Executive Summary
- NEAR Protocol stands as a Layer-1(L1) smart contract blockchain that couples a state-of-the-art sharded architecture with an emphasis on offering a user experience reminiscent of Web2 platforms. While maintaining the security and decentralization integral to blockchains, NEAR aims to surpass the capabilities of prior chains, such as Ethereum, in terms of usability, efficiency, and scalability. Recognizing and aiming to overcome Ethereum's limitations, NEAR incorporates sharding. This key distinction allows the blockchain to significantly enhance its throughput, accommodating a more substantial transaction volume by dividing the blockchain into smaller, concurrent shards.
- A pivotal differentiator for the NEAR Protocol, sharding was introduced in November 2021 as Nightshade. This technique allows validators to process only transactions specific to their assigned shards, enabling potentially infinite scalability. For end users and investors, Nightshade ensures quicker transaction speeds at reduced fees. Diverging from traditional sharding methods that split the blockchain into multiple states, NEAR's design maintains the blockchain as a singularly sharded entity. Additionally, a synchronized state mechanism ensures that a change in one block's state prompts adjustments in other shards correspondingly.
- In March 2023, NEAR unveiled the Blockchain Operating System (BOS), a groundbreaking open-source platform that allows developers to craft applications across various blockchain environments using well-known programming languages. Moreover, it provides crypto users with an experience reminiscent of Web 2. Designed to be inclusive, BOS appeals toWeb3 veterans and those new to the decentralized web. By ensuring easy onboarding, robust security, and seamless cross-chain interactions, BOS is setting a new paradigm for Web 3 application development.
- The NEAR Foundation, with the inception of the NEAR Digital Collective (NDC) and a pivot to community DAOs, is pioneering a transition to a more democratized and decentralized framework compared to the conventional Board-based system. Launched in Q3 2022, the NDC represents a concerted effort to decentralize decision-making within the NEAR network, emphasizing transparency through defined treasury management and embracing decentralized governance with on-chain voting. Furthermore, the NDC aspires to advance validator decentralization and stimulate the development of the core protocol and infrastructure.
- Looking forward into 2024, the Near protocol will introduce several pivotal milestones, including the next step in Nightshade sharding, meta transactions, zero-balance accounts, a Global Storage proposal, and more.
Introduction to Near
NEAR Protocol is a Layer-1 (L1) smart contract blockchain with a bleeding-edge sharded design and an emphasis on an intuitive Web 2-like customer experience, all while preserving the security and decentralization users expect with a blockchain. Established in 2018, it sets out to achieve improved usability, efficiency, and scalability over preceding chains like Ethereum. Founded by Illia Polosukhin and Alexander Skidanov andspear headed by the Near Collective, the NEAR Protocol was envisioned to serve as a community-driven cloud computing PoS blockchain and a decentralized hub tailored explicitly for hosting innovative decentralized applications.
The central motivation behind NEAR's technology is to prevent network congestion and furnish a conducive environment for developers, thereby promoting on-chain protocol development. Early on, NEAR identified certain operational challenges in Ethereum, particularly related to network congestion and high/volatile gas fees, that it looked to solve. To do so, Near turned towards sharding.
A key differentiator for NEAR, sharding, in essence, provides the ability for a blockchain to increase its throughput and handle a larger number of transactions by partitioning the blockchain into smaller parallel shards. In its pursuits, Near introduced an original approach to sharding in November 2021 known as Nightshade, initially unveiled as Simple Nightshade. The underlying principle of Nightshade is that validators are not burdened with the task of processing every incoming transaction. Instead, they only handle transactions that are within specific shards. By doing so, Nightshade paves the way for theoretically limitless scalability. But what does this mean for the end user or investor? Primarily, this approach, which is entirely abstracted from the end-user experience, allows for reduced transaction fees while ensuring rapid transaction speeds.
Additionally, Near recently launched a new initiative in early 2023 known as the Blockchain Operating System (BOS). This development represents a significant shift in how we perceive blockchain platforms. The BOS is designed to integrate seamlessly with various blockchain systems while facilitating decentralization and discoverability, which have historically been impossible to achieve together.
Essentially, the BOS is grounded in blockchain technology but broadens its application by acting as a universal layer, making it adaptable to different blockchain frameworks. One of its primary features is the provision of a decentralized platform for front-end development. This platform aims to simplify the creation of blockchain applications by emphasizing clarity and flexibility.
One of the core advantages of BOS is its potential to decentralize user interactions, improve security protocols, and enhance the modularity of components. Additionally, it prioritizes compatibility across diverse blockchains, presenting developers with a more intuitive and straightforward development environment.
NEAR Technologies
Blockchain Operating System (BOS)
In March 2023, the NEAR protocol introduced the Blockchain Operating System (BOS), an open-source platform empowering developers with the flexibility to build across diverse blockchain environments using familiar programming languages and equipping crypto users with a familiar Web 2 UX. The BOS is designed to be inclusive and democratize the open, catering not only to seasoned web3 enthusiasts but also to the broader audience who might be newer to the decentralized web. A significant breakthrough in the system is eliminating the immediate need for a new user to own any cryptocurrency, substantially reducing the friction of user onboarding.
Additionally, the BOS interface streamlines access and navigation, making it more user-friendly for both developers and the general populace. Moreover, it enables users to search through a portal to diverse communities and applications, all the while prioritizing data privacy. Further, the BOS's user-centric design, coupled with its focus on accessibility, does not just simplify the onboarding experience but also bolsters the discovery of new applications.
Remarkably, the BOS functions both as a development platform and a social network. It’s an environment where users can both deploy and unearth new applications. In delivering straightforward onboarding procedures, unmatched security, and fluid interactions across all chains, the BOS is reshaping the framework for constructing Web 3 applications.
BOS Under the Hood
The Blockchain Operating System (BOS) by NEAR seeks to redefine the landscape of Web3 applications through its unique architecture based on three pivotal elements: components, blockchains, and gateways. Here, we will delve into the significance of each element and examine how they collectively shape the BOS framework.
Components: The Building Blocks of BOS
Components exist at the decentralized application (dApp) layer and can be equated with notable platforms such as Lido, Uniswap, Compound, and others. They stand out for their on-chain storage, high degree of transparency, and their ability for developers to fork these applications, harnessing their functionalities and composability to craft comprehensive web applications. Storing the entirety of a component's code on-chain not only ensures auditability but also bolsters security. With the code readily available for scrutiny in blockchain explorers, users can operate these applications locally, enjoying resilience against potential censorship and a streamlined user experience. This ability to natively audit and locally run the applications represents a paradigm shift in the user-app relationship.
Blockchains: The Underlying Infrastructure
The versatility of components and the BOS becomes apparent in their ability to interact with numerous blockchains and smart contracts instead of just one chain. Currently, BOS offers compatibility with all EVM chains, such as Ethereum, Polygon, Arbitrum, and Optimism, as well as, the native NEAR platform. As EVM chains dominate the TVL in the DeFi space, the BOS’ ability to work across nearly all enables users to tap into nearly all the liquidity and top dApps in the crypto economy. NEAR's capability to efficiently and cost-effectively store HTML/CSS/JS makes it the preferred choice for hosting app source codes.
Gateways: Bridging the Gap to Decentralization
Gateways, the third pillar of the BOS, facilitate the delivery of decentralized front-ends to a broader audience. Each gateway is underpinned by a bespoke virtual machine (VM) equipped to load and run frontends for protocols, be they Ethereum-based, Layer 2 solutions, oralt-L1 platforms like NEAR. All code pertaining to these frontends finds its home on the NEAR blockchain. The gateways are diverse, ranging from wallets and portfolio tools to distinct applications like SWEAT. They cater to tasks as rudimentary as adding swap functionality or as intricate as erecting decentralized app stores. Integrating this expansive functionality requires just the addition of a JavaScript library, followed by a selection of desired app front-ends. Prominent gateway exemplars include near.org, bos.gg, near.social, Cantopia, and nearpad.dev.
