Shipchain for Dummies Part 2— Token economics & governance 1/2
Disclaimer: This article’s author is not affiliated in anyway with ShipChain Inc. He is just a blockchain and logistics enthusiast who owns SHIP tokens. While most of this article’s content was derived from public information, some elements may be subject to speculation from the community and may eventually turn out to be incorrect. Please take everything with a pinch of salt. Credits and copyright to Loomx.io for some of the illustrations.
While the previous article intended to introduce you to IoT and blockchain technologies, and how Shipchain is combining both to introduce Trust in Logistics, this article will focus on the engine that is running behind. It is highly recommended to be comfortable with notions approached in the first article before attempting to read this one.
In a series of 2 articles (this one covering basic definitions and the second one explaining how these concepts are interlinked), we will essentially try to explain the chart below, which covers both the Shipchain dApp & its users, and the Shipchain network & associated governance body.
Let’s start in this first article with some definitions:
dApp:
Decentralized Application. The ‘d’ was added to reflect that an application stores its data on a public blockchain contrary to standard applications which would run on databases and be, per se, centralized. Shipchain developed a Track & Trace and Last Mile Delivery Platform, which is a dApp that can be accessed from Web or Mobile and stores its data on the Shipchain public blockchain.
SaaS:
Software as a Service. There are multiple revenue models for business applications, like charging a one-off fee or a monthly subscription to purchase access to the app. The SaaS fee would be what Shipchain Inc. as owner of the Shipchain dApp(s) would charge to its customers.
dPoS:
Decentralized Proof of Stake. There are few types of public blockchains (dPoS like Shipchain, or Proof of Work like Bitcoin) which essentially divert on how actors of the blockchain validate blocks before being written down permanently. Every options have pros and cons in terms of decentralization and speed (how many transactions can be run per second). As a rule of thumb, the more actors involved in the validation process, the slower it is and so is the throughput. For example, Bitcoin or Ethereum’s actors, called miners (hundred of thousands), have to solve complex algorithms to validate a block and are rewarded for it. As a result, both networks achieved great level of decentralization but struggle with a low throughput (max 15 transactions per sec on Ethereum 1.0). A logistics dApp would generate a high transaction demand (in the hundreds, or thousands per seconds), for which a dPoS validation consensus is more suitable. In a dPoS, speed (higher throughput) comes from limiting the number of actors involved in the validation process which in turns undoubtedly reduce level of decentralization vs Bitcoin or Ethereum.
SHIP token:
Every network has a token. ETH for Ethereum, BNB for Binance Chain... So does the Shipchain network with SHIP. Why? The answer holds in 2 words, utility and incentives.
Utility: one can see these utility tokens as washing machine tokens. They are consumed to perform a task. On the washing machine analogy, the token would allow its user to start a washing program (effectively paying for the electricity costs and equipment involved in that task). In Shipchain, anyone holding SHIP tokens would be able to record transactions on the blockchain (effectively compensating for the computing energy required to process and validate transactions on the blockchain) — see Karma for more details.
Incentives: these networks need contribution from random individuals and companies whose servers would perform the needful for the blockchain to operate. This implies fixed costs (server rental costs or equipment acquisition and electricity cost) and no one would do this for free. So, these servers’ owners are rewarded for their service in token payments from a reserve dedicated to that purpose called the “Validator Reward Pool”.
KARMA, a rate-limiter that acts as ‘gas’
In Ethereum, transaction fees are equal to a fraction of the network’s native token, expressed with the unit of measure ‘gwei’ also called ‘gas’ (in direct analogy with the gasoline your car’s engine needs to power the car): 1 GWEI = 0.000000001 ETH.
In Shipchain, there are, per se, no transaction fee, which makes it handy for entreprises as it allows dApps developers to avoid for their customers direct exposure to crypto-currencies (which, quite frankly, corporations won’t be ready to do so until further development on crypto infrastructures and regulations). However a dPoS network still needs to establish a relationship between its native token and network use to function. This is where KARMA comes into play.
Every network has a maximum capacity (throughput). Ethereum can process 15 txs/sec for example. In case there is a demand higher than this maximum capacity, there is a backlog and a need to set the order in the queue (whoever paid the highest fee should get in front of the queue). The Karma module can be used for that purpose and can limit the amount of transactions each user can trigger per seconds. The main logic outlined in Loom’s docs is simple: the more Karma you own, the more transactions you can run. Thus establishing a direct relationship between token and network use, which is close to the concept of ‘gas’.
