Wednesday, July 9, 2014

Initial distribution of 100% PoS currencies (by: BCNext and revised by Come-from-Beyond)

Initial distribution of the coins and the forging schedule are more serious problems than they appear at first glance. A 100% proof-of-stake currency needs at least a small part of the coins to be distributed in the beginning because these coins is the only forging instrument. A forging schedule has a lot of influence on initial distribution and must be defined in the first place.

The PoS algorithm used in Nxt has such properties that give a little advantage to an account that holds more coins comparing to an account with a lower amount. If every block subsidizes the forger with extra coins (in addition to the fees) then bigger accounts become even bigger by following the compound interest curve. In a currency with selfish forgers most of the coins would be absorbed by very few accounts that would lead to centralization of the currency. Because of this all the coin in Nxt were distributed at once in the genesis block.

Bootstrapping requires to make a decision how to do the initial distribution. We consider three main schemes, any other scheme can be represented as a combination of them.

The first scheme – all the coins go to a single account controlled by one entity that transfers coins to the others in exchange for work done for development and promotion of the currency. This scheme is completely unacceptable because it’s not “compatible” to decentralized nature of cryptocurrencies.

The second scheme – all the coins are split equally among a group of people. This approach faces some problems. A Sybil attack can be easily conducted by an entity to acquire a significant part of the coins. Such a counterattack as usage of a certification service can’t be used because majority of potential users won’t agree to reveal their true identities. Another possible counterattack, based on proof-of-resources approach, can’t give “fair” distribution because the resources are distributed in “unfair” way. Anyway, even if the Sybil attack could be significantly mitigated, the second scheme is a bad choice because the history of humankind teaches us that an economy driven society where all individuals own equal amount of resources is unsustainable and even utopian. (Note by CfB: It would be interesting to hear opinion of NEM guys on this issue…)

The third scheme – all the coins are distributed in “chaotic” way. This scheme doesn’t have disadvantages of the previous ones, no centralization, no necessity to deanonymize users, no need to counteract Sybil attacks. Economy and sociology sciences state that distribution of the coins will follow the Pareto 80-20 principle. An important note should be made. The fact that (almost?) all the societies conform to this principle assures that the third scheme is the best one. The Pareto principle seems to be a result of universal but yet unknown laws of nature. If the distribution follows the principle then with high probability we can assume that our system will sustain for a long period of time. The previous schemes will transform into “80% of coins belongs to 20% of entities” systems anyway, but the third scheme has such an advantage that it doesn’t need to survive the period of instability.

According to the described above logic Nxt was created by issuing all the coins at once and distributing them by following the last distribution scheme.

Initial distribution has two properties – percentages and number of participants. Common sense says that number of participants should be as large as possible.  This seems to be true, but we should take into account that every system has three main stages of the progress – bootstrapping, normal functioning and decaying. We consider only the first two because our goal is to create an ever-functioning system.

We shouldn’t ignore the lessons of history. Societies created by a lot of people are abnormal phenomena. Number of participants in the very beginning should be rather small than large. This is an arguable statement but disputes on the issue lay out of the scope of this paper. The creator of Nxt preferred a small number of “founders” because he had no possibility to do several experiments on finding the best number nor he had time to build a theory that could predict this number. The most stable economic systems were always bootstrapped by a few people (feods, corporations, etc.) so it was safer to follow a similar way.

Now, half a year after the launch of Nxt we see that it didn’t die and keeps growing at fast pace. This lets us guess that the choice of BCNext was a correct one.

Source: https://nxtforum.org/initial-distribution/initial-distribution-of-100-pos-currencies/

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