Saito Economics

The major problems in blockchain design are caused by bad incentives on the economic layer. The Saito whitepaper discusses the two major issues: a tragedy-of-the-commons problem that encourages blockchain bloat; and a free-rider problem that incentivizes nodes to privatize formerly-public network services.

Most blockchains consider these problems unsolvable, ignore them, and focus on optimizations that do not solve the problems they are intended to address. This failure consequently leave their chains vulnerable to a wide range of economic attacks while also reducing the number of nodes that offer public services like transaction collection and sharing at scale.

Saito is the only blockchain which eliminates these problems completely. It solves the tragedy-of-the-commons by introducing a market-based pruning mechanism. It solves the free-rider problem by paying nodes for an activity (“fee collection”) that incentivizes nodes to spend money doing the activities that other blockchains leave to unpaid volunteers. Since this second problem is poorly understood in the blockchain space generally, a brief explanation follows:

  1. All public blockchains require nodes to provide non-excludable access to inbound transaction flows and outbound consensus data. Networks that do not incentivize this behavior become permissioned networks at scale.
  2. The scaling challenge involves encouraging the private sector to step in and provide these data-flows as the network grows and volunteers stop running servers. It is common to hear from non-economists that firms will do this because otherwise they won’t get paid. But this is not true.
  3. Because sharing data means providing “non-excludable” benefits to peers, a class of market failures known to economists since the 1960s limits the willingness of any private firms to run these servers. The private sector can only be induced to pay if they are allowed to privatize data-flows.
  4. Networks with controlled data-flows no longer behave like public blockchains. They devolve into permissioned networks run by monopolies and protected by barriers to entry and economies of scale.

Those new to Saito are often baffled by the fact that Saito treats economic problems as more significant than technical issues. In time they realize that fixing these underlying economic problems requires changes to the way that blockchains identify and pay for value, and that changing these fundamental properties prevents the kinds of cheating that lead to network capture and collapse. For blockchains aiming at scale, the only proper design is a mechanism that pays nodes for scaling up network throughput and security.

The mechanism Saito uses to solve this “layer-0” problem is paying for a new form of work: collecting transaction fees and sharing them with peers in the network. This incentivizes nodes to service users and share their fee-bearing transactions with their peers in the network.

The technical accomplishment of the blockchain is securing this form of work so that it offers superior cost-of-attack guarantees than proof-of-work and proof-of-stake networks. The solution ensures that any attacker who tries to censor the network must necessarily lose money. It allows all participants in the network to be confident that attackers seeking to re-write the longest chain will need to spend a quantifiable amount of their own money in order to do so.

For those new to Saito, the hardest part of understanding how the network works is internalizing the logic of the lottery system, which eliminates the fifty-percent attack. If you are interested in this aspect of Saito, you may enjoy this “poker video” with its visually-intuitive explanation of how attackers are forced into a catch-22. See if you can come up with a profitable strategy for attacking the payment mechanism!

In general, Saito is different from other blockchains as it replaces ideology with actual economics, and forces developers to grapple with questions like “what is value” and “how do we measure it” that are almost never asked in the blockchain industry yet are critical to understanding why and where alternate blockchain designs fail. Those who put time into understanding how Saito works will not find themselves on the cutting-edge of blockchain design, but will gain a deeper understanding of why proof-of-work and proof-of-stake networks consistently fail.

If you have questions about Saito or are interested in getting involved, please feel welcome to join our Telegram channel or join any of the numerous communities that are living and growing on the Saito network.