The Economic Model of Vite

Published in

Vite Labs

11 min readJun 15, 2022

This piece is written by the CEO of Vite Labs Charles Liu

Vite was designed as a zero gas public chain in hopes to boost the ecosystem by lowering the cost of usage. We need to realize that it’s not a utopia when we design the economic model of Vite, but it is a real world product that is tested in a decentralized environment. Therefore, simply changing the gas price to zero doesn’t solve any problem, we need to carefully analyze all the user characteristics within the network and find out the similarities/conflicts in their interests before we can design a set of simple yet effective rules to answer the following:

Who pays for the network resources consumed on the blockchain?
What is the value in the native coin of a free public chain?
How to prevent attacks or abuses of the network when the cost to attack is reduced to align with the cost of usage?

Issues in the Current Fee Model

As we all know, the successful mass adoption of the internet is based on the fact that its cost to the users is close to zero. However, most public blockchains (Ethereum for example) have not seen such adoption of their ecosystem applications due to high gas fees. Users need to pay high gas fees for every transaction, regardless of the purposes of the transactions, whether it’s for asset transfers or trading on DEXs. Who is willing to spend a $3 fee to transfer $10? Excessive friction hinders blockchain products from scaling up in high-frequency use cases. Institutions and attackers are more willing to spend these fees compared to everyday users. This poses as a threat to the decentralization and safety of the public chain.

To solve this problem, Ethereum and its competitors tried to lower the gas fee by controlling the cost within an acceptable range. These attempts have successfully improved the product experience. In some cases, users only had to pay a few cents to transfer assets on chain (For example, in May 2022, the gas fee for one transfer of BEP20 token was about $0.1). However, this fee model still lacks thoughtful design to be applied in a wider range of use cases. For example, it is hard to be accepted by traders or market-makers if any order on a L1 DEX requires a fee regardless of whether the transaction is executed or not. Consequently, users are willing to find alternatives, they would flock to L2 DEXs or AMMs which are an extremely simplified version of DEX (they are a toned-down version due to technical constraints)

Fee rate is only one of the contributing factors to lack of mass adoption. There are additional issues within this fee model:

It is only paid by the end users
It is paid per transaction
Miners of the network (e.g. Ethereum) decide the order of transactions
Regardless of the use case, the fee is calculated solely based on the resources consumed by each contract request (computing and storage)
The inability to distinguish regular users from attackers

This fee model is seemingly ridiculous to be applied in the real world or even in Web2:

Imagine, if everyone in the bank (whether they have a business account, in private banking or retail banking), regardless of what they want to do there, is charged a fee based on how much resource they have consumed at the teller (the time they spent there, the chair they sat on, the conversation they had with the clerk) — would anyone still come into this bank again?

Another example, let’s say everyone is charged a fee based on the consumed CPU and storage on the server whenever they use a Google service (searching, sending Gmail, downloading an app from Google Play), people will find it ridiculous even if the fee is low.

No one had problems with this fee model at the birth of Bitcoin, because the main purpose of blockchain then was for bookkeeping and P2P transfers. However, this simple model is not suitable anymore as Ethereum expands blockchain “transactions” to smart contract calls. The network resources consumed by trading millions of dollars of assets are similar to modifying a nickname in a contract call, but the real world significance is far from the same.

Who Foots the Bill

Normally, a blockchain network is viewed as public resource not governed by anyone, therefore, once a smart contract is deployed, all users of the network are equally part of the protocol. Since all the miners/validators of the network have to pay for operating costs, all users of the network should also share such costs. Based on their motives, we can categorize the network participants into two types — end users and service providers.

Obviously, the service providers are more inclined to pay for the costs associated with maintaining the blockchain network infrastructure. This is similar to how banks operate in our real world — they will pay for the costs such as office rent to attract borrowers and lenders. Such costs are ultimately covered by the interests income charged by the bank. The same is true in the Web2 world. Google is willing to pay for the costs associated with the networks and servers, they provide these services for free to their customers but ultimately sell ads to cover these costs.

Therefore, while improving the blockchain fee model, rather than reducing the costs, we should be thinking more about enabling service providers to reduce costs passed onto the end users. This will attract more users and provide the liquidity necessary for profitability.

