Polkadot – Blockchain to change the rules of the game?
Maciej Zieliński
26 Aug 2021
Polkadot is a blockchain protocol that combines multiple specialized blockchains into one unified network. Until now, all blockchain protocols worked separately, the developers of Polkadot set out to change this by aiming to create an internet of interoperable blockchains for a decentralized network.
Founded in 2020 by Ethereum co-founder Gavin Wood, among others, Polkadot has joined the blockchain aimed at developing cryptocurrency ecosystems. However, it differs from protocols such as Ethereum, EOSIO and COSMOS in several key technological innovations.
Why it is such an important solution?
Currently, developers designing pioneering decentralized systems must build them virtually from scratch. This means that their talent, time and resources are invested in developing various competing networks rather than creating a common standard. Polkadot's goal is to enable developers to create value on all blockchains, not just one.
How does Polkadot work?
To achieve this, the protocol was designed to support two types of chains: the main chain, where transactions are permanent, and so-called paracheins - chains created by users. Importantly, paracheins can have virtually any number of uses while remaining attached to the main chain. Thus, they benefit from the level of security it provides.
Key elements
Main chain (Polkadot Relay Chain)
It is in this chain that transactions are finalized. To increase speed, this chain separates the addition of new transactions from their validation. As a result, the protocol is able to process more than 100 transactions per second.
To keep the network in agreement about the state of the system, the Relay Chain network uses a variation of proof-of-stake (PoS) consensus called nominated-proof-of-stake (NPoS).
Parachains
Parachains are blockchains created and attached by Polkadot users. They use the relay chain to validate transactions.
Bridges
They allow the Polkadot network to work with other blockchains. Currently working on bridges connecting Polkadot with blockchains such as Ethereum or Bitcoin, which would allow token exchange without its centralization.
The biggest advantages of Polkadot
Among the biggest advantages of the protocol, the developers mention:
Scalability
Because the ecosystem is a partitioned multi-chain network, it can process multiple transactions in parallel across multiple chains. This eliminates the bottleneck effect found in legacy networks, making it easier to scale the ecosystem.
Community Management
At Polkadot, it is the communities that manage their network as they see fit and have a significant impact on the development of the protocol.
Polkadot facilitates collaboration
Polkadot provides inter-chain communication, which allows users to transfer information between chains.
Specialization
Each parachain can have a novel design optimized for a specific application
Not sure which protocol will work best for your project? Make an appointment for a free consultation: contact@nextrope.com. Our experts will help you choose the technology solution that perfectly fits your needs.
Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.
In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.
The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.
Defining the Problem
This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that.
The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE. MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.
In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes. A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.
Identifying Stakeholders and Value Flows in Token Engineering
This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.
Incentive Mechanisms Canvas
The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.
Design Phase of Token Engineering Process
The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase.
Objective Function
Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function. Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.
Deployment Phase of Token Engineering Process
The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.
Agent-based Modelling
In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.
Monte Carlo Simulations
Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.
Testnet Deployment
If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.
Time Duration
Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.
Required Skills for Token Engineering
Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:
Systems Engineering
Machine Learning
Market Research
Capital Markets
Current trends in Web3
Blockchain Engineering
Statistics
Summary
The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.
If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.
FAQ
What does token engineering process look like?
Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.
Is token engineering meant only for big projects?
We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.
How long does the token engineering process take?
It depends on the project and may range from 2 weeks to 5 months.
What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained
Karolina
18 Mar 2024
Enter Berachain: a high-performance, EVM-compatible blockchain that is set to redefine the landscape of decentralized applications (dApps) and blockchain services. Built on the innovative Proof-of-Liquidity consensus and leveraging the robust Polaris framework alongside the CometBFT consensus engine, Berachain is poised to offer an unprecedented blend of efficiency, security, and user-centric benefits. Let's dive into what makes it a groundbreaking development in the blockchain ecosystem.