The decentralization of composable front ends enabled by the BOS is unique to Near, filling a conspicuous and much-needed void in the crypto arena. Instead of relying on centralized data servers, these front ends are blockchain-stored, promoting both composability and resistance to potential censorship. Historical instances, such as Uniswap's token delisting and the sanctions imposed on Tornado Cash, underscore the vulnerabilities of front ends. BOS’s decentralized approach allows developers the flexibility to fork these front ends and build in the truly OSINT environment that the cryptocurrency movement was built upon.
BOS Advantages
The BOS aims to integrate decentralization with discoverability and developer flexibility. Central to the BOS framework is its array of Web3 development tools that are crafted with the intent of pushingWeb3 mainstream. From the onset, the system is designed to enhance user onboarding, improve cross-chain development and app discoverability, and create a seamless UX for Web3 users.
This last point on abstracting away different blockchains for a seamless Web3 experience has benefits beyond simply improving UX. It can potentially also reduce the liquidity fragmentation and tribalism associated with a fragmented crypto economy built around disparate, siloed blockchains. The BOS proposes a solution to this by striving for a consistent user experience across multiple blockchains and allowing developers globally to access and implement various Web3 components. With users and developers now(potentially) unable to discern which blockchain they are using, there is no longer a need to promote one over the other.
None of this is possible without the composability offered by the BOS. The system aims to be chain and language-agnostic, allowing developers to reuse and adjust different components while utilizing the language of their choice. The BOS supports a variety of languages for smart contract development, including JavaScript, Rust, Assembly Script, and Solidity. Complementing this are their collaborations with established cloud providers, namely Google, Seracle, and Alibaba Cloud, to make transitioning from Web2 to Web3 as comfortable as possible.
In addition, NEAR has initiated the NEAR DevHub, a platform envisioned as a resource hub for developers. Preliminary outputs from this initiative include sponsored hackathons and the establishment of community groups.
Thresholded Proof of Stake
The NEAR Protocol operates on a distinctconsensus mechanism known as "Thresholded Proof of Stake" (TPoS).Similar to other PoS implementations, TPoS still uses validators, who muststake NEAR tokens to participate, to validate transactions and ensure theintegrity/security of the network. However, within the TPoS environment,validators can assume one of four pivotal roles:
- Chunk Producers: Their primary responsibility is to authenticate transactions on individual shards, subsequently crafting a chunk, often referred to as a "shard block", from their designated shard.
- Block Producers: These validators gather chunks from their chunk-producing counterparts associated with discrete shards. Their function culminates in the production of a block, which is then added to the primary chain.
- Hidden Validators: Operating under a veil of confidentiality, these validators authenticate random shards — shards whose identity remains a secret to them and is undisclosed to the public. This veil serves a dual purpose. Firstly, it considerably complicates the task for any malevolent entities attempting to compromise them. Secondly, it robustly augments the chain's overall security measures.
- Fishermen: Actively overseeing certain chain segments, these validators act as the guardians against fraudulent activities. They constantly monitor, ready to flag any nefarious activities. Interestingly, their operational requirements are modest — a minimal stake. However, this role, though critical, doesn't confer any rewards.
Central to TPoS is its innovative auction system employed to select validators. This methodology, in essence, discourages the practice of pooling. When validators amass resources, they not only amplify their individual rewards but also consolidate control over the chain. Such centralization runs counter to the foundational principles of blockchain, which emphasize distributed control. The TPoS design confronts this challenge head-on by placing natural barriers against pooling.
Additionally, TPoS tackles the issue of consensus forking — a scenario in which multiple validators simultaneously contribute blocks to the chain. Such events can elongate the time required for transaction finality. By minimizing the possibility of these forking instances, TPoS ensures swifter transaction finality.
Validator Requirements
Validators bear the critical responsibility of validating and executing transactions across the entirety of NEAR's sharded blockchain. Additionally, they monitor their peers (other validators), ensuring no invalid blocks are produced or alternate chains are formed. Validators found compromising network stability undergo "slashing," where part or all of their staked assets are confiscated. To compensate for their services and inherent risks, NEAR validators receive a inflationary protocol rewards, amounting to 4.5% of the total supply annually.
Given the complexity of the validator role, there are stringent hardware requirements (e.g. costs) for anyone looking to run one. To effectively run a validator, a robust system configuration, consisting of an 8-Core CPU, 16GB of RAM, and 1 TB SSD storage, is necessary. Current estimates indicate that the monthly expenditure for hosting a block-producing validator node stands at $330+.
Potential and existing validators can gain insights into the current active validators by visiting the Explorer. For those considering becoming a block-producing validator, the seat price is a crucial factor. This price is derived from the 300th proposal and is subject to real-time updates, which are also available for viewing on the Explorer. Notably, only validator nodes that stake an amount surpassing this seat price are eligible to join the active validator cohort.
On the other hand, the more specialized chunk-only producers, introduced in September 2022, have lower hardware and stake requirements. The introduction of chunk-only producers increased the network's validator capacity ~3x, with ~120 chunk-only producers. This rise invalidating entities can be attributed to the lowered operational requirements for these validators (an 8-core CPU, with 16GB of RAM, and 500 GB SSD of storage) and a consequent reduction in the validator seat price.
Validator Selection and Seat Price
Thresholded Proof of Stake (TPoS) forms the backbone of the NEAR Protocol’s consensus mechanism. Designed to foster increased network engagement, TPoS distributes rewards equitably by capping them per shard relative to the staked NEAR quantity. This system, in theory, curbs the dominance of larger validator pools by proffering higher rewards for shards with minimal stakes.
Furthermore, the concept of storage staking is integral to the NEAR ecosystem. Here, account owners pay for smart contract storage through tokens. These tokens, corresponding to the volume of stored data, are locked, consequently reducing both the tokens available for general staking and the overall circulating supply. As of Q3 2023, approximately 600 million NEAR tokens have been staked, encompassing about 51% of the entire supply. This staked amount is distributed among 217 validators, seemingly highlighting the protocol's decentralized nature.
TPoS endeavors to cultivate an extensive participant pool, comprised of witnesses (an individual participant) that are designated for election during consensus deliberations. These elections follow a prescribed structure over a 24-hour period, segmented into 1,440 slots, implying a slot a minute. An impressive tally of 1,024 witnesses is allocated per block, cumulatively providing 1,474,560 individual witness opportunities (seats). The price of each seat is inherently anchored to the aggregate NEAR staked by the aspiring witnesses. A compulsory lock-in period of three days is imposed on any NEAR earmarked for this purpose.
This design, while intended to promote decentralization, is not immune to centralizing forces. Let’s look at an example. If each of the 1,474,560 witnesses pledged 10 NEAR, the requisite seat cost would be 10 NEAR. However, if this stake were concentrated among ten individuals, each staking in 1,474,560 tokens, the seat value would still remain unchanged at 10 NEAR, but the distribution and power skew dramatically. In the latter scenario, while the price-per-seat is comparable, each of these ten participants holds a staggering 147,456 seats.
Actual Validator Decentralization
NEAR Protocol has ~ 217 validators, a relatively small absolute number when compared to some other blockchains. This inevitably leads to a certain level of centralization, especially if a significant percentage of these validators are hosted by a few entities. The empirical results regarding the efficacy of TPoS’ ability to mitigate pooling and enhance decentralization are mixed. Data from 2023 highlights that the lion's share (~35%) of the stake is held by the top eight staking pools in NEAR. Such concentration is arguably similar to Bitcoin’s PoW hashrate distribution and other PoS designs, like Ethereum. However, a retrospective glimpse to early2022 shows that approximately 33% was under the control of just six entities, suggesting a gradual yet positive trajectory for overall stake distribution.
This model certainly accentuates network involvement but seemingly falters in promoting true decentralization. While incentivizing widespread participation potentially aids in spreading block validation tasks across the NEAR Protocol, it doesn't necessarily decentralize the decision-making authority. The inherent design of NEAR’s TPoS ensures that seats are apportioned based on the NEAR amount each entity stakes. Consequently, entities with large stakes invariably dominate the majority of the available seats. Additionally, the concentration of validators among a few hosting sites can introduce central points of failure and diminish the decentralized ethos of blockchain. Per the image below, three hosting services account for over 50% of Near’s validator set. Because Near’s hardware requirements and seat price (~26,600 NEAR or ~$26,600 USD at the time of writing) preclude most individuals from becoming a validator, a more balanced distribution among several providers would be preferable.