It is based on this thesis, Vite is designed as an asynchronous network, dividing up the contract call into “Request” and “Response” two transactions. There is almost zero cost when a user initiates a “request”, only after the request is accepted by the smart contract to execute, will there be computational and storage costs associated with it. Within the Vite network, the Quota used to pay for contract calls is deducted from the contract address but not the caller address.

Strictly speaking, Vite is a blockchain free for the end users, which also means Vite is not free for service providers or attackers.

Certainty

Additionally, Vite substitute gas fees with Quota as the unit of account for measuring network costs. It replaces the pay-per-use model with a long term leasing model, providing the certainty necessary for service providers to operate.

For the service providers, ensuring such certainty on the cost of maintaining the infrastructure is sometimes more important than reducing costs. A bank must lock in the lease for their offices. It can’t operate out of a hotel room, which requires competition against travelers for available rooms daily. Google also need its own servers and network to ensure any one can use its service on demand.

Similarly, dApps on blockchains are more akin to brick and mortar stores in real life. They are not operating a food truck business. In a fee model devoid of such certainty, no dApps can have cost assurance, it is competing for resources all the time. The end result could be disastrous. During network congestion, important transactions such as DeFi liquidation have to auction with gas fees, hoping that miners will facilitate the transaction. Since the protocol does not have any delineation on how miners should choose pending transactions, if an auction fails, it could result in tremendous loss. The probability of such loss also increases when attackers have the opportunity to benefit from such liquidation failures.

Within the Vite network, users can lock more VITE to increase the share of public resources they need for the DeFi contract. Regardless of the status of the network, one contract will always secure the corresponding amount of resources given the amount of VITE locked. For instance, if there is a total of x amount of VITE locked for Quota on the network and the A smart contract has locked y amount of VITE, therefore, at any given time, A smart contract will be entitled to no less than y/x amount of the public resources on the Vite network.

Therefore, the Vite network provides the certainty for any smart contract willing to lock VITE in exchange for their proportional share of public resources.

Fairness

Another problem with existing fee models is that it is entirely up to miners to decide which transactions to place and order in blocks, and miners usually prefer those with higher gas fees. This seemingly fair sales model can easily become a hotbed for hackers. After seeing the transaction broadcasted by the user, the attacker can “bribe” the miner by paying a higher gas fee, so as to insert the transaction initiated by himself before the user’s transaction placed into the ledger by the miner. This attack method is called front running.

In Vite, the order in which all pending requests are received must follow a predetermined rule. An attacker cannot preempt a transaction by increasing the gas fee for a single transaction. If you want to increase the priority of your own requests being received, you can only lock more VITE tokens than others. Obtaining the tokens required for an attack would have to pay a larger cost, so large that the attack would be unprofitable.

User Identification

In the design of Vite, an address can not only obtain Quota for itself, but also obtain Quota for other addresses. That is, a contract can get Quota for specific users who meet certain conditions.

For example, a DEX contract can get Quota for addresses whose net deposits are greater than a certain threshold, thereby exempting active users from the small Quota required to send requests, allowing these users to use the DEX for absolutely free — no need to purchase and lock any VITE coins.

Users who do not meet this condition must lock a certain amount of VITE for themselves in exchange for Quota, which simultaneously excludes invalid users and attackers and avoids the abuse of free resources.

Vite adopts the DAG ledger structure where each address has its own blockchain and the on-chain behavior of any address can be completely recorded. When identifying a valid user, the contract can not only track the user’s access history to this contract, but can also track their access behavior to other contracts. Most other blockchains do not support retrieving historical transactions of a certain address from the contract because they lack the index by account dimension, and transactions of different addresses are mixed together in the ledger.

In Web3, an address represents an independent identity in the crypto world, and its on-chain transaction history determines who it is and its credit value.

Value Capture

A blockchain network must rely on miners/validators to run nodes, verify transactions, and secure the ledger. The incentive cost of miners is usually reflected by public chain tokens. In the public chain protocol, users pay miners directly through gas fees or tips or indirectly pay miners by minting additional tokens to dilute the rights and interests of original token holders.