Berachain is an EVM-compatible Layer 1 (L1) blockchain that stands out through its adoption of the Proof-of-Liquidity (PoL) consensus mechanism. Designed to address the critical challenges faced by decentralized networks. It introduces a cutting-edge approach to blockchain governance and operations.
Key Features
High-performance Capabilities. Berachain is engineered for speed and scalability, catering to the growing demand for efficient blockchain solutions.
EVM Compatibility. It supports all Ethereum tooling, operations, and smart contract languages, making it a seamless transition for developers and projects from the Ethereum ecosystem.
Proof-of-Liquidity.This novel consensus mechanism focuses on building liquidity, decentralizing stake, and aligning the interests of validators and protocol developers.
EVM compatibility means a blockchain can interact with Ethereum's ecosystem to some extent. It can interact supporting its smart contracts and tools but not replicating the entire EVM environment.
EVM-Equivalent
An EVM-equivalent blockchain, on the other hand, aims to fully replicate Ethereum's environment. It ensures complete compatibility and a smooth transition for developers and users alike.
Berachain's Position
Berachain can be considered an "EVM-equivalent-plus" blockchain. It supports all Ethereum operations, tooling, and additional functionalities that optimize for its unique Proof-of-Liquidity and abstracted use cases.
Berachain Modular First Approach
At the heart of Berachain's development philosophy is the Polaris EVM framework. It's a testament to the blockchain's commitment to modularity and flexibility. This approach allows for the easy separation of the EVM runtime layer, ensuring that Berachain can adapt and evolve without compromising on performance or security.
Proof Of Liquidity Overview
High-Level Model Objectives
Systemically Build Liquidity. By enhancing trading efficiency, price stability, and network growth, Berachain aims to foster a thriving ecosystem of decentralized applications.
Solve Stake Centralization. The PoL consensus works to distribute stake more evenly across the network, preventing monopolization and ensuring a decentralized, secure blockchain.
Align Protocols and Validators. Berachain encourages a symbiotic relationship between validators and the broader protocol ecosystem.
Proof-of-Liquidity vs Proof-of-Stake
Unlike traditional Proof of Stake (PoS), which often leads to stake centralization and reduced liquidity, Proof of Liquidity (PoL) introduces mechanisms to incentivize liquidity provision and ensure a fairer, more decentralized network. Berachain separates the governance token (BGT) from the chain's gas token (BERA) and incentives liquidity through BEX pools. Berachain's PoL aims to overcome the limitations of PoS, fostering a more secure and user-centric blockchain.
Berachain EVM and Modular Approach
Polaris EVM
Polaris EVM is the cornerstone of Berachain's EVM compatibility, offering developers an enhanced environment for smart contract execution that includes stateful precompiles and custom modules. This framework ensures that Berachain not only meets but exceeds the capabilities of the traditional Ethereum Virtual Machine.
CometBFT
The CometBFT consensus engine underpins Berachain's network, providing a secure and efficient mechanism for transaction verification and block production. By leveraging the principles of Byzantine fault tolerance (BFT), CometBFT ensures the integrity and resilience of the Berachain blockchain.
Conclusion
Berachain represents a significant leap forward in blockchain technology, combining the best of Ethereum's ecosystem with innovative consensus mechanisms and a modular development approach. As the blockchain landscape continues to evolve, Berachain stands out as a promising platform for developers, users, and validators alike, offering a scalable, efficient, and inclusive environment for decentralized applications and services.
Resources
For those interested in exploring further, a wealth of resources is available, including the Berachain documentation, GitHub repository, and community forums. It offers a compelling vision for the future of blockchain technology, marked by efficiency, security, and community-driven innovation.
FAQ
How is Berachain different?
It integrates Proof-of-Liquidity to address stake centralization and enhance liquidity, setting it apart from other blockchains.
Is Berachain EVM-compatible?
Yes, it supports Ethereum's tooling and smart contract languages, facilitating easy migration of dApps.
Can it handle high transaction volumes?
Yes, thanks to the Polaris framework and CometBFT consensus engine, it's built for scalability and high throughput.
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