The Economics of Public Blockchains

The technical problems that developers have scaling public blockchains are caused by bad incentives on their economic layer. The Saito whitepaper discusses the two core issues: a tragedy-of-the-commons problem that leads to blockchain bloat, and a free-rider problem that subverts the openness of the consensus mechanism at scale.

Saito fixes these problems by correcting the incentives that lead participants to behave in anti-social ways. Solving the tragedy-of-the-commons is possible by introducing a market-based data-pruning mechanism. This allows the blockchain to prune data that is no longer economically viable. The video in our sidebar on the “Tragedy of the Commons” provides a simple introducton to this solution.

The second problem is more subtle, because keeping the public network functioning requires getting the private-sector to pay for something that free markets are not good at providing: public goods. Our sidebar on the “Free Rider” problem contains a video slideshow that explains this in more detail. The short version of the problem is as follows:

  1. All public blockchains have data-sharing nodes that provide open and non-excludable access to transaction and block data. These nodes ensure that anyone can participate in consensus and collect and share the fees that keep the consensus mechanism secure so that block producers cannot simply hoard them.
  2. As blockchains grow, volunteers stop running these nodes and the private sector must 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 these public nodes provide non-excludable benefits, they suffer from a common type of market failure known to economists since the 1960s. The private sector can be induced to pay for them, but only by finding ways to restrict public access to their benefits.
  4. There are many ways this process can play out, but all lead to the privatization of data-flows, such as the hoarding or sale of transaction-flow. In all cases, what starts as a public blockchain transitions into a “permissioned” network as access to these closed data-flows determines competitiveness in the consensus mechanism.

Saito’s most important contribution to economics is the solution it offers to this second problem. And what an elegant solution! Instead of worrying about how to make block production “difficult” (an impossible task for any network which pays for a form of “work” that can be purchased or rented), Saito focuses on ensuring that attackers always lose money attacking the network. The amount of money they are guaranteed to lose per block then becomes the cost of the attack.

The network enforces losses on attackers by separating the block from the block reward and distributing payments using a lottery that costs more money to attack than attackers can earn in fees from gaming it. The lottery manages this by paying for a kind of “routing work” that is secured by cryptographic signatures and cannot be orphaned or stolen. Attackers cannot produce the longest-chain without including the transactions from that chain in their fork, but doing so requires them to pay money to the nodes that routed those transactions into the network.

The hardest part of understanding Saito is internalizing how this system forces costs up for attackers but not honest nodes. If you are interested in this aspect of how Saito works, we have put together a “poker video” with a more intuitive explanation of how Saito forces attackers into a catch-22. See if you can come up with a profitable strategy for attacking the payment mechanism!

The reason this system solves the free-rider problem is quite abstract. Because Saito pays nodes to collect money for the blockchain, it is the only blockchain that incentivizes any kind of work that contributes value to the network: inducing users to pay the fees that are needed to sustain and secure the consensus mechanism. A full understanding of Saito thus requires a willingness to grapple with questions like “what is value” and “how do we measure it” that are almost never asked in the industry.

In practice, it will be many ideas before Saito is understood. Those who put time into studying how the network works will be best placed to take advantage of the technological revolution that will happen with the advent of truly scalable and economically self-sufficient public blockchains. If you have questions about how Saito works, 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.