Nightshade Sharding
The NEAR Protocol's solution to scalability isa sharding technique, which seeks to alleviate computational strain bysegmenting the network's data into more manageable fragments, termed"shards." While many sharded blockchain architectures operate eachshard as an independent blockchain with its unique set of validators, NEAR hasintroduced an innovative variant dubbed "Nightshade."
To fully appreciate the intricacies of shardedarchitectures, it's essential to delve into the functions of nodes within ablockchain network and the accruing resource demands they shoulder over time.Nodes, in their quintessential role, shoulder three primary responsibilities inthe decentralized expanse of a blockchain:
- Compute: Engaging in the processing of incoming transactions.
- Consensus: Disseminating validated blocks to the interconnected nodes spanning the network.
- Storage: Chronicling the comprehensive state and historical tapestry of the entire network.
Each facet of a node's operation, however, isaccompanied by escalating demands. A surge in transactional volume necessitatesenhanced computational prowess, the relaying of blocks and transactionsamplifies bandwidth requirements, and an expanding ledger accentuates storageprerequisites.
Within a typical sharded blockchain infrastructure, each shard becomes a custodian of its localized state, ensuring it only broadcasts transactions intrinsic to its jurisdiction. This delegation inherently lightens the resource commitment on individual nodes and augments scalability. Nevertheless, it also ushers in an intricate challenge - the need for efficient cross-shard collaboration. In a dynamically sharded environment, it's imperative for shards to remain cognizant of the location of all or specific states continuously and synchronize in tasks like validator selection and punitive measures.
Frameworks such as Ethereum and Polkadot have sought to streamline this coordination by anchoring their architecture around a central Beacon or Relay chain, respectively. These serve as epicenters of communication, ensuring fluid interoperability and coordination among the myriad shards. However, there are limiting factors around the scalability of such a design.
However, the ingenuity of NEAR’s Nightshade implementation lies in its differing approach to shards and cross-shard consensus. Here's a more granular look into why it stands out:
● Unified Blockchain Sharding :Unlike some sharding methodologies that segment the blockchain into multiple states, NEAR's approach ensures the blockchain remains sharded as a single-state entity.
● Inter-shard Transactions: Every block within the NEAR protocol can accept transactions from all other shards. This not only promotes interoperability but also enhances the holistic functioning of the network.
● Synchronized Shard States: An intriguing feature of NEAR’s protocol is its synchronized state mechanism. When the state of one block undergoes a change, other shards within the network are triggered to adjust their states correspondingly.
Instead of segmenting the chain, Nightshade functions as one cohesive blockchain. In this setup, every block amalgamates transactions from all shards and synchronously updates the complete state of every shard. This design choice ensures no single node is responsible for downloading the entire network state.
The implications of Nightshade's design are profound, conferring NEAR with three distinct advantages:
● Enhanced Network Stability: With fewer opportunities for network forking, security gets a substantial boost.
● Optimized Speed: Since network participants manage only their respective shards, the network operates at an expedited pace.
● Improved Cross-Shard Composability: This feature allows for better interoperability between different shards.
NEAR validators are relieved from constantly downloading data whenever the complete state of a block undergoes changes. Instead, they efficiently maintain the state of individual shards, treating them as distinct data segments specific to each shard.
Ethereum, with its Beacon Chain model, mandates that each transaction receives confirmation by the beacon chain itself. This architecture inherently caps scalability, contingent on the beacon chain's throughput capacity. Contrarily, NEAR's interblock sharding method removes such constraints. It's independent of a central chain for transaction validation, thus eliminating the bottleneck prevalent in Ethereum’s system.
Stages of Nightshade
The Initial Phase: Simple Nightshade
The maiden phase, termed "Simple Nightshade," aimed to shard the blockchain's state without altering its processing. Validators remain obligated to process each transaction individually, but the protocol bifurcates the network into four separate shards. This first step was notably executed in November 2021, marking the Phase 0 launch, which expedited transactions for validators by a commendable fourfold.
The Evolution to Phase 1
Phase 1, released in Q3 2022, added a fresh validator type to the protocol's arsenal: chunk-only producers. Their primary contribution lies in enabling individuals, who might not possess ample NEAR to operate a full validator node, to produce 'chunks'—partial blocks derived from a shard. These chunk-only producers, in essence, resonate with NEAR's core philosophy of emphasizing usability. They effectively level the playing field, removing some of the biggest obstacles that prevented many from actively participating in the validation process.
The Anticipated Phase 2
The subsequent phase, Phase 2, is poised to define the final stage of network validators. In this advanced stage, both the state and its processing will be comprehensively sharded. This transformation ensures validators are no longer tethered to tracking every shard, thereby lowering the hardware prerequisites for running a block producer on NEAR. This not only democratizes participation but also underpins the broader goals of decentralization and fortification of the network's security.
The Pinnacle: Dynamic Resharding in Phase 3
The final frontier, Phase 3, is charted for a~2024 rollout and promises dynamic resharding capabilities. This essentially confers the network with the agility to merge or split shards based on real-time resource utilization. Underutilized shards can seamlessly integrate with peers to optimize network efficiency.
NEAR Token
Purpose/Use Cases
The protocol's native token, NEAR, powers the smart contracts that get executed on the network. NEAR tokens are somewhat analogous to ETH in the Ethereum network in this way. However, a distinct fee-burning mechanism is employed where 70% of transaction fees are burned, and the remaining 30% are directed to the originating contract (developer rewards).This is a critical distinction when compared to other smart contract blockchains, as they do not have direct developer incentives “baked into” the protocol. As the image below illustrates, the amount of gas used by the network has seen a dramatic increase in Q2 2023, translating to more NEAR burned and more developer rewards all around.
Transaction fees in NEAR are gauged based on network compute and bandwidth capacities, diverging from Ethereum's auction-centric approach. Storage fees, an additional expenditure, are attributed to the consumption of storage space.
NEAR incorporates both inflationary and deflationary dynamics without a predetermined token supply cap. The network enforces an annual inflation rate of 5%, directing the lion's share (90%) of the rewards to validators and apportioning the remaining to the protocol treasury. Current data reveals that about 84% of NEAR tokens are in circulation. The expected complete treasury unlocking is slated for October2025. However, the market introduction of these tokens depends on treasury distribution decisions.
For stakeholders, NEAR offers an annual yield of 9.4%, translating to a real yield of 4.4%.
Governance and Decentralization
Governance in any blockchain ecosystem is a nuanced and intricate process. The mechanism determines how decisions are made and who gets to make them. NEAR’s governance approach is bifurcated into two realms: technical and resource governance.
Technical Governance
Technical governance is paramount for the security of the blockchain. It helps create the check-and-balances that dictate who can make regular protocol changes and updates but also who may be able to respond to bugs and hacks. Technical governance encompasses:
- Bug Fixes: Rectifying any issues in the code that could be detrimental to the functioning of the network.
- System Updates: Introducing new components or improving existing ones to enhance the network's performance.
- Code Enhancements: Refining the existing codebase for efficiency and effectiveness.
The challenge with technical governance lies in its decentralized nature. Since every node (regardless of its capacity)needs to adopt and implement these changes, achieving consensus is paramount. Failure to adopt these changes risks creating a network fork, where nodes operate on different versions of the blockchain.
A unique feature of NEAR’s governance model, the Reference Maintainer, plays a crucial role in technical upgrades. Chosen by the Foundation Board, this entity essentially acts as the steward of technical evolution. However, to ensure checks and balances, there's a provision for the community to intervene. A two-week window allows token holders to veto major upgrades, ensuring community sentiments are considered.
Resource Governance
This revolves around how the funds and resources of the NEAR ecosystem are allocated and utilized. Proper resource governance helps grow the ecosystem, prevent corruption, and promote the development of key infrastructure.
- Protocol Treasury: This is where the funds originally assigned to the NEAR Foundation are held. These funds are at the disposal of the Foundation to distribute as they see fit.
