nodes must also of course be rewarded. So it can be seen that under this type of consensus protocol, two actors must be rewarded, block producers and random number generators.
In systems such as EOS and Cosmos which use the Byzantine Fault Tolerance (BFT) consensus protocol, the nodes participating in consensus need to vote for candidate blocks. Only the blocks which have obtained a certain percentage of votes will be validated. In such consensus agreements, the subjects which must be rewarded are the nodes responsible for voting.
> Reward source which ensures continuity:
There are two types of reward sources. One is similar to Bitcoin. The total amount of rewards is set at the beginning, and then released in a continually decreasing schedule with a fixed amount released to miners for each block. A similar reward source is often seen in PoS protocols. Under these protocols, a certain amount of initial funds are reserved to reward consensus participants, and these funds are also released in a continually decreasing schedule.
Both of the above mentioned reward sources don’t include any additional issuance of tokens through inflation, and we won’t include any discussion of systems which include inflation. Additional inflation will naturally dilute the value of any rewards issued in the system. While our system does not include inflation for this reason. This ensures that the value in the system remains stable.
Since the fixed reward will be naturally reduced over time, the question arises, will node operators begin to lose interest in participation as the rewards decrease? How can we ensure that rewards remain sufficient to maintain the system over time? This problem must be considered carefully in the design. In addition to adjusting the parameters such as the percentage of reduction of reward and the periods at which the reduction happens, the most important feature is that in addition to the fixed incentives, node operators also receive transaction fees for their work. These transaction fees are paid by the transaction initiator for the consensus node’s bookkeeping work. With the improvement of the ecosystem, the increase of transactions, and the increase of value, this part of the compensation will gradually become the main reward and the source of economic incentives in the system.
> Ensuring the fairness of rewards:
Ensuring the fairness of rewards is a very broad concept. We touched on the basic principles of economic incentives in our Galaxy Consensus yellow paper. The first principle is that rewards should be equivalent to the contributions. For example, if a node participates in consensus, but does not do any work after registration — does not work to package transactions for block production and does not participate in random number generation — then this type of node will be considered ‘lazy,’ and should not be rewarded. Therefore, there must be criteria for judging when to reward, and there should be an assessment of the behavior of the nodes participating in consensus.
For this purpose we have introduced the concept of an ‘activeness’ coefficient in Galaxy Consensus. Under this concept, nodes which are not actively participating in consensus will lose some or all of their rewards. This ensures the fairness of the mechanism, laying the foundation for a rational and benign competitive environment which allows for the healthy operation of the consensus protocol.
> Considering the delegation mechanism:
In our previous article, we outlined in detail Galaxy Consensus’s robust delegation mechanism. In the article we emphasized that the mechanism reduces the threshold for participation in PoS consensus, and is of great importance to the practicality and security of the entire consensus. So how should economic incentives for the delegation mechanism be designed?
We start from considering the significance of the delegation mechanism when considering this problem. First of all, it is to lower the threshold for participation in consensus. That is, to give holders of smaller amounts of tokens an opportunity to participate in consensus. This is done by allowed them to designate a proxy to operate in the consensus protocol on their behalf. Then they should provide the proxy agent with a processing fee. We therefore allow the proxy agent to set their own commission rate, so that they can receive a part of the consensus reward from the tokens delegated to them in compensation for their work.
We must also consider another issue. If the proxy agent is allowed to accept a large amount of delegations, although the agent may hold a significant amount of stake themselves, their power within the consensus protocol is very large. For example, if the proxy node has only 100,000 of their own tokens staked, but accepts 1 million tokens in delegations, than that node represents 1.1 million worth of staked tokens in the protocol. This means that while the node has a relatively small amount of its own stake in the system, they represent an much larger amount of stake in the protocol due to the delegations they have received. This naturally brings about the issue of the proxy agent potentially behaving maliciously in order to benefit itself, without fear of harming their relatively small stake in the protocol. We therefore set a delegation ratio limit for the acceptable amount of delegations a proxy node is allowed to receive. For example, if we set a 1:1 delegation ratio, then if a proxy node has 100,000 of its own stake, it can only receive up to 100,000 in delegated stake, for a total of 200,000. If the ratio is 1:5, then for 100,000 of its own stake, a node can then receive up to 500,000 in delegated stake for a total of 600,000. For delegations over the ratio limit, the node will no longer receive additional rewards. When setting this limit, we need to balance both the economic incentives and also the security implications of this limit.
