The success of Bitcoin stems from a subtle concept —— Bootstrap. The blockchain has experienced nearly 13 years of development, and the Bootstrap method has also developed from Proof of Work and Proof of Stake to liquidity mining.
The Bootstrapping of Bitcoin
There are subtle interactions between the three different aspects of Bitcoin: the security of the blockchain, the health of the mining ecology, and the value of Bitcoin. We all hope that the blockchain will be safe and make Bitcoin a viable electronic cash. In order to make the blockchain secure, the counterparty must not be able to create a large number of mining nodes, and must not be able to take over 50% or more of new block creation.
But how can this be achieved? A prerequisite is to have a healthy mining ecosystem composed of honest and protocol-compliant nodes.
How can we meet this prerequisite —— to enable a large number of miners to put in a great deal of computing power into the competition of Bitcoin mining? Miners will only do this when the exchange rate of Bitcoin relative to the U.S. dollar is quite high, because the rewards they receive are in Bitcoin while their expenditures are in U.S. dollars. Therefore, the higher Bitcoin's value rises, the greater the incentive for miners and the fiercer the competition.
How can we ensure the high and stable value of Bitcoin? This happens only when users generally trust the security of the blockchain. If they think that the network is likely to be hacked by attackers at any time, then Bitcoin will not be of great value as electronic cash.
Therefore, the security of the blockchain, the healthy mining ecology and the exchange rate of Bitcoin are interdependent on each other.
When Bitcoin was created, these three aspects did not exist. Except for Satoshi Nakamoto, no other miners run mining software, and Bitcoin has no value as an electronic cash. In fact, the Bitcoin blockchain at this stage was not secure, because there was no massive mining going on, anyone can easily attack it.
However, as people learn more about Bitcoin, they become more interested in mining. The more they are interested in mining, the more confident people are in the security of the Bitcoin blockchain, because there are more mining activities going on, which in turn will promote the rise of Bitcoin's exchange rate against the U.S. dollar, making people pay more attention to and understand Bitcoin.
Due to the interdependence of these three aspects, the Bitcoin blockchain has formed a natural cycle, solving the Bootstrap problem.
Proof of Stake
Since Peercoin adopted PoS to verify transactions in 2012, more than one hundred decentralized networks have adopted the Proof of Stake mechanism, including Polkadot, Cardano, Cosmos, Dfinity, ETH2.0, and so on.
Proof of Stake is becoming a common method to protect decentralized networks. Compared with time-proven Proof of Work (as represented by Bitcoin), Proof of Stake has many advantages: including faster block time, finality, lower operating costs, higher throughput, and lower ecological and environmental impact. In addition to these advantages, what is more important is that Proof of Stake solves the Bootstrap problem well.
In a network that uses Proof of Stake, tokens are created regularly and distributed to validators based on the votes of the staked token holders. This mechanism allows voters to reward the validators' contribution through the token, ensuring that everyone in the ecosystem is happy: the validators' efforts are rewarded, and the holders of staked token are also satisfied, because the holders of staking certificates will receive a staking reward for voting.
Finally, the tokens come from the reward pool instead of anyone's wallet, and is released through simple voting, so the users' cognitive burden is minimal. At the same time, as the decentralized network becomes more and more secure, the more stake holders and validators there are, the higher the value of the decentralized network token. All of these create a positive feedback loop (Bootstrapping), which leads to compound growth of the network, as demonstrated by the past decentralized networks that adopted the PoS mechanism.
Proof of Stake actually gives entrepreneurs the opportunities to gain support from the community. Entrepreneurs, validators, and staked token holders promote the development of decentralized networks in the direction of multi-party consensus security in a positive feedback loop.
Liquidity Mining
"Liquidity mining" was defined by the Hummingbot team in November 2019. In the earliest definition, "liquidity mining" specifically refers to providing liquidity for exchanges. Later on, the DeFi industry further generalized the concept of this term, extending its use in lending or other financial applications, because these services also require one party to provide liquidity.
The Hummingbot team's definition of "liquidity mining" is: We call this process "liquidity mining" because its concept is very similar to PoW mining. Compared with the use of mining machines and electricity, liquidity mining uses computational resources and token inventory to run Hummingbot's market making client. By competing with other participants to obtain promotion incentives, their joint efforts can achieve a common goal of providing liquidity for specific tokens and exchanges. In return, they will receive compensation commensurate with their work based on the model defined by the algorithm.
If we see PoW and PoS as a decentralized network solution to bootstrapping, then "liquidity mining" also has some of the same characteristics.
If there is no "Liquidity Mining", the DeFi ecosystem may not develop so rapidly in this year. The DeFi boom —— a.k.a DeFi Summer, also started after Compound launched its governance token COMP in June 2020.
How Does "Liquidity Mining" Solves the Problem of Bootstrapping?
"Liquidity mining" on Sushiswap means to provide liquidity for trading pairs. For example, to provide liquidity for the SUSHI-WETH trading pair, the liquidity provider can deposit SUSHI and WETH tokens, and then according to certain algorithms, SUSHI tokens and corresponding transaction fees are received.
As more users provide liquidity for the SUSHI-WETH trading pair, Sushiswap’s network becomes more secure, which will increase the value of SUSHI. More users will provide liquidity for the SUSHI-WETH trading pair and activate the "flywheel" of the positive network. "Liquidity mining" solves the Bootstrap problem by adopting a similar approach to PoW and PoS.
Staking Economy
Whether it is PoW, PoS, or liquidity mining, it is in line with the basic principles of staking economy.
