Nervos

The team behind Nervos Network is building a public blockchain ecosystem that utilizes a dual layered architecture to ensure the security and safety of a layer 1 blockchain while maintaining the scalability and speed of a layer 2 solution. Led by Jan Xie, former member of the Core Ethereum Research team, they believe Nervos is the answer to the fundamental issues that currently plague both the Bitcoin and Ethereum blockchains. They have raised $31 million, securing investments from Polychain Capital, Sequoia China, Multicoin Capital, and others. Their public sale is scheduled for September 2019 and will be followed by their Main net which launches in Q4.

Market Analysis

EOS, Cardano, NEO, Bitcoin Cash, Litecoin, and the list goes on of blockchain solutions that were introduced with the idea of “killing” Bitcoin and Ethereum. The fact remains that while some of these blockchains have eaten into the market share of Bitcoin and Ethereum, none have surpassed them in value.  Co-founder of Nervos, Kevin Wang, contends that flaws of Bitcoin and Ethereum will cause them to be unsustainable solutions. Considerable research and planning went into the Nervos design, allowing the team to build a solution that avoids the common pitfalls of its competitors and will hopefully help advance the overall state of the blockchain ecosystem.

Issues with the Bitcoin Network: 

  • Conflicting Incentives for Users: Two of the main usecases for cryptocurrency tokens are as a store of value (SOV) and a medium of exchange (MOE). The attributes that qualify Bitcoin as a SOV are its safety, security, and appreciable nature. The Bitcoin protocol furthers its use case as a SOV by using a fixed block size limit (1 MB) for transactions. This means that each block mined on the network can hold 1 MB of transactions from users. As a result, more blocks are required to be mined to meet the demands of users. The mining of more blocks adds security to the network making it more difficult to attack and creating a safer environment for long-term holders. However, limiting the block size also means that miners receive less transactions per block and must charge higher transaction fees to remain profitable.  To be a successful payment platform and viable MOE, Bitcoin must have competitively low transaction fees and high processing speeds. These needs directly conflict with the desires of long-term holders who as mentioned value the network in its current state.
  • Finite Supply: The Bitcoin network will stop producing blocks after the total fixed supply has been mined. To be a successful SOV, Bitcoin needs miners to continue mining to keep the network from being exploitable. So, what happens when the miners no longer receive their block reward from mining? The current proposed solution is that by this point, Bitcoin will be so valuable that the transaction fees alone will be enough to incentivize the miners. However, the underlying issue with that is if the transaction fees are high then it is less likely the network will be heavily used. MOE users will likely use a cheaper alternative rather than paying high fees to transact on the Bitcoin network. 

Issues with the Ethereum Network

  • Storage: At its simplest form, Ethereum can be compared to a bank with millions of users. When a person tries to buy something using their debit card, the bank will only allow this transaction to be processed if there are sufficient funds in that person’s account. They accomplish this by keeping a record of all the person’s transactions and the current balance of their account. Similarly, on Ethereum, nodes store the “state” of the network with every transaction. This state includes the list of all accounts on Ethereum and their balance. When a transaction occurs on the network, nodes will verify if it can be processed by accessing the balance of the participants. The problem with this system is that since transaction data remains on the Ethereum blockchain forever, nodes must store data in perpetuity but only receive one transaction fee for doing so. We can examine the EOS token sale to better illustrate why this is an issue. With EOS, ETH nodes owned by investors who did not participate in the EOS ICO were still responsible for the storage of the EOS smart contract. All this additional storage is burdensome for the network and because users only pay a transaction fee once for what is essentially eternal storage, there is zero incentive to clear any of this occupied storage space. All these factors are causing the ETH network to grow at an exponential pace, slowing the network, and making it a less attractive MOE for prospective users.  
  • Conflicting Incentives for Users: The other problem that Ethereum faces is there is a misalignment of incentives in the Ethereum ecosystem. Ethereum developers want increased adoption and more users to access their projects, long-term holders want the token to appreciate, users want fast and cheap transactions, and miners want to maximize profits. The developers prefer low transaction fees to encourage usage of their projects. Similarly, transactional users desire low fees because they are primarily concerned about the monetary cost of the transaction. Contrarily, long term holders want higher fees because higher fees mean that users will need to use more ETH to pay for transactions, thereby benefiting the ETH price. Miners also want high transaction fees, as that would equal more profits. 