- Grants Program: A notable initiative by the NEAR Foundation, the program saw a substantial allocation of grants, with a prominent focus on gaming, metaverse, and infrastructural undertakings.
Prominent beneficiaries of the grant include:
- AERX: Venturing into the realm of decentralized social media.
- Solace: A unique wallet proposition with a focus on user-friendliness and security.
- Deep Skills: A DAO initiative aimed at bridging the employment gap in the decentralized space.
- Arcnes: An incubator to foster gaming innovations on the blockchain.
NEAR Digital Collective
The blockchain world has witnessed a rapid shift towards decentralized governance and funding in recent times, and NEAR Protocol has been at the forefront of this movement. With the establishment of the NEAR Digital Collective (NDC) and a shift towards community DAOs, the NEAR Foundation is making significant strides towards creating a more democratized and decentralized ecosystem when compared to the previous system with a standard Board.
The NDC was conceived as an essential step towards democratizing decision-making within the NEAR network. Formed in Q32022, this entity seeks to improve transparency with clear treasury management and a commitment to decentralized governance via an on-chain voting process.
This emphasis on transparency is made evident by the weekly On Chain Data Report, which presents aggregated analytics and other key metrics within the Near ecosystem. The NDC also has goals to foster validator decentralization and promote core protocol and infrastructure development.
The NDC's architecture comprises five pillars:
- Voting Body: This includes every active NEAR account.
- House of Merit: A body of recognized community members chosen by their peers.
- Council of Advisors: Experienced advisors to guide the House of Merit.
- Transparency Commission: Ensuring checks and balances.
- Community Treasury: Financial support for grassroots initiatives.
The NDC’s first elections were held in 2023,with results expected in early October, which looked to fill the roles outlined in the table below.
Another big development for Near governance in2023 was its transformation towards DAO-driven governance. These DAOs,including Marketing DAO, Developer Governance DAO, and Creatives DAO, willhandle significant aspects of decision-making, including:
- Marketing DAO: Concentrates on content and social media.
- Developer Governance DAO: Works towards decentralizing the developer ecosystem.
- Creatives DAO: Provides a platform for artists and creators to thrive.
To ensure a smooth transition and effective governance model, the Governance Working Group (GWG) has been set up. It includes community members dedicated to refining governance paradigms, with the NEAR Foundation providing support and resources.
The NEAR protocol's shift towards decentralized governance and community-driven funding is a promising evolution. The establishment of entities like the NDC and community DAOs indicates a commitment to building an inclusive, transparent, and decentralized ecosystem. It's a significant stride towards ensuring that all stakeholders have a voice in the evolution and administration of the NEAR platform. As blockchain technology continues its march into mainstream adoption, NEAR's initiatives seta commendable example for other projects in the space.
Roadmap and Progression
Since its inception in 2018, the NEAR Protocol has undergone numerous significant changes in its pursuit of industry-leading scalability and robust decentralization.
The Past
Mainnet Rollout
- Phase 0 (April 2020): This marked the initiation of the NEAR mainnet, albeit in a restricted Proof of Authority (PoA) format.
- Phase 1 (September 2020): This phase began the process of onboarding third-party validators, removing the restrictions in the PoA model.
- Phase 2 (October 2021): Full community governance was realized as token holders could now participate in on-chain votes, thereby decentralizing decision-making.
Nightshade Sharding: A Journey in Phases
- Simple-Nightshade (Phase 0, November 2021): The introduction of the sharded architecture and foundation for future phases.
- Phase 1 (Q3 2022): With the introduction of chunk-only producers, NEAR further decentralized its network. This approach aimed to break away from the previous restriction of 100 validators, paving the way for enhanced network performance.
The Present
- Phase 2 (Projected 2023): This phase aims to redefine the roles and responsibilities of validators. By eliminating the need for validators to monitor every shard, it's poised to lower hardware prerequisites, thus making network participation more inclusive and accessible.
The Future
- Phase 3 (2024): The introduction of adaptive scalability in which the network will be able to merge or split shards based on usage. This dynamic reconfiguration is expected to significantly optimize network efficiency.
Below are a few of the additional milestones, beyond Nightshade, that the Near protocol looks to release in the near future.
Meta Transactions: Aiming to enhance user onboarding, meta transactions will empower third parties to cover the transaction costs. This ensures that newcomers to NEAR apps can start their journey without initial NEAR tokens, breaking barriers to entry.
Zero-balance Account: By allowing zero-balance accounts, NEAR intends to simplify the account creation process. This move is particularly strategic for apps and wallets that wish to ease the onboarding process for new users.
Secp256r1 Keys: With this initiative, iPhone users will enjoy an unprecedentedly smooth onboarding experience. By supporting Secp256r1 keys, iPhone users can gain an implicit on-chain account without the traditional hassle of account creation via wallets. This approach is poised to set a new gold standard in user experience, surpassing even some of the best Web2 practices.
Global Storage: Addressing inefficiencies in storage costs, global storage is NEAR’s answer to redundant storage staking costs arising from deploying identical smart contracts multiple times. By allowing developers to burn tokens for a one-time deployment, subsequent uses won’t incur additional storage staking costs. It’s a solution that's not only economical but also resource-efficient.
Running wasm in wasm: Enhancing smart contract interactions, this feature will enable native NEAR contracts to load and execute another smart contract within its execution seamlessly. It’s a nod to synchronous interactions, mirroring the capabilities present in Aurora.
Conclusion/Final Thoughts
The NEAR Protocol, through its sophisticated sharded architecture and commitment to offering a Web 2-like user experience, has firmly positioned itself at the forefront of the L1 landscape. By incorporating unique sharding methodologies like Nightshade and launching progressive platforms like the Blockchain Operating System, NEAR consistently demonstrates its dedication to merging usability with the inherent security of decentralized systems. Moreover, with the establishment of the NEAR Digital Collective and its shift towards more transparent and democratized governance, NEAR embodies a vision that transcends traditional blockchain constraints. As we anticipate the advancements slated for 2024, it becomes clear that NEAR's trajectory is one of continuous innovation and commitment to refining the decentralized landscape for developers, users, and the broader community.
Disclaimer: This report was commissioned by the NEAR Foundation. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
Executive Summary
- NEAR Protocol stands as a Layer-1(L1) smart contract blockchain that couples a state-of-the-art sharded architecture with an emphasis on offering a user experience reminiscent of Web2 platforms. While maintaining the security and decentralization integral to blockchains, NEAR aims to surpass the capabilities of prior chains, such as Ethereum, in terms of usability, efficiency, and scalability. Recognizing and aiming to overcome Ethereum's limitations, NEAR incorporates sharding. This key distinction allows the blockchain to significantly enhance its throughput, accommodating a more substantial transaction volume by dividing the blockchain into smaller, concurrent shards.
- A pivotal differentiator for the NEAR Protocol, sharding was introduced in November 2021 as Nightshade. This technique allows validators to process only transactions specific to their assigned shards, enabling potentially infinite scalability. For end users and investors, Nightshade ensures quicker transaction speeds at reduced fees. Diverging from traditional sharding methods that split the blockchain into multiple states, NEAR's design maintains the blockchain as a singularly sharded entity. Additionally, a synchronized state mechanism ensures that a change in one block's state prompts adjustments in other shards correspondingly.
- In March 2023, NEAR unveiled the Blockchain Operating System (BOS), a groundbreaking open-source platform that allows developers to craft applications across various blockchain environments using well-known programming languages. Moreover, it provides crypto users with an experience reminiscent of Web 2. Designed to be inclusive, BOS appeals toWeb3 veterans and those new to the decentralized web. By ensuring easy onboarding, robust security, and seamless cross-chain interactions, BOS is setting a new paradigm for Web 3 application development.
- The NEAR Foundation, with the inception of the NEAR Digital Collective (NDC) and a pivot to community DAOs, is pioneering a transition to a more democratized and decentralized framework compared to the conventional Board-based system. Launched in Q3 2022, the NDC represents a concerted effort to decentralize decision-making within the NEAR network, emphasizing transparency through defined treasury management and embracing decentralized governance with on-chain voting. Furthermore, the NDC aspires to advance validator decentralization and stimulate the development of the core protocol and infrastructure.