In Vite’s design, we inevitably face the following contradictions: It is free for end users, so that validator incentives can only come from the inflation of VITE tokens, which in turn dilutes the value of the tokens, thereby affecting miner income. Validators lose their incentives, and the blockchain network will gradually become less secure. This creates a vicious circle where without an effective value capture model, the Vite network and VITE token will fall into a death spiral.

There are many cases like this in the real world: the market cap of some dApp token exceeds that of its layer-1 token, and the value of the latter somehow doesn’t increase in response to the ecosystem’s prosperity. And when the speculative hype dies out, the layer-1 will stop being useful due to a dearth of miner/validator interest. And hence the dApp loses the basic infra that its security and existence rely upon.

As such, we need to design a reasonable economic model that can allow the layer-1 token to accrue value, thereby benefiting all downstream participants.

In this model, visitors to the Vite network assume the following roles:

End User: Consumer of a product or service on the Vite chain
Vendor (or Project): This could be an individual, centralized team or a DAO. They provide products/services based on Vite, issue project tokens, organize the development/operations of dApps, and benefit from the success of their project.
Stake Holder (Holder of VITE tokens): Investor of Vite’s infrastructure. Their goal is to profit off the increase in VITE’s value.
Validator: Maintainer of Vite’s infrastructure. They assume costs of the server and network bandwidth, operate SBPs, propagate and validate transactions, update the ledger, and earn block rewards.

Of course, a real user can assume two or more roles. Let’s see below how these four roles achieve their goals via participating in the Vite ecosystem.

Alice is a terminal user. She wants to trade a certain coin on a DEX. She doesn’t particularly care about the Vite chain, and doesn’t plan to own the VITE coin. She just wants the DEX to be as user friendly as Binance. Of course, she is willing to pay a fee for every transaction.

Bob is a vendor. He deploys a DEX contract on Vite, which provides services to Alice. For every transaction, the contract takes a 0.1% commission in exchange for the service. Obviously, the more frequent the transactions, the higher his income. As such, he decides to lock VITE tokens on behalf of his more active users and secure Quota for them, and thus incentivize their usage. At the same time, Bob’s contract also needs to lock an amount of VITE coins to secure the right to use Vite’s infrastructure. To that end, he could choose to purchase VITE and lock it, but he doesn’t have enough funds and doesn’t want to be exposed to VITE’s volatility. So he gets a crowd-loan, where other VITE holders lock on his behalf and receives his DEX tokens in return.

Charlie is a token holder. He buys some VITE and hopes to profit from the purchase. He sees Bob’s project as his top investment, and decides to lock VITE for Bob and supply his contract with Quota. During the locking period, Charlie receives DEX tokens accordingly. In order to maintain his project’s competitiveness, Bob will think of different ways to have token lockers lock for him. If Bob’s project dies, Charlie can unlock his VITE and re-lock for other projects.

David is a validator. He rents an instance on AWS, runs a Vite node on it, and registers it as an SBP. He receives a certain amount of VITE tokens as block production rewards every day. Whenever his SBP goes down, his rewards will be reduced, and VITE holders are no longer willing to vote for him. Therefore, David must ensure the uptime of his SBP.

In the aforementioned economic model, each participant has a clear goal, and they end up in a win-win situation. Alice is the only person that pays. She purchases a product/service to meet her needs; Bob earns an income via providing a service, and gives up part of his project’s shares (tokens) in exchange for the right to use the basic infrastructure; Charlie earns returns from his investments and shares in the prosperity of the ecosystem, while taking on the risks of coin inflation and price volatility, and giving up the liquidity of his coins; David collects block rewards in return for paying for servers and costs of maintaining his node.

This entire model works if the blockchain and its projects are able to offer real products and services that real-world users are willing to consume. If the blockchain coin is nothing but speculation, and every participant is an investor but not a consumer, then the ecosystem is nothing but a zero-sum casino, and eventually falls into a death spiral.

Therefore, zero-cost does not imply that value can be created from thin air. There must be effective incentivization that makes the economic system stand on its own legs and bring welfare of all participants.

Official: https://www.vite.org/

ViteX Official: https://vitex.net/

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