In earlier articles, I’ve talked about how Nano is the future of money, amongst other reasons because it is instant, has zero fees and has no inflation. After this article was published, I got some questions about how Nano can have no fees and yet still incentivize people or businesses to run nodes (representatives, those that confirm transactions). In this article, I’ll explain how Nano’s zero-fee proposition provides plenty of incentives in theory and practice, and why having zero fees makes Nano more secure than other cryptocurrencies.
Classical incentives, such as in Bitcoin
Simplified: The classical, old way of confirming transactions as done in Proof of Work coins such as Bitcoin has miners competing over blocks which contain many transactions. The first miner to solve a mathematical puzzle, thereby validating the block, gets the fees that were paid for all the transactions in the block and gets an X amount of Bitcoin, increasing the total money supply.
The idea is that the competition for these rewards incentivises miners to invest in more hash power, increasing their chances of solving a block. While this might seem like a reasonable method to ensure many miners try to “solve” blocks and therefore there is a lot of competition, the problems become clear when we think this through.
In Bitcoin mining, there are many economies of scale. Buying more mining rigs at once gets you discounts, the marginal cost of electricity decreases with scale, maintenance of mining rigs becomes more efficient, and larger players have access to cheaper capital. While great for individual companies, economies of scale are why we have antitrust legislation in place. Decentralized networks have no place for governmental interference, and these economies of scale therefore lead to concentration/centralization over time, as the big parties get ever bigger. This is the opposite of what we want in a cryptocurrency, as security comes from the decentralized nature.
Nano’s feeless incentives
Rather than paying fees to validators, no one pays anything for Nano transactions. There are no fees, and there is no inflation. However, despite the lack of fees, there are plenty of incentives.
If you are a business that profits from the Nano network being up, you want the network to stay up. Nanocharts shows the largest representatives - the top 4 consisting of Nendly (a forum that uses Nano), Kappture (a point of sale processor that implemented Nano), Nanovault (a Nano wallet) and Kraken (an exchange that trades Nano). These parties have a vested interest in the Nano network being online, hence they run a node. The same holds true for many other exchanges (Huobi, Kucoin, Wirex) and wallets (Natrium, Nanowallet, Atomic Wallet), who all run nodes.
Exchanges profit from the Nano network because people trade in Nano, providing the exchanges with income. Businesses such as Kappture profit from Nano because it’s a very efficient, feeless way to transfer value. These businesses have a second incentive to run a node - it allows them to use the network trustlessly. If you are a crypto exchange you do not want to rely on an outside party to tell you whether the $10 million Nano deposit was actually deposited. You would run your own node, so that you can check for yourself whether the transaction has been confirmed.
This is not just a theoretical exercise, the vote distribution on Nanocharts shows that the theory is playing out in practice, with Nano becoming more decentralized over time.
As opposed to the aforementioned economies in Bitcoin leading to centralization over time, Nano actively incentivizes decentralization. Because there are no fees, no Nano holder or business has a reason to want a large share of validation power. The closer your share gets to 51%, the lower the value of the Nano network will be, thereby destroying your own value.
In other words, while in Bitcoin miners have every incentive to increase their validation power, in Nano everyone holding Nano or using the network has every incentive to spread out validation power.
While Nano’s instant and feeless proposition (try that part out for yourself, for free, here) is a great catchphrase and easy to demonstrate, the incentivization of decentralization is what makes Nano so incredibly secure. Nano becomes ever more secure in the long run, and is one of the most future-proof cryptocurrencies because of its lack of fees.
Thanks for reading, comments and feedback much welcome.