- Looking forward into 2024, the Near protocol will introduce several pivotal milestones, including the next step in Nightshade sharding, meta transactions, zero-balance accounts, a Global Storage proposal, and more.
Introduction to Near
NEAR Protocol is a Layer-1 (L1) smart contract blockchain with a bleeding-edge sharded design and an emphasis on an intuitive Web 2-like customer experience, all while preserving the security and decentralization users expect with a blockchain. Established in 2018, it sets out to achieve improved usability, efficiency, and scalability over preceding chains like Ethereum. Founded by Illia Polosukhin and Alexander Skidanov andspear headed by the Near Collective, the NEAR Protocol was envisioned to serve as a community-driven cloud computing PoS blockchain and a decentralized hub tailored explicitly for hosting innovative decentralized applications.
The central motivation behind NEAR's technology is to prevent network congestion and furnish a conducive environment for developers, thereby promoting on-chain protocol development. Early on, NEAR identified certain operational challenges in Ethereum, particularly related to network congestion and high/volatile gas fees, that it looked to solve. To do so, Near turned towards sharding.
A key differentiator for NEAR, sharding, in essence, provides the ability for a blockchain to increase its throughput and handle a larger number of transactions by partitioning the blockchain into smaller parallel shards. In its pursuits, Near introduced an original approach to sharding in November 2021 known as Nightshade, initially unveiled as Simple Nightshade. The underlying principle of Nightshade is that validators are not burdened with the task of processing every incoming transaction. Instead, they only handle transactions that are within specific shards. By doing so, Nightshade paves the way for theoretically limitless scalability. But what does this mean for the end user or investor? Primarily, this approach, which is entirely abstracted from the end-user experience, allows for reduced transaction fees while ensuring rapid transaction speeds.
Additionally, Near recently launched a new initiative in early 2023 known as the Blockchain Operating System (BOS). This development represents a significant shift in how we perceive blockchain platforms. The BOS is designed to integrate seamlessly with various blockchain systems while facilitating decentralization and discoverability, which have historically been impossible to achieve together.
Essentially, the BOS is grounded in blockchain technology but broadens its application by acting as a universal layer, making it adaptable to different blockchain frameworks. One of its primary features is the provision of a decentralized platform for front-end development. This platform aims to simplify the creation of blockchain applications by emphasizing clarity and flexibility.
One of the core advantages of BOS is its potential to decentralize user interactions, improve security protocols, and enhance the modularity of components. Additionally, it prioritizes compatibility across diverse blockchains, presenting developers with a more intuitive and straightforward development environment.
NEAR Technologies
Blockchain Operating System (BOS)
In March 2023, the NEAR protocol introduced the Blockchain Operating System (BOS), an open-source platform empowering developers with the flexibility to build across diverse blockchain environments using familiar programming languages and equipping crypto users with a familiar Web 2 UX. The BOS is designed to be inclusive and democratize the open, catering not only to seasoned web3 enthusiasts but also to the broader audience who might be newer to the decentralized web. A significant breakthrough in the system is eliminating the immediate need for a new user to own any cryptocurrency, substantially reducing the friction of user onboarding.
Additionally, the BOS interface streamlines access and navigation, making it more user-friendly for both developers and the general populace. Moreover, it enables users to search through a portal to diverse communities and applications, all the while prioritizing data privacy. Further, the BOS's user-centric design, coupled with its focus on accessibility, does not just simplify the onboarding experience but also bolsters the discovery of new applications.
Remarkably, the BOS functions both as a development platform and a social network. It’s an environment where users can both deploy and unearth new applications. In delivering straightforward onboarding procedures, unmatched security, and fluid interactions across all chains, the BOS is reshaping the framework for constructing Web 3 applications.
BOS Under the Hood
The Blockchain Operating System (BOS) by NEAR seeks to redefine the landscape of Web3 applications through its unique architecture based on three pivotal elements: components, blockchains, and gateways. Here, we will delve into the significance of each element and examine how they collectively shape the BOS framework.
Components: The Building Blocks of BOS
Components exist at the decentralized application (dApp) layer and can be equated with notable platforms such as Lido, Uniswap, Compound, and others. They stand out for their on-chain storage, high degree of transparency, and their ability for developers to fork these applications, harnessing their functionalities and composability to craft comprehensive web applications. Storing the entirety of a component's code on-chain not only ensures auditability but also bolsters security. With the code readily available for scrutiny in blockchain explorers, users can operate these applications locally, enjoying resilience against potential censorship and a streamlined user experience. This ability to natively audit and locally run the applications represents a paradigm shift in the user-app relationship.
Blockchains: The Underlying Infrastructure
The versatility of components and the BOS becomes apparent in their ability to interact with numerous blockchains and smart contracts instead of just one chain. Currently, BOS offers compatibility with all EVM chains, such as Ethereum, Polygon, Arbitrum, and Optimism, as well as, the native NEAR platform. As EVM chains dominate the TVL in the DeFi space, the BOS’ ability to work across nearly all enables users to tap into nearly all the liquidity and top dApps in the crypto economy. NEAR's capability to efficiently and cost-effectively store HTML/CSS/JS makes it the preferred choice for hosting app source codes.
Gateways: Bridging the Gap to Decentralization
Gateways, the third pillar of the BOS, facilitate the delivery of decentralized front-ends to a broader audience. Each gateway is underpinned by a bespoke virtual machine (VM) equipped to load and run frontends for protocols, be they Ethereum-based, Layer 2 solutions, oralt-L1 platforms like NEAR. All code pertaining to these frontends finds its home on the NEAR blockchain. The gateways are diverse, ranging from wallets and portfolio tools to distinct applications like SWEAT. They cater to tasks as rudimentary as adding swap functionality or as intricate as erecting decentralized app stores. Integrating this expansive functionality requires just the addition of a JavaScript library, followed by a selection of desired app front-ends. Prominent gateway exemplars include near.org, bos.gg, near.social, Cantopia, and nearpad.dev.
The decentralization of composable front ends enabled by the BOS is unique to Near, filling a conspicuous and much-needed void in the crypto arena. Instead of relying on centralized data servers, these front ends are blockchain-stored, promoting both composability and resistance to potential censorship. Historical instances, such as Uniswap's token delisting and the sanctions imposed on Tornado Cash, underscore the vulnerabilities of front ends. BOS’s decentralized approach allows developers the flexibility to fork these front ends and build in the truly OSINT environment that the cryptocurrency movement was built upon.
BOS Advantages
The BOS aims to integrate decentralization with discoverability and developer flexibility. Central to the BOS framework is its array of Web3 development tools that are crafted with the intent of pushingWeb3 mainstream. From the onset, the system is designed to enhance user onboarding, improve cross-chain development and app discoverability, and create a seamless UX for Web3 users.
This last point on abstracting away different blockchains for a seamless Web3 experience has benefits beyond simply improving UX. It can potentially also reduce the liquidity fragmentation and tribalism associated with a fragmented crypto economy built around disparate, siloed blockchains. The BOS proposes a solution to this by striving for a consistent user experience across multiple blockchains and allowing developers globally to access and implement various Web3 components. With users and developers now(potentially) unable to discern which blockchain they are using, there is no longer a need to promote one over the other.
None of this is possible without the composability offered by the BOS. The system aims to be chain and language-agnostic, allowing developers to reuse and adjust different components while utilizing the language of their choice. The BOS supports a variety of languages for smart contract development, including JavaScript, Rust, Assembly Script, and Solidity. Complementing this are their collaborations with established cloud providers, namely Google, Seracle, and Alibaba Cloud, to make transitioning from Web2 to Web3 as comfortable as possible.
In addition, NEAR has initiated the NEAR DevHub, a platform envisioned as a resource hub for developers. Preliminary outputs from this initiative include sponsored hackathons and the establishment of community groups.
Thresholded Proof of Stake
The NEAR Protocol operates on a distinctconsensus mechanism known as "Thresholded Proof of Stake" (TPoS).Similar to other PoS implementations, TPoS still uses validators, who muststake NEAR tokens to participate, to validate transactions and ensure theintegrity/security of the network. However, within the TPoS environment,validators can assume one of four pivotal roles:
- Chunk Producers: Their primary responsibility is to authenticate transactions on individual shards, subsequently crafting a chunk, often referred to as a "shard block", from their designated shard.