In a sense, the Stake in the PoS network is a kind of deposit: by becoming the validator (litigant) through Stake Token, the token holder (guarantor) actually provides the contract with deposit to prove that the validator will fulfill its obligation to stay online and faithfully validate transactions. Token holders provide this deposit for future bonuses (Staking Rewards), and this reward is immediately paid to the guarantor by contract or transferred to the guarantor from the litigants.
This behavior of the PoS network is basically similar to the mining behavior of PoW network and liquidity mining. In order to receive future bonuses (mining rewards), Bitcoin miners need to purchase mining machines and electricity (equivalent to staking tokens) to fulfill their obligation to stay online and faithfully validate transactions.
From the basic economic principles, this staking behavior of PoW and PoS networks protects the security and stability of the networks. Of course, as a reward for protecting the network, Bitcoin miners will get new Bitcoins, while the validators of the PoS network will get staking rewards. It is also the Staking economy that brings the Bootstrap of PoW, PoS, and liquidity mining.
Crowd-Staking
Crowd-Staking is a next-generation Bootstrap method based on Staking Economy, similar to PoW, PoS, and liquidity mining.
As of July 2021, the entire staking market worth is as high as 633.6 billion U.S. dollars, of which the blockchains using the PoS mechanism have staked 146.5 billion U.S. dollars in tokens, and the annual staking reward amounts to more than 15 billion U.S. dollars. Crowd-Staking is taking advantage of the stable market of staking economy to become the workhorse of application-oriented DAOs, that is, to solve the Bootstrap problem of application-oriented DAOs. A typical example is the Nutbox Peanut Network.
Nutbox Peanut Network
Nutbox Peanut Network (Peanut for short) launched its network through Crowd-Staking in October 2020. After 9 months of development, it has become the second largest staking platform & the largest DeFi platform on the Steem blockchain.
Peanut is a decentralized staking platform built on the Steem blockchain. On Peanut, users can delegate staking assets (STEEM POWER, SP for short) to Peanut.community.pool to receive its community tokens (PNUT). At the same time, Peanut.community.pool uses the delegated stake assets to obtain staking rewards and deposit them into the @community.mine account. The Peanut Committee will repurchase PNUT on decentralized exchange regularly to inject the value of the staking rewards into the community token (PNUT).
As Peanut.Community.pool receives more and more SP delegations, the staking rewards held by the Community.mine will also increase, and the amount of PNUT to be repurchased will also increase, which will increase the value of Peanut's network and further excite more SP holders’ interest in delegating to Peanut.
Through this simple model, Peanut solves the problem of initiating the network from 0 to 1 (i.e. Bootstrap) in a similar way to PoW, PoS, and liquidity mining.
At present, Peanut is considering supporting more staking assets, such as DOT and ETH2.0 etc. with higher market capitalization, to further expand the network. At the same time, when the Peanut community distributes PNUT to SP delegators, it will distribute 10% of PNUT to Peanut.DAO to reward community development, operation, and marketing personnel through voting on proposals. Peanut (peanut.nutbox.io) has successively launched DApp modules such as liquidity mining, community blogs, and pay PNUT for upvotes.
Crowdloan
At the same time, Polkadot is also using the staking mechanism (Crowdloan and Slot Auction) to initiate its parachain slot auction to help parachain start its network and solve the Bootstrap problem. How did they do it?
Polkadot uses Crowdloan to help ecological projects participate in the Parachain slot auction. Ecological project users can stake DOT to the eco-project's upcoming auction slot to receive project tokens. In one cycle, Polkadot uses candle auctions to determine the winning project to receive a slot and serve as a Parachain connected to the Polkadot relay chain.
The more users participate in the project's Crowdloan, the sooner the project can obtain a slot, share the consensus security of Polkadot, and achieve cross-chain interoperability with other parachains through Relay Chain earlier, which will increase the value of the project's token and increase the number of users involved in the construction of the project, further enhance the safety and value of the project and initiate the "flywheel effect".
The Large-scale Proliferation of DAOs Brought by Nutbox
Nutbox Walnut Network is modularizing the Crowd-Staking method pioneered by Peanut to solve the Bootstrap problem in more application-oriented DAOs.
From PoW to PoS, Bootstrap can be realized with lower operating costs. From PoS to liquidity mining, there is no need to create a complex underlying blockchain system to bring Bootstrap to the network. From liquidity mining to Crowd-Staking, there is not even the need to write smart contracts to achieve Bootstrapping.
We believe that under the promotion of Nutbox Walnut Network, Crowd-Staking will soon become the next generation of Bootstrap method, promoting the large-scale proliferation of application-oriented DAO in the Web3.0 era, and bring about the next outbreak of blockchains.
References
「1」《BOOTSTRAPPING A DECENTRALIZED AUTONOMOUS CORPORATION: PART I》https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274
「2」《BOOTSTRAPPING AN AUTONOMOUS DECENTRALIZED CORPORATION, PART 2: INTERACTING WITH THE WORLD》https://bitcoinmagazine.com/technical/bootstrapping-an-autonomous-decentralized-corporation-part-2-interacting-with-the-world-1379808279
「3」《BOOTSTRAPPING A DECENTRALIZED AUTONOMOUS CORPORATION, PART 3: IDENTITY CORP》https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-3-identity-corp-1380073003
「4」https://www.stakingrewards.com/
Translated from: Nutbox专栏 | 从PoW到Crowd-Staking，几种Bootstrap方式及其演变
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