Karma can solely be exchanged with the SHIP token via the Karma vendor gateway visible on the chart. The conversion rate between the two is a parameter that can be set in the network. One can assume that changing it will require consensus from network’s validators. Per default, it is 1 SHIP = 1 KARMA. The Karma module also includes settings for the rate-limiting mechanism described above.
Public exchange:
While a washing machine token’s value is usually only linked to fixed costs related to using the machine, one could argue that most people in a crowd of 1000 individuals with access to only 1 machine would be willing to pay a higher price in order to use the machine first. That demand and supply mechanism consequently needs a marketplace for the right token price to settle. This is the purpose of public exchange platforms which can be used to exchange tokens against tokens or against real currencies like USD or EUR. Anyone who owns a token is called a token holder.
OTC:
In case 2 individuals would like to proceed with an exchange, under specific terms agreed by both stakeholders, without going through a third party like the above, one would say that the exchange happened Over-The-Counter.
Nodes:
A network is constituted of servers that communicate with each other’s. Each of these servers are called nodes. We will now cover one specific type of nodes called ‘validators’ which are the heart of a dPoS network.
Validators:
These are the servers who actually perform the validation task on the blockchain. There are 51 validator nodes on Shipchain. In a nutshell, a data block is written on the blockchain once 2/3 of the validators nodes have reached consensus, following a specific algorithm capable of Byzantine Fault Tolerance. Validators are then rewarded for their effort in periodic payment of tokens whose amount is directly linked to the amount of tokens that they already held.
Explaining why BFT is important now would go beyond the purpose of this article but we highly recommend reading this article explaining how BFT where derived from “The Byzantine Generals Problem” paper written by Lamport, Shostak and Pease in 1982. (https://medium.com/blockwhat/finding-consensus-1-4-byzantine-fault-tolerance-dd79aecf8d1c).
Delegators & Staking:
One crucial aspect of a dPoS network from a security perspective is how validators nodes are elected. Indeed, the fate and reliability of the network depends on their behavior. The best way to understand it is to take an example. Say there are 51 validators to elect. In this election process, whoever owns network’s tokens has the power to ‘vote’ for one or multiple validators. The more token you own, the more your vote will count since the 51 nodes who got the most ‘votes’ (or delegated tokens to use the right term) are effectively elected validators, until the next election. The process of ‘voting’ with your token is also called ‘delegating’ your tokens and make you a ‘delegator’. We will cover later what are the incentives for validators and delegators to perform their duty properly. This mechanism of being financially rewarded for contributing to the network security is called ‘staking’.
Interoperability:
In the blockchain industry, there are 2 different visions for the future. One is that one single network will achieve the ultimate goal of combining high level of decentralization and high throughput, the other is that multiple blockchains will emerge, all with their own pros and cons, and will have to be able to communicate together. As the former is currently, and likely for the next few/several years/ever, a myth, the Shipchain Network (undoubtedly a compromise between decentralization and speed) was built on a platform that was already able to communicate with other public blockchains like Ethereum (or Binance Chain, Tron and soon Bitcoin according to LOOM’s 2020 development roadmap) in order to offer their higher level of security to their customers too. In such case, we talk about blockchains interoperability.
Foundation:
The chart above clearly differentiates end-users and dApp developers (the blue part) from the Shipchain blockchain, its actors and governance body (the orange part). As such, it separates Shipchain Inc., a startup registered in the USA, who developed the Shipchain dApps from the governance body in charge of making future decisions about the blockchain and its utility token SHIP. One potential vision for the future, that is yet to be established, is that this governance body would be a non-profit organisation, operated by members democratically elected by all actors of the Shipchain ecosystem. A tentative name for this body is OpenScale and some draft documentation about its operating framework were published on the unofficial Shipchain FAQ (Medium).
Closing words (for now)
While these definitions above are necessary to understand token economics, we acknowledge that they may be difficult to digest at once for new comers. So, take a glass of wine, and once you’re ready meet us on our third and last article of this series ‘Shipchain for Dummies’ describing how are all these concepts tied up together.