- Block Producers: These validators gather chunks from their chunk-producing counterparts associated with discrete shards. Their function culminates in the production of a block, which is then added to the primary chain.
- Hidden Validators: Operating under a veil of confidentiality, these validators authenticate random shards — shards whose identity remains a secret to them and is undisclosed to the public. This veil serves a dual purpose. Firstly, it considerably complicates the task for any malevolent entities attempting to compromise them. Secondly, it robustly augments the chain's overall security measures.
- Fishermen: Actively overseeing certain chain segments, these validators act as the guardians against fraudulent activities. They constantly monitor, ready to flag any nefarious activities. Interestingly, their operational requirements are modest — a minimal stake. However, this role, though critical, doesn't confer any rewards.
Central to TPoS is its innovative auction system employed to select validators. This methodology, in essence, discourages the practice of pooling. When validators amass resources, they not only amplify their individual rewards but also consolidate control over the chain. Such centralization runs counter to the foundational principles of blockchain, which emphasize distributed control. The TPoS design confronts this challenge head-on by placing natural barriers against pooling.
Additionally, TPoS tackles the issue of consensus forking — a scenario in which multiple validators simultaneously contribute blocks to the chain. Such events can elongate the time required for transaction finality. By minimizing the possibility of these forking instances, TPoS ensures swifter transaction finality.
Validator Requirements
Validators bear the critical responsibility of validating and executing transactions across the entirety of NEAR's sharded blockchain. Additionally, they monitor their peers (other validators), ensuring no invalid blocks are produced or alternate chains are formed. Validators found compromising network stability undergo "slashing," where part or all of their staked assets are confiscated. To compensate for their services and inherent risks, NEAR validators receive a inflationary protocol rewards, amounting to 4.5% of the total supply annually.
Given the complexity of the validator role, there are stringent hardware requirements (e.g. costs) for anyone looking to run one. To effectively run a validator, a robust system configuration, consisting of an 8-Core CPU, 16GB of RAM, and 1 TB SSD storage, is necessary. Current estimates indicate that the monthly expenditure for hosting a block-producing validator node stands at $330+.
Potential and existing validators can gain insights into the current active validators by visiting the Explorer. For those considering becoming a block-producing validator, the seat price is a crucial factor. This price is derived from the 300th proposal and is subject to real-time updates, which are also available for viewing on the Explorer. Notably, only validator nodes that stake an amount surpassing this seat price are eligible to join the active validator cohort.
On the other hand, the more specialized chunk-only producers, introduced in September 2022, have lower hardware and stake requirements. The introduction of chunk-only producers increased the network's validator capacity ~3x, with ~120 chunk-only producers. This rise invalidating entities can be attributed to the lowered operational requirements for these validators (an 8-core CPU, with 16GB of RAM, and 500 GB SSD of storage) and a consequent reduction in the validator seat price.
Validator Selection and Seat Price
Thresholded Proof of Stake (TPoS) forms the backbone of the NEAR Protocol’s consensus mechanism. Designed to foster increased network engagement, TPoS distributes rewards equitably by capping them per shard relative to the staked NEAR quantity. This system, in theory, curbs the dominance of larger validator pools by proffering higher rewards for shards with minimal stakes.
Furthermore, the concept of storage staking is integral to the NEAR ecosystem. Here, account owners pay for smart contract storage through tokens. These tokens, corresponding to the volume of stored data, are locked, consequently reducing both the tokens available for general staking and the overall circulating supply. As of Q3 2023, approximately 600 million NEAR tokens have been staked, encompassing about 51% of the entire supply. This staked amount is distributed among 217 validators, seemingly highlighting the protocol's decentralized nature.
TPoS endeavors to cultivate an extensive participant pool, comprised of witnesses (an individual participant) that are designated for election during consensus deliberations. These elections follow a prescribed structure over a 24-hour period, segmented into 1,440 slots, implying a slot a minute. An impressive tally of 1,024 witnesses is allocated per block, cumulatively providing 1,474,560 individual witness opportunities (seats). The price of each seat is inherently anchored to the aggregate NEAR staked by the aspiring witnesses. A compulsory lock-in period of three days is imposed on any NEAR earmarked for this purpose.
This design, while intended to promote decentralization, is not immune to centralizing forces. Let’s look at an example. If each of the 1,474,560 witnesses pledged 10 NEAR, the requisite seat cost would be 10 NEAR. However, if this stake were concentrated among ten individuals, each staking in 1,474,560 tokens, the seat value would still remain unchanged at 10 NEAR, but the distribution and power skew dramatically. In the latter scenario, while the price-per-seat is comparable, each of these ten participants holds a staggering 147,456 seats.
Actual Validator Decentralization
NEAR Protocol has ~ 217 validators, a relatively small absolute number when compared to some other blockchains. This inevitably leads to a certain level of centralization, especially if a significant percentage of these validators are hosted by a few entities. The empirical results regarding the efficacy of TPoS’ ability to mitigate pooling and enhance decentralization are mixed. Data from 2023 highlights that the lion's share (~35%) of the stake is held by the top eight staking pools in NEAR. Such concentration is arguably similar to Bitcoin’s PoW hashrate distribution and other PoS designs, like Ethereum. However, a retrospective glimpse to early2022 shows that approximately 33% was under the control of just six entities, suggesting a gradual yet positive trajectory for overall stake distribution.
This model certainly accentuates network involvement but seemingly falters in promoting true decentralization. While incentivizing widespread participation potentially aids in spreading block validation tasks across the NEAR Protocol, it doesn't necessarily decentralize the decision-making authority. The inherent design of NEAR’s TPoS ensures that seats are apportioned based on the NEAR amount each entity stakes. Consequently, entities with large stakes invariably dominate the majority of the available seats. Additionally, the concentration of validators among a few hosting sites can introduce central points of failure and diminish the decentralized ethos of blockchain. Per the image below, three hosting services account for over 50% of Near’s validator set. Because Near’s hardware requirements and seat price (~26,600 NEAR or ~$26,600 USD at the time of writing) preclude most individuals from becoming a validator, a more balanced distribution among several providers would be preferable.
Nightshade Sharding
The NEAR Protocol's solution to scalability isa sharding technique, which seeks to alleviate computational strain bysegmenting the network's data into more manageable fragments, termed"shards." While many sharded blockchain architectures operate eachshard as an independent blockchain with its unique set of validators, NEAR hasintroduced an innovative variant dubbed "Nightshade."
To fully appreciate the intricacies of shardedarchitectures, it's essential to delve into the functions of nodes within ablockchain network and the accruing resource demands they shoulder over time.Nodes, in their quintessential role, shoulder three primary responsibilities inthe decentralized expanse of a blockchain:
- Compute: Engaging in the processing of incoming transactions.
- Consensus: Disseminating validated blocks to the interconnected nodes spanning the network.
- Storage: Chronicling the comprehensive state and historical tapestry of the entire network.
Each facet of a node's operation, however, isaccompanied by escalating demands. A surge in transactional volume necessitatesenhanced computational prowess, the relaying of blocks and transactionsamplifies bandwidth requirements, and an expanding ledger accentuates storageprerequisites.
Within a typical sharded blockchain infrastructure, each shard becomes a custodian of its localized state, ensuring it only broadcasts transactions intrinsic to its jurisdiction. This delegation inherently lightens the resource commitment on individual nodes and augments scalability. Nevertheless, it also ushers in an intricate challenge - the need for efficient cross-shard collaboration. In a dynamically sharded environment, it's imperative for shards to remain cognizant of the location of all or specific states continuously and synchronize in tasks like validator selection and punitive measures.
Frameworks such as Ethereum and Polkadot have sought to streamline this coordination by anchoring their architecture around a central Beacon or Relay chain, respectively. These serve as epicenters of communication, ensuring fluid interoperability and coordination among the myriad shards. However, there are limiting factors around the scalability of such a design.