How it Works

The Nervos Network is a multilayer blockchain with the core focus and layer one as the Nervos Common Knowledge Base (CKB). The CKB is the storage and verification layer of Nervos. As noted in the issues with Ethereum and Bitcoin, using a single layer to handle computation and storage can put strain on the network, leading to poor performance and undesirable results. With Nervos, developers can use layer 2 (Axon) which is a high performance blockchain kernel to buildout their blockchain. Axon supports multiple consensus modules and has the flexibility to allow for more. The CKB can be used to store valuable digital assets and cryptographic primitives (core algorithms used for layer 2). This relationship allows blockchains built on Nervos to achieve competitively high throughput without sacrificing in security and safety.

A solution to Bitcoin’s Issue of a Finite Supply and Ethereum’s Storage:

There are two types of native token (CK Bytes) issuances, the base issuance and secondary issuance. The base issuance will be rewarded only to miners as an incentive to protect the network. It has a finite supply and follows the Bitcoin model by halving approximately every 4 years until it is completely exhausted. The secondary issuance is Nervos’ solution to the hardcap issued faced by Bitcoin and storage issues encountered by Ethereum.  Anytime a block is mined on the Nervos blockchain, a secondary issuance will occur. When this happens, all existing holders of CK Bytes will pay “rent” by way of a transaction fee. As to not penalize long-term holders, they have the option to store their CK Bytes in the NervosDAO (DAO) where not only will they not be subject to rent, they also will receive a share of the rent paid by existing holders that are not in the DAO. See the below example from the whitepaper which illustrates the results of a secondary issuance: 

“Let’s suppose at the time of a secondary issuance event, 60% of all CK Bytes are used to store state, 35% of all CK Bytes are deposited and locked in the NervosDAO, and 5% of all CK Bytes are kept liquid. Then 60% of the secondary issuance goes to the miners, 35% of the issuance goes to the NervosDAO to be distributed to the locked tokens proportionally. The use of the rest of the secondary issuance – in this example, 5% of the that issuance – is determined by the community through the governance mechanism. Before the community can reach agreement, this part of the secondary issuance is going to be burned.”

Without the secondary issuance, miners would have no incentive to continue mining after the final block had been issued from the base issuance. Without miners continuing to work, the network security would dramatically decrease, and it would become an easy target for bad actors. This in turn would make the CKB a poor SOV and likely render the network unusable. The secondary issuance resolves this issue by continuing the reward miners with “rent” payments after the base issuance is fully released. 

Aligning the Incentives of All Network Participants:

With Nervos, all members of the ecosystem are working toward the same goal, an increase in the token price of the native token (CK Byte).  Miners will be more profitable if price of the CK Byte appreciates. If they are profitable, they will be encouraged to buy better equipment and mine more efficiently. This in turn will make the network more secure which will benefit the regular users whose main concerns are not speed or transaction cost but instead the price and safety of their assets. If the network is performing properly and seen as a good SOV, the price of the CK Byte should likely appreciate which is in the interest of long-term holders. Lastly, developers on Nervos want adoption and will benefit from a more secure network since it indicates that the CBK is functionally properly. All the interests of the participants on the Nervos network are completely aligned. A system with everyone working together will surely be more productive than one with parties pitted against each other.  

Team Highlights & Notable Advisors

Founder: Jan Xie – Founder of Cryptape (Advised by Vitalik), Core Researcher and Developer for Ethereum

Co-Founder: Kevin Wang – MSE at University of Pennsylvania, IBM (9 Years), Co-Founder of Launch School (online school for engineers), and Co-Founder of Teahour (One of the most popular technical podcasts in China)

CEO & Director: Terry Tai – Chief Product Officer at Cryptape, Co-Founder & Host of TeaHour 

Advisor: David Zou – Chief Economist at Bitmain

Conclusion: 

Nervos is an intelligently designed project that provides the speed advantages of a layer 2 solution and the security of a layer 1 solution. The team is experienced in the blockchain and is supported by some of the most premier investors in the blockchain space, Polychain Capital. Their crypto economic design is innovative and most likely will be something that future projects attempt to use and build upon. From a purely technical standpoint, Nervos is elite and may be the best project I have seen in this space. 

Nervos has a total supply of 33.6 billion. Per their latest announcement, the token price of their public sale will be 1 CKB = $.01 USD. They have previously raised $31 million and plan to make another $67 million available for purchase in their token sale. This places their initial circulating supply at close to $100 million with their total supply reaching $336 million. At first glance, this seems incredibly high especially when compared to the market caps of some of the recent blockchain releases. However, when you compare this valuation to some other blockchains: Ethereum ($21 billion), Litecoin ($5 billion), EOS ($3 billion), and Cardano ($1 billion), it is clear that there is room to grow. Nervos has the potential to be a valuable investment opportunity that not only can be profitable for an investor but also can help more the industry forward.


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