3. Common economic incentives
In general, there are two categories of economic incentives, positive and negative.
Positive incentives: Simply put, participants will be rewarded for completing work required by the protocol. For example, in Galaxy Consensus, participants must complete a number of actions defined by the protocol, such as random number generation, packaging transactions, and proposing valid blocks. We therefore issue rewards as positive incentives for participants which complete these actions.
Negative incentives: Negative incentives aim to suppress any malicious behavior aimed at damaging the protocol. There are two common negative incentives: slashing, and reduction of rewards. Slashing requires a system of supervision, in which evidence of malicious behavior must be submitted, and then the node’s stake is slashed based on that evidence. One of the difficult points here is in defining how to identify malicious behavior. Some well know examples of malicious behavior include double signing and long ranged attacks. As for reduction of rewards, essentially this is simply applying the principle of maximizing the rewards for those nodes which faithfully follow protocol rules. For example, if the nodes participating in random number generation try disrupting this process by submitting inconsistent information at different stages, then when the rewards are distributed, these nodes will not be rewarded, thus suppressing this type of malicious behavior.
4. Galaxy Consensus’s incentives model
After introducing the above design considerations, we will now take a close look at the incentives model implemented in Galaxy Consensus. The reward source of Galaxy Consensus consists of 10% of the total WAN issuance provided by the Wanchain Foundation, which is 21 million WAN. This part of the funds will be dispersed in a series of decreasing stages. In addition to this fixed reward, transaction costs will also be a part of the reward received by nodes. The reward is not distributed per block, but rather after each epoch is settled. The transaction fees will be shared between Random Number Proposers (RNP), and Epoch Leaders (EL) in order to ensure that all participants are rewarded fairly. We believe that the role and contributions of RNP and EL nodes are equally important in the consensus operation, so in each epoch, the reward will be evenly distributed between random number proposers and epoch leaders. That is, if each node runs honestly and completes its work, then the benefits will be the same.
Economic incentives for random number proposers
Earlier we emphasized the important role of random numbers in consensus protocols, and also stated that nodes must be incentivized for their work in random number generation. For for random number proposers, it is relatively easy to determine whether they have done their work honestly. First, let’s look at the work that nodes must do to participate in random number generation:
>Submit commitments in DKG1 phase.
>Submit encrypted data and proof in DKG2 phase.
>Submit signature fragments in the SIGN phase.
As long as the nodes participating in random number generation complete each of these steps, their work is done and they will receive their rewards. If they miss or incorrectly complete any of these steps, they will not receive any reward.
Economic incentives for block producers
Lets take a look at the work required of block producers:
>Submit the commitment in the SMA1 phase.
>Submit the encrypted data and proof in the SMA2 phase.
>Complete the secret information sequence sharing.
>Propose the block in the slot package transaction that it is responsible for.
These four tasks can be divided into two parts according to the work content. The first two items concern the secret message array, while the latter items concern block generation. Therefore, the overall reward of the block producers will be split into two parts. One part is used as the reward for the secret message array generation, and another part is used to reward block production. Similar to random number generation, the two stages of secret message array generation are a complete process, which requires all steps to be completed by the node for it to be considered completed. Therefore, the block producer can only get this part of the reward if it is correctly completed. Additionally, an activeness coefficient will be taken into account in order to measure the activeness of the participants. The higher the group activity, the larger the rewards received by the group.
Delegation Rewards
As mentioned above, in the delegation mechanism, the validator will take part of the reward according to the delegation fee set for compensation, and the remaining part of the reward will be received by the delegator. If the amount delegated goes about the delegation limit, then the reward received by both will be zero.
About Wanchain
Wanchain is the infrastructure connecting the decentralized financial world. Wanchain’s live cross-blockchain solution is EVM-based, includes optional private transactions, and provides a decentralized, permissionless, and secure approach for interoperability. Wanchain has employees globally with teams in Beijing (China), Austin (USA), London (UK), Kuala Lumpur (Malaysia), Paris (France), and Madrid (Spain).
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