However, the ingenuity of NEAR’s Nightshade implementation lies in its differing approach to shards and cross-shard consensus. Here's a more granular look into why it stands out:
● Unified Blockchain Sharding :Unlike some sharding methodologies that segment the blockchain into multiple states, NEAR's approach ensures the blockchain remains sharded as a single-state entity.
● Inter-shard Transactions: Every block within the NEAR protocol can accept transactions from all other shards. This not only promotes interoperability but also enhances the holistic functioning of the network.
● Synchronized Shard States: An intriguing feature of NEAR’s protocol is its synchronized state mechanism. When the state of one block undergoes a change, other shards within the network are triggered to adjust their states correspondingly.
Instead of segmenting the chain, Nightshade functions as one cohesive blockchain. In this setup, every block amalgamates transactions from all shards and synchronously updates the complete state of every shard. This design choice ensures no single node is responsible for downloading the entire network state.
The implications of Nightshade's design are profound, conferring NEAR with three distinct advantages:
● Enhanced Network Stability: With fewer opportunities for network forking, security gets a substantial boost.
● Optimized Speed: Since network participants manage only their respective shards, the network operates at an expedited pace.
● Improved Cross-Shard Composability: This feature allows for better interoperability between different shards.
NEAR validators are relieved from constantly downloading data whenever the complete state of a block undergoes changes. Instead, they efficiently maintain the state of individual shards, treating them as distinct data segments specific to each shard.
Ethereum, with its Beacon Chain model, mandates that each transaction receives confirmation by the beacon chain itself. This architecture inherently caps scalability, contingent on the beacon chain's throughput capacity. Contrarily, NEAR's interblock sharding method removes such constraints. It's independent of a central chain for transaction validation, thus eliminating the bottleneck prevalent in Ethereum’s system.
Stages of Nightshade
The Initial Phase: Simple Nightshade
The maiden phase, termed "Simple Nightshade," aimed to shard the blockchain's state without altering its processing. Validators remain obligated to process each transaction individually, but the protocol bifurcates the network into four separate shards. This first step was notably executed in November 2021, marking the Phase 0 launch, which expedited transactions for validators by a commendable fourfold.
The Evolution to Phase 1
Phase 1, released in Q3 2022, added a fresh validator type to the protocol's arsenal: chunk-only producers. Their primary contribution lies in enabling individuals, who might not possess ample NEAR to operate a full validator node, to produce 'chunks'—partial blocks derived from a shard. These chunk-only producers, in essence, resonate with NEAR's core philosophy of emphasizing usability. They effectively level the playing field, removing some of the biggest obstacles that prevented many from actively participating in the validation process.
The Anticipated Phase 2
The subsequent phase, Phase 2, is poised to define the final stage of network validators. In this advanced stage, both the state and its processing will be comprehensively sharded. This transformation ensures validators are no longer tethered to tracking every shard, thereby lowering the hardware prerequisites for running a block producer on NEAR. This not only democratizes participation but also underpins the broader goals of decentralization and fortification of the network's security.
The Pinnacle: Dynamic Resharding in Phase 3
The final frontier, Phase 3, is charted for a~2024 rollout and promises dynamic resharding capabilities. This essentially confers the network with the agility to merge or split shards based on real-time resource utilization. Underutilized shards can seamlessly integrate with peers to optimize network efficiency.
NEAR Token
Purpose/Use Cases
The protocol's native token, NEAR, powers the smart contracts that get executed on the network. NEAR tokens are somewhat analogous to ETH in the Ethereum network in this way. However, a distinct fee-burning mechanism is employed where 70% of transaction fees are burned, and the remaining 30% are directed to the originating contract (developer rewards).This is a critical distinction when compared to other smart contract blockchains, as they do not have direct developer incentives “baked into” the protocol. As the image below illustrates, the amount of gas used by the network has seen a dramatic increase in Q2 2023, translating to more NEAR burned and more developer rewards all around.
Transaction fees in NEAR are gauged based on network compute and bandwidth capacities, diverging from Ethereum's auction-centric approach. Storage fees, an additional expenditure, are attributed to the consumption of storage space.
NEAR incorporates both inflationary and deflationary dynamics without a predetermined token supply cap. The network enforces an annual inflation rate of 5%, directing the lion's share (90%) of the rewards to validators and apportioning the remaining to the protocol treasury. Current data reveals that about 84% of NEAR tokens are in circulation. The expected complete treasury unlocking is slated for October2025. However, the market introduction of these tokens depends on treasury distribution decisions.
For stakeholders, NEAR offers an annual yield of 9.4%, translating to a real yield of 4.4%.
Governance and Decentralization
Governance in any blockchain ecosystem is a nuanced and intricate process. The mechanism determines how decisions are made and who gets to make them. NEAR’s governance approach is bifurcated into two realms: technical and resource governance.
Technical Governance
Technical governance is paramount for the security of the blockchain. It helps create the check-and-balances that dictate who can make regular protocol changes and updates but also who may be able to respond to bugs and hacks. Technical governance encompasses:
- Bug Fixes: Rectifying any issues in the code that could be detrimental to the functioning of the network.
- System Updates: Introducing new components or improving existing ones to enhance the network's performance.
- Code Enhancements: Refining the existing codebase for efficiency and effectiveness.
The challenge with technical governance lies in its decentralized nature. Since every node (regardless of its capacity)needs to adopt and implement these changes, achieving consensus is paramount. Failure to adopt these changes risks creating a network fork, where nodes operate on different versions of the blockchain.
A unique feature of NEAR’s governance model, the Reference Maintainer, plays a crucial role in technical upgrades. Chosen by the Foundation Board, this entity essentially acts as the steward of technical evolution. However, to ensure checks and balances, there's a provision for the community to intervene. A two-week window allows token holders to veto major upgrades, ensuring community sentiments are considered.
Resource Governance
This revolves around how the funds and resources of the NEAR ecosystem are allocated and utilized. Proper resource governance helps grow the ecosystem, prevent corruption, and promote the development of key infrastructure.
- Protocol Treasury: This is where the funds originally assigned to the NEAR Foundation are held. These funds are at the disposal of the Foundation to distribute as they see fit.
- Grants Program: A notable initiative by the NEAR Foundation, the program saw a substantial allocation of grants, with a prominent focus on gaming, metaverse, and infrastructural undertakings.
Prominent beneficiaries of the grant include:
- AERX: Venturing into the realm of decentralized social media.
- Solace: A unique wallet proposition with a focus on user-friendliness and security.
- Deep Skills: A DAO initiative aimed at bridging the employment gap in the decentralized space.
- Arcnes: An incubator to foster gaming innovations on the blockchain.
NEAR Digital Collective
The blockchain world has witnessed a rapid shift towards decentralized governance and funding in recent times, and NEAR Protocol has been at the forefront of this movement. With the establishment of the NEAR Digital Collective (NDC) and a shift towards community DAOs, the NEAR Foundation is making significant strides towards creating a more democratized and decentralized ecosystem when compared to the previous system with a standard Board.
The NDC was conceived as an essential step towards democratizing decision-making within the NEAR network. Formed in Q32022, this entity seeks to improve transparency with clear treasury management and a commitment to decentralized governance via an on-chain voting process.
This emphasis on transparency is made evident by the weekly On Chain Data Report, which presents aggregated analytics and other key metrics within the Near ecosystem. The NDC also has goals to foster validator decentralization and promote core protocol and infrastructure development.
The NDC's architecture comprises five pillars:
- Voting Body: This includes every active NEAR account.
- House of Merit: A body of recognized community members chosen by their peers.
- Council of Advisors: Experienced advisors to guide the House of Merit.
- Transparency Commission: Ensuring checks and balances.
- Community Treasury: Financial support for grassroots initiatives.
The NDC’s first elections were held in 2023,with results expected in early October, which looked to fill the roles outlined in the table below.
Another big development for Near governance in2023 was its transformation towards DAO-driven governance. These DAOs,including Marketing DAO, Developer Governance DAO, and Creatives DAO, willhandle significant aspects of decision-making, including:
- Marketing DAO: Concentrates on content and social media.
- Developer Governance DAO: Works towards decentralizing the developer ecosystem.
- Creatives DAO: Provides a platform for artists and creators to thrive.
To ensure a smooth transition and effective governance model, the Governance Working Group (GWG) has been set up. It includes community members dedicated to refining governance paradigms, with the NEAR Foundation providing support and resources.
The NEAR protocol's shift towards decentralized governance and community-driven funding is a promising evolution. The establishment of entities like the NDC and community DAOs indicates a commitment to building an inclusive, transparent, and decentralized ecosystem. It's a significant stride towards ensuring that all stakeholders have a voice in the evolution and administration of the NEAR platform. As blockchain technology continues its march into mainstream adoption, NEAR's initiatives seta commendable example for other projects in the space.
Roadmap and Progression
Since its inception in 2018, the NEAR Protocol has undergone numerous significant changes in its pursuit of industry-leading scalability and robust decentralization.
The Past
Mainnet Rollout
- Phase 0 (April 2020): This marked the initiation of the NEAR mainnet, albeit in a restricted Proof of Authority (PoA) format.
- Phase 1 (September 2020): This phase began the process of onboarding third-party validators, removing the restrictions in the PoA model.
- Phase 2 (October 2021): Full community governance was realized as token holders could now participate in on-chain votes, thereby decentralizing decision-making.
Nightshade Sharding: A Journey in Phases
- Simple-Nightshade (Phase 0, November 2021): The introduction of the sharded architecture and foundation for future phases.
- Phase 1 (Q3 2022): With the introduction of chunk-only producers, NEAR further decentralized its network. This approach aimed to break away from the previous restriction of 100 validators, paving the way for enhanced network performance.
The Present
- Phase 2 (Projected 2023): This phase aims to redefine the roles and responsibilities of validators. By eliminating the need for validators to monitor every shard, it's poised to lower hardware prerequisites, thus making network participation more inclusive and accessible.
The Future
- Phase 3 (2024): The introduction of adaptive scalability in which the network will be able to merge or split shards based on usage. This dynamic reconfiguration is expected to significantly optimize network efficiency.
Below are a few of the additional milestones, beyond Nightshade, that the Near protocol looks to release in the near future.
Meta Transactions: Aiming to enhance user onboarding, meta transactions will empower third parties to cover the transaction costs. This ensures that newcomers to NEAR apps can start their journey without initial NEAR tokens, breaking barriers to entry.
Zero-balance Account: By allowing zero-balance accounts, NEAR intends to simplify the account creation process. This move is particularly strategic for apps and wallets that wish to ease the onboarding process for new users.
Secp256r1 Keys: With this initiative, iPhone users will enjoy an unprecedentedly smooth onboarding experience. By supporting Secp256r1 keys, iPhone users can gain an implicit on-chain account without the traditional hassle of account creation via wallets. This approach is poised to set a new gold standard in user experience, surpassing even some of the best Web2 practices.
Global Storage: Addressing inefficiencies in storage costs, global storage is NEAR’s answer to redundant storage staking costs arising from deploying identical smart contracts multiple times. By allowing developers to burn tokens for a one-time deployment, subsequent uses won’t incur additional storage staking costs. It’s a solution that's not only economical but also resource-efficient.
Running wasm in wasm: Enhancing smart contract interactions, this feature will enable native NEAR contracts to load and execute another smart contract within its execution seamlessly. It’s a nod to synchronous interactions, mirroring the capabilities present in Aurora.
Conclusion/Final Thoughts
The NEAR Protocol, through its sophisticated sharded architecture and commitment to offering a Web 2-like user experience, has firmly positioned itself at the forefront of the L1 landscape. By incorporating unique sharding methodologies like Nightshade and launching progressive platforms like the Blockchain Operating System, NEAR consistently demonstrates its dedication to merging usability with the inherent security of decentralized systems. Moreover, with the establishment of the NEAR Digital Collective and its shift towards more transparent and democratized governance, NEAR embodies a vision that transcends traditional blockchain constraints. As we anticipate the advancements slated for 2024, it becomes clear that NEAR's trajectory is one of continuous innovation and commitment to refining the decentralized landscape for developers, users, and the broader community.
Disclaimer: This report was commissioned by the NEAR Foundation. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
Executive Summary
- NEAR Protocol stands as a Layer-1(L1) smart contract blockchain that couples a state-of-the-art sharded architecture with an emphasis on offering a user experience reminiscent of Web2 platforms. While maintaining the security and decentralization integral to blockchains, NEAR aims to surpass the capabilities of prior chains, such as Ethereum, in terms of usability, efficiency, and scalability. Recognizing and aiming to overcome Ethereum's limitations, NEAR incorporates sharding. This key distinction allows the blockchain to significantly enhance its throughput, accommodating a more substantial transaction volume by dividing the blockchain into smaller, concurrent shards.
- A pivotal differentiator for the NEAR Protocol, sharding was introduced in November 2021 as Nightshade. This technique allows validators to process only transactions specific to their assigned shards, enabling potentially infinite scalability. For end users and investors, Nightshade ensures quicker transaction speeds at reduced fees. Diverging from traditional sharding methods that split the blockchain into multiple states, NEAR's design maintains the blockchain as a singularly sharded entity. Additionally, a synchronized state mechanism ensures that a change in one block's state prompts adjustments in other shards correspondingly.
- In March 2023, NEAR unveiled the Blockchain Operating System (BOS), a groundbreaking open-source platform that allows developers to craft applications across various blockchain environments using well-known programming languages. Moreover, it provides crypto users with an experience reminiscent of Web 2. Designed to be inclusive, BOS appeals toWeb3 veterans and those new to the decentralized web. By ensuring easy onboarding, robust security, and seamless cross-chain interactions, BOS is setting a new paradigm for Web 3 application development.
- The NEAR Foundation, with the inception of the NEAR Digital Collective (NDC) and a pivot to community DAOs, is pioneering a transition to a more democratized and decentralized framework compared to the conventional Board-based system. Launched in Q3 2022, the NDC represents a concerted effort to decentralize decision-making within the NEAR network, emphasizing transparency through defined treasury management and embracing decentralized governance with on-chain voting. Furthermore, the NDC aspires to advance validator decentralization and stimulate the development of the core protocol and infrastructure.
- Looking forward into 2024, the Near protocol will introduce several pivotal milestones, including the next step in Nightshade sharding, meta transactions, zero-balance accounts, a Global Storage proposal, and more.
Introduction to Near
NEAR Protocol is a Layer-1 (L1) smart contract blockchain with a bleeding-edge sharded design and an emphasis on an intuitive Web 2-like customer experience, all while preserving the security and decentralization users expect with a blockchain. Established in 2018, it sets out to achieve improved usability, efficiency, and scalability over preceding chains like Ethereum. Founded by Illia Polosukhin and Alexander Skidanov andspear headed by the Near Collective, the NEAR Protocol was envisioned to serve as a community-driven cloud computing PoS blockchain and a decentralized hub tailored explicitly for hosting innovative decentralized applications.
The central motivation behind NEAR's technology is to prevent network congestion and furnish a conducive environment for developers, thereby promoting on-chain protocol development. Early on, NEAR identified certain operational challenges in Ethereum, particularly related to network congestion and high/volatile gas fees, that it looked to solve. To do so, Near turned towards sharding.
A key differentiator for NEAR, sharding, in essence, provides the ability for a blockchain to increase its throughput and handle a larger number of transactions by partitioning the blockchain into smaller parallel shards. In its pursuits, Near introduced an original approach to sharding in November 2021 known as Nightshade, initially unveiled as Simple Nightshade. The underlying principle of Nightshade is that validators are not burdened with the task of processing every incoming transaction. Instead, they only handle transactions that are within specific shards. By doing so, Nightshade paves the way for theoretically limitless scalability. But what does this mean for the end user or investor? Primarily, this approach, which is entirely abstracted from the end-user experience, allows for reduced transaction fees while ensuring rapid transaction speeds.
Additionally, Near recently launched a new initiative in early 2023 known as the Blockchain Operating System (BOS). This development represents a significant shift in how we perceive blockchain platforms. The BOS is designed to integrate seamlessly with various blockchain systems while facilitating decentralization and discoverability, which have historically been