The Economics of Public Blockchains

The security and scaling problems in modern blockchain design are caused by bad incentives on the economic layer of these networks, which prevent money from getting where it is needed and incentivize forms of cheating that destroy the openness of the blockchain itself. The Saito whitepaper discusses the two major economic problems: a tragedy-of-the-commons and a free-rider problem lurking in the design of every single non Saito-class blockchain network.

Saito fixes these problems on the incentive level. The tragedy-of-the-commons problem is solved through the invention a market-based pruning mechanism. The free-rider problem is solved by inducing the private-sector to provide everything that the blockchain needs to scale. As this second problem is often difficult for non-economists to understand, a brief explanation of the problem follows:

  1. All public blockchains require nodes to share access to network data. Network nodes must provide non-excludable access to transactions, and consensus data lest the network become de-facto privatized.
  2. As blockchains grow, volunteers stop providing servers and other network services and the private sector must step in to pay for them. 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 “open” data offers “non-excludable” benefits, their provision is limited by a class of market failures known to economists since the 1960s. The private sector can indeed be induced to pay for network services, but will privatize data-flows to fund their activities.
  4. Privatized data flows undermine the security assumptions that keep blockchains safe and destroy their “public” and “open” properties. At scale these blockchains become permissioned chains.

Saito eliminates this issue and preserves openness by paying for new form of work. Where other networks pay for unrelated activities like mining and staking, Saito pays nodes for collecting and sharing transactions within the network. This incentivizes nodes to provide public access to users and share user transactions with their peers. Providing open network access is the way for nodes to maximize their income.

The technical accomplishment of the Saito system is securing this form of work so that the blockchain can offer the same security guarantees as bitcoin: a quantifiable cost-of-chain-reorganization. The network manages this by separating the block from the block reward and using a lottery that pays fee-collecting nodes in proportion to the amount of money they have shared with the network. The design of this lottery ensures that attackers must spend more money attacking the lottery than they are required to pay other nodes in the network. This results in a system that does not have a 50 percent attack and that guarantees that attackers who try to censor the network will always lose money.

The result is a revolutionary blockchain. For those new to Saito, the hardest part of understanding how the blockchain works is internalizing how the lottery system forces costs up for attackers but not honest nodes. If you are interested in this aspect of Saito, we have put together a “poker video” with a more 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 requires actual economic knowledge, and forces users to grapple with questions like “what is value” and “how do we measure it” that are almost never asked in the blockchain industry. Because Saito provides a coherent answer, those who put time into studying how the network works will not only improve their understanding of other blockchain designs, but be well-placed to take advantage of the technological revolution that is coming with the advent of truly scalable and economically self-sufficient blockchains.

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.