Economics and Market Failures

The Saito whitepaper discusses the two economic problems that prevent public blockchains from achieving the scale necessary to support web3 applications: a tragedy-of-the-commons problem that leads to blockchain bloat if unaddressed; and a free-rider problem that encourages participants to focus on paid work like mining and staking at the expense of unpaid but equally important work like running user-facing network infrastructure.

The second of these problems is the most conceptually difficult for most non-economists to grasp. Many technical developers also struggle with it for ideological reasons: they have been told that free markets deliver socially-optimal outcomes! But this is not the case: there are situations in which markets commonly fail, one of the most common of which is the provision of public goods with non-excludable benefits. While the private sector will happily do work that offers private benefits, it cannot effectively fund activities that have non-excludable benefits. Asking a market to do this typically requires privatization (the elimination of the non-excludable benefit). This is why companies in the blockchain space invariably create hub-and-spoke networks when asked to provide public routing infrastructure.

The underlying problem is a matter of incentive structures that prevent individuals from cooperating to achieve optimal outcomes. Even though everyone in a blockchain would be better off if everyone chipped-in to fund otherwise-unpaid activities that generate transaction volume, each participant is strictly better off if they avoid paying their share. The incentive structure leads participants to maximize their individual rather than their group welfare.

In the blockchain space we see these problems in the lack of funding for public-facing network infrastructure, the refusal of many miners to do full-block validation and/or serve the entire blockchain to the public, and the refusal of many profit-earning businesses to run network nodes. The concomitant underfunding of public access points also cripples the ability of these networks to support web3 data services. The problem can only be solved by fixing the underlying incentive layer.

The Nature of the Solution

The tragedy of the commons problem is the easier of the two problems to eliminate, and we will not spend much time on it here. In short, Saito fixes the problem by introducing a market-based pruning mechanism. The mechanism forces nodes to operate at a loss if they add too much data to the blockchain, and thus encourages them to never let the blockchain grow to the point of collapse. In addition to eliminating blockchain bloat, the Saito solution fixes several other intransigent problems, such as allowing the network to properly calculate the cost of on-chain storage into perpetuity.

Eliminating the free-rider problem is harder as it requires a conceptual leap forward: replacing mining and staking with a form of work that cannot be privatized: the efficient collection and sharing of non-excludable value. Instead of trying to force participants to act altruistically, Saito changes the problem and encourages them to act selfishly, but transforms the selfish action into the act of sharing value with the other nodes in the network. The consensus algorithm incentivizes the sharing of data and pays the nodes which do the best job of giving away value / fees.

The use of a form of work that is derived from money-flows opens the network to the prospect of circular economic attacks on the payment mechanism. Saito prevents this with an elegant cryptographic lottery with a critical economic property: attackers who wish to dominate the network must spend more money attacking the lottery than they can ever collect from attacking it. The solution is known as the “golden ticket” system. It eliminates the 51 percent attack (reorganizing the blockchain remains quantifiably costly even under majoritarian conditions), while ensuring that payments flow to the nodes that are servicing users and routing their fee-paying transactions inward through the network. Any activities that provide value to users can consequently justify outbound payments to node producers, even if those activities involve running network infrastructure for other blockchains or cryptocurrencies.

Saito up-ends the economic fundamentals of blockchains, but does so in a manner that lets it actually deliver on the original promise of Bitcoin: delivery of a permissionless data network that can remain self-sufficient and trustless at scale. If you are new to Saito, you may enjoy this “poker video” which attempts to offer a visually-intuitive explanation of the lottery mechanism that forces attackers into a catch-22 and requires them to haemorrhage money should they wish to attack the chain.

The outcome in either case is a network with the scale to support web3 data-throughput, and the economic structure to support the maintenance of whatever blockchain infrastructure provides the greatest value to network users.

The rest of this site contains information documenting Saito consensus and introducing developers to the network. If you have questions about Saito or are interested in getting involved, please join our Telegram channel or any of the numerous communities that are living and growing on Saito.