On Decentralized Economics and Inequities
Avoiding the traps of the past
One value of decentralized blockchains is to bring more fairness and freedom to transact by removing intermediaries and gatekeepers. The technology has proven to be capable and may meet these aspirations. A lot more work is needed to ensure that we improve the future and not just replace one gatekeeper for another. Distributed architectures will change how we transact and improve global fairness in transacting; however, they may introduce their flavor of inequities. etherfuse recognizes this and is creating products, policies, and technology to help communities capture the value they create and promote better decentralization of blockchain infrastructure. Let's simplify how proof of stake networks work to demonstrate the risk.
A proof-of-stake architecture is a blockchain-based network that allows anyone to create a wallet to send and save money. Like other blockchains, this system does not require a middleman or bank to approve or manage transactions. A proof-of-stake network enables trust through consensus of the network. A set of machines called validators runs this network — these machines use distributed algorithms to approve transactions and create a proof of history for transactions.
A validator approves transactions on the blockchain. These machines earn rewards and make money. While validators make money from a few sources, transaction fees are intended to be the primary reward for running a validator. The image below demonstrates this network and algorithms in a simplified way.
When I want to send money to Carlos, it gets recorded on the blockchain. The validator vote leader (green diamond) verifies the transaction, and the rest of the network (orange diamonds) agree with that decision through consensus. After they agree, the transaction fees will be distributed to the validators who voted and agreed.
The mechanism to provide the proper incentive for people to run a validator is through rewards. A validator earns money by approving transactions; the intended long-term reward mechanism for a validator is transaction fees. It’s worth mentioning that we are purposefully omitting a complete discussion of other complexities, like inflation and vote credits, that are less intuitive and distract from the purpose of this paper.
A validator earns rewards proportional to its trust or popularity in the network. A validator gains trust and popularity through a third-party stake. Staking is an action by a crypto user to stake/move their money to a separate account that references a trusted validator — to earn interest. This action acts as a vote of confidence in a validator, thus raising its popularity. We can compare this intuitively to modern banking. If I want to earn interest on my money, I can save it in a bank account. One may measure a bank's trust and popularity among its users, the number of people who have bank accounts. One could assume that a bank with many account holders has demonstrated to be responsible stewards of people's savings. The bank's reputation and history have enabled them to attract trust.
A validator in a proof-of-stake network is the same. A validator's potential to earn profits is directly related to its trust and popularity. Using the image above, let's take a simplified example to demonstrate the concept. Assume a set of transactions on the blockchain with fees totaling $10. Further, let's assume there are only five validators with third-party stake accounts totaling 1, 1, 2, 3, and 4, respectively. Once that block of transactions is processed the rewards will be distributed according to their popularity to the validators as determined by third-party stake 1, 1, 2, 3, and 4 respectively. The more third-part stake, popularity, or trust a validator has, the higher rewards it earns. Trust and popularity can be measured by a validator's third-party stake committed by the network's users. The public blockchain includes all the information on stake, validators, and profitability.
For the reasons previously mentioned, crypto will boom in Mexico. As Mexican citizens start to normalize the use of payments via crypto these citizens of Mexico will create value through transaction fees. These fees will be used as rewards for running a validator that approves these transactions on the blockchain. Before launching the first Solana validator in Mexico, the predestined value to be created by the Mexican people would be captured by the West.
We recognize that everyone can stake with any validator and capture value. We've omitted that point for simplicity, as the above images assume 100% validator commissions. However, Mexicans adopting crypto without any of the validators would be like Mexican banking without any Mexican banks. One can imagine the problems that could arise from that lack of representation in economics. The skills, regulations, and technologies should all exist in Mexico so Mexicans can further support and grow their communities from the value they create.
We're demonstrating how to do this in Mexico first, then we’re onto the rest of the world.