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Incentivized Blockchains Make Most Sense Economically

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Network sustainability indisputably better in quid pro quo arrangement with node operators

Blockchain network sustainability is about good economics.

Perry Woodin, founder at Node40, a node hosting service for incentivized blockchains, says that a plan to attract participation is crucial, and without incentivizing users to host or contribute to the network, stability will rest on volunteers or a centralizing authority.

“For one, you don’t know how reliable [volunteers] are going to be. Is it going to be running 24/7, are they going to just jump to the next best thing once it’s available?”

It is well known Bitcoin’s blockchain, which sits at about 74.7 GB when database indexes are excluded, relies on a volunteer-based network of node owners.

Declining numbers were reported by various industry-related media outlets in 2014 and 2015, just a handful of years after the cryptocurrency hit the world stage.

According to Bitnodes, the number of full node operators around the globe is 5,646.

If Bitcoin’s blockchain continues to grow, which seems likely, the role of running a full node, without a protocol change, becomes more intensive and expensive and therefore increasingly exclusive. Consider having to sync-up with the Bitcoin blockchain via a basic home computer.

The advent of simple payment verification (SPV) wallets for Bitcoin was meant to enhance accessibility, offering a lightweight process that doesn’t require the downloading of the full chain of data for verification.

This seemed more like an oversight however, says Woodin, as network participants were originally required to run a node as a cost of interacting with the system. And, as Bitcoiners well know, full nodes form the anchor of trustless security within Bitcoin’s system.

Segregated Witness (SegWit), which will offer a range of improvements to address the scalability issue of Bitcoin, is currently being tested and is nearing release, according to Bitcoin Core.

SegWit will effectively increase the block size limit to about 1.7 MB (an approximate 70 percent increase over the current block size). It will also allow further scaling options, such as the Lightning Network (LN), purported to be a second tier to provide instant transaction capability using smart contracts for the creation of a network of secure participants.

When the LN will be viable is another uncertainty. Bitcoin Magazine reported that Bitcoin developer Peter Todd, at the Bitcoin in Use conference in late June, explained of a possible failure mode of the LN.

Returning to incentivized models, Woodin contends, there are basic economic constraints, even within Dash. The world’s seventh most valuable cryptocurrency by market capitalization, Dash provides a share of the block reward to a secondary tier of nodes, termed masternodes, as an incentive.

“At some point the volume return on investment is going to decrease to the point where people reconsider the value of running masternodes,” says Woodin. “But this should self-correct.”

“As more and more masternodes come online, the share of the pie decreases because there’s only so much Dash that’s created every single day, in a block.”

This will lead to some users leaving in lieu of the low return while others with a different appetite or goal in investment will remain and the return will begin to reshape itself.

If in for the long run, in other words betting in conjunction with the idea Dash will increase in value over time, then the investment equation shifts.

Regardless, “What’s the alternative?” Woodin posits.

A volunteer-based system with the potential implications such a framework defines, or, he says, a centralization of ownership.

Blockstream and Blockchain.info are two examples. Both companies run full nodes because it is in their business interest to do so, explains Woodin. Security and speed of the network is to the benefit of their enterprise.

New blockchains — like Steem, a self-purported blockchain-based social media platform and TransferCoin (TX), a PoW/PoS hybrid cryptocurrency based on the X11 hashing algorithm — have adopted an incentivized model.

The difference, says Woodin, is between securing vested users for a long-term, sustainable investment in a blockchain network versus specific organizations or altruism to run nodes.

Further, an incentivized model within an innovative or worthwhile blockchain-based product generates returns.

The hard data on Node40 node owners, according to Woodin, has been upwards of a 300 percent return over the past 12 months.

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