Figment’s First Look: NEAR Protocol
NEAR Protocol’s restricted mainnet is scheduled to launch this Summer, with their permissionless mainnet set to follow via a community vote. Figment will be supporting NEAR Protocol and NEAR token holders during its restricted and permissionless mainnet.
What is NEAR Protocol?
NEAR Protocol is an upcoming layer-one sharded blockchain that plans to be highly scalable and developer friendly. Drawing from the original vision of Ethereum, the NEAR team defines the protocol as a blockchain based community cloud that combines compute and storage in a trustless way. The technical design is focused on creating a quality user experience that is familiar, which the NEAR team hopes will lead to increased end user adoption of applications built on NEAR.
The “NEAR Collective” currently has over 30 full time contributors and is growing. Many contributors to the project are previous ICPC gold medalists and finalists. The project was founded by Alexander Skidanov and Illia Polosukhin. The founders have experience working for Google and Microsoft, and the NEAR project is backed by the likes of a16z, Coinbase Ventures, and IDEO CoLab.
NEAR’s technology includes 4 key elements:
Sharding: This will allow the blockchain to scale horizontally and indefinitely by distributing the work across multiple shards. The shards will be connected through a beacon chain that verifies changes within the shards.
Consensus: Consensus across all shards is achieved using NEAR’s novel Nightshade algorithm. Nightshade allows individual shards to produce only a “chunk” of a block on the network. The total block is a combination of all the chunks produced by individual shards.
Staking Selection and Game Theory: NEAR uses a Proof of Stake design. Validators are randomly selected to perform work on the network and are rewarded for good behavior.
Randomness: NEAR uses a simple randomness beacon which can tolerate up to ⅓ of malicious activity while still maintaining liveness, and up to ⅔ of malicious activity while remaining unbiasable and unpredictable.
NEAR states that digital money, identity, and asset ownership data benefit the most from being decentralized and stored/transferred on the NEAR platform.
While many people in the blockchain space have high hopes for everything ultimately being decentralized, the team behind NEAR states that most things do not have to be. Decentralized systems have additional costs when compared to centralized systems due to their redundancy, and most data stored in applications today are high volume and low value. Therefore, the NEAR team believes decentralization is most important for highly sensitive and valuable data.
Applications being built on NEAR can take advantage of the network’s design to safely store and transfer this data without having to develop a way to do it themselves.
Applications like DAOs, games, marketplaces, and insurance are already being developed on the NEAR network.
The NEAR token is the native token on the NEAR blockchain. Similar to other Proof of Stake networks, it will be used to secure the network through staking, and used to pay for transaction fees. It will also be used as a right to store data on the network. NEAR token holders will have the right to store data on the network proportional to the amount of NEAR tokens they have.
NEAR has a fixed issuance rate of around 5% a year. 90% of this issuance will go to the validators that secure the network and 10% of the issuance will go to the protocol treasury to fund future development. Delegators will receive a share of the validators rewards minus the fee set by validators. Because of the fixed issuance rate, the annual inflation rate will adjust based on transaction fees as you can see in the table below.
NEAR tokens used to pay for transaction fees are burned instead of going to validators. This may seem like validators and delegators are not benefiting from transactions on the network, but it actually increases their yield.
For example, if the total supply of NEAR is 100, 50 of which is staked, and 5 tokens are paid in an epoch reward, then if there are no fees burned – the yield is (55/105)/(50/100)-1~=4.76%. While if there were 5 tokens burned, the yield would be (55/100)/(50/100)-1~=10%.
There can potentially be negative inflation rates on NEAR, but NEAR claims that will not affect the annual reward rate of validators based on what is mentioned above. Regardless, negative inflation rates are something we do not expect to see anytime soon on NEAR, since the network will need to be processing over 1 billion transactions per day. To put that in perspective, there are currently only around 300,000 Bitcoin transactions a day.
Validators will be selected to be in the active set via an auction mechanism. Validators will send a NEAR stake transaction to the network, which will place them in the auction. Seats will be given to validators based on the size of the stake transaction in proportion to the total amount being staked on the network. This will happen every epoch, which is 12 hours.
Smart Contract Delegation
NEAR token holders who want to stake their NEAR tokens can do so via smart contract delegation since NEAR does not support in-protocol delegation. NEAR will provide validators with a reference contract, but they expect more custom smart contracts to be created in the future. For example, one validator might offer delegators a better return if they lock their tokens for a longer period of time while another might offer better returns for larger size delegations.
Once you have delegated your tokens to a validator, it will take 12 to 24 hours to begin receiving rewards, and there is a 24 to 36 hour unbonding period if you decide to stop delegating your NEAR tokens.
Validators who perform an equivocation (double signing a block at the same height) or an invalid state transition (producing an invalid chunk of a block) will result in 100% of their stake being slashed. This includes all delegated tokens.
Validators will not be slashed for downtime, but they will be removed from the active set if they are offline for more than 90% of a 12 hour period.
Validators with at least 90% uptime within a 12 hour period will receive reward for that period and will receive rewards in full for at least 99% uptime.
This means that it is highly important that you know your validator and trust their ability to perform on the network without committing a slashable offense.
NEAR Protocol’s Stake Wars Episode II incentivized testnet starts on May 20th. The incentivized testnet is designed to test NEAR’s smart contract delegation feature. Figment will be an active participant, and we are currently on the Validator Advisory Board for NEAR Protocol.
NEAR plans to launch its restricted mainnet this Summer allowing whitelisted validators, like Figment, to participate on mainnet while also allowing end users and developers to delegate their tokens.
NEAR’s community governed mainnet will follow after it is approved via a community vote. This will enable token transfers and allow anyone to participate in the network. Changes after this point will be decided via a decentralized governance process.