A new service for IOTA introduces “proof-of-work as a service” reminiscent of proof-of-work mining in other major cryptocurrencies, illustrating the importance of carefully-balanced economic incentives to result in intended outcomes.
IOTA is a cryptocurrency running on a directed acyclic graph (DAG) instead of a more traditional blockchain setup. A key component of this is the eschewing of traditional proof-of-work mining and transaction fees popular in blockchain currencies such as Bitcoin and Dash, with users performing a portion of the the proof-of-work themselves in order to confirm transactions instead. This new service, PoWServe.io, allows some users to delegate the proof-of-work to the service instead, producing a more efficient transaction processing experience than having each user confirm transactions themselves.
Notable in this setup is that it resembles mining in traditional cryptocurrencies, where a more limited number of specialized machines take care of securing the network on behalf of users. Some see this as a vindication of the blockchain’s proof-of-work mining model:
Looks like IOTA just invented "delegated Proof-of-Work" after all (or, in other words, plain old regular mining). Who could have thought IOTA would be affected by the same economies of scale as everyone else? It's so surprising. I am in shock. pic.twitter.com/YOEPIEKotC
— Eric Wall (@ercwl) September 8, 2018
At the moment, PoWServe.io does not require fees to process transactions, but instead limits the number of transactions able to be processed by each user. In response to the scarcity of efficient, delegated processing, paid services may crop up, reverting to the more established cryptocurrency fee-based transaction model, though this has likely not yet happened.
“Free” transactions and other features are never truly free
One of the more commonly used promotional points for IOTA and other DAG-based cryptocurrencies has been the concept of free transactions/zero fees. This is achieved by having devices perform a small portion of proof-of-work to secure the network in order to send. In traditional cryptocurrencies such as Bitcoin and Dash, miners perform the entirety of this work, and are rewarded by receiving both the block reward of new coins created and fees for processing transactions. The process is essentially the same, with the main difference being the distribution of work and the payment of fees.
Essentially, however, the pure concept of free fees does not exist in cryptocurrency. Currency itself is a store of value and medium of exchange, essentially a way to quantify and efficiently transmit the product of labor and the value of goods and services. By paying fees to process transactions, users are valuing that fee less than the time and effort required to process the transaction themselves. The division of labor allows increased efficiency through different economic actors in the ecosystem specializing in activities that provide the most economic value for the time and effort invested. This economic principle still applies even in a system that expects the whole network to perform proof-of-work functions, hence the market for delegated proof-of-work present in IOTA.
Dash’s careful alignment of incentives has stood the test of time
A key principle of Dash has been the balancing of economic incentives so that the network can run efficiently and autonomously, without resorting to outside actors with potentially misaligned incentives and conflicts of interest. Dash’s network primarily relies on proof-of-work mining such as in Bitcoin and other similar coins, and these are compensated with fees and a portion of the block reward (45%) in order to perform their duties. In contrast with most other networks, however, Dash also has incentivized nodes (masternodes) who also receive a portion (45%) of the block reward in order to perform special functions such as providing instant and private transactions, as well as vote. Other networks do not incentivize nodes, leaving them to either be run on a volunteer basis, or run by services such as exchanges and wallet providers that need them, presenting fewer and larger points of failure. Finally, Dash’s treasury makes available the last part (10%) of the block reward primarily to fund development, but also for any additional service that the network may require.
Because of this balancing, Dash is set up to give the highest probability possible of the network running smoothly and as intended, beyond simply having the technical tools in place for such an outcome. By working around incentives to human behavior, Dash aims to ensure that its actors behave in a beneficial way that will result in an efficient and decentralized payment network.