Dappers’ Meetup #1: Takeaways from Saito — Tackling Blockchain Scalability with Economic Incentive Design

Every month, The Dappers host a public meetup around interesting developments in crypto. We recently hosted Saito, a project working on tackling the issue of economic sustainability in decentralized networks with PoW or PoS consensus, which sparked some internal discussion about just how sustainable Bitcoin is.

“in 20 Years, there will be either very large transaction volume or no volume.” — Satoshi, Feb 2010

It’s been 10 years since Bitcoin was created, ten years of hacks and forks. But bitcoin has survived and proved that the Proof-of-Work consensus is sound and robust, so far.

But, how about the next 10 years, 20 years?

As the block rewards continue to decrease through the next decade, will miners and nodes still be incentivized to continue securing the blockchain from transaction fees alone?

As I went on to do my own research, I came across a similar discussion that happened 9 years ago when someone discovered while mining, they received a tiny amount extra and were not sure what it was. Satoshi himself answered their questions which triggered further questions like: “when mining rewards stop, will transaction fees be enough to pay nodes?”

“There will be either very large transaction volume or no volume.” — Satoshi

Unfortunately Satoshi disappeared not long after the discussion, and the above answer leaves us all in suspense especially nowadays when the Bitcoin blockchain has hit bottlenecks in both cost and speed.

A report released recently discussed the limitations of the Nakamoto design in greater detail — The BIS report (Beyond the doomsday economics of “proof-of-work” in cryptocurrencies) highlighted:

proof-of-work can only achieve payment security if mining income is high, but the transaction market cannot generate an adequate level of income. As a result, liquidity is set to deteriorate substantially in years to come. The backdrop is that the bulk of miners’ current income consists of block rewards. But block rewards are being phased out. For example, in Bitcoin and many of the clones that have “forked” from it, the next time block rewards will halve is in 2020. Whenever block rewards decrease, the security of payments decreases and transaction fees become more important to guarantee the finality of payments. However the economic design of the transaction market fails to generate high enough fees. A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered “final”.

Richard from Saito opened his talk pointing out similar concerns for the PoW design. Specifically outlining a list of work, required by the network, that is currently not appropriately incentivized:

• Transaction sourcing (nodes are not incentivized to source transactions. Transactions are passed to them)
• Transaction propagation
• Network optimization
• Transaction validation (SPV mining as free rider on the blockchain still exists without being punished)
• Double-spend defense (when hash power for the PoW chain is cheap enough, Like ETC attack)
• Bandwidth
• Storage

He continued that PoW encourages participants to 1) only do the work they are paid for, and 2) cheat or “optimise” to get paid more than the others.

As an alternative, Saito proposes a new consensus mechanism called “Proof of Transactions”. It’s not POW and not POS. Instead it

1. Measures value (in transaction fees)
2. Pays all nodes in proportion to value contributed

(for an outline of how Saito achieves this refer to the resources at saito.tech)

In addition to Proof of Transactions, Saito proposes another radical change in blockchain design. A transient (limited length) blockchain with a rebroadcasting function that allows data to be kept on chain — at a cost.

“So data not paid for will be pushed off blockchain instead of stored forever. … Yes. It’s unnerving and unconventional. It’s called the Transient Chain.”

The analogy is would you trust iCloud or dropbox, to store your data forever for a single payment now. If you wouldn’t why do you expect that of a Blockchain?

In layman’s terms:

• Economic sustainability and balance is the main theme
• Pay for what you do
• Pay those who do the work you need
• Keeping the blockchain for data people are willing to pay to keep on chain

To dive deeper into the PoT design, this 6 min video walk through is a good explainer: https://saito.tech/movies/transient_demo_480.mp4

If you’ve enjoyed the Saito event, please visit our Medium or join our TG group. We will publish future events there. Feel free to write to us if you have any suggestions here: hellodappers@gmail.com

About The Dappers

Community run, open for all, monthly Meetup group for anything fun and exciting in the blockchain and decentralized application space. It’s also non-profit and chain agnostic.

Priding ourselves as early adopters and tinkers of new and experimental tech, we believe decentralization is pushing our existing organizations and products to transform.

Always looking for good ideas that we can share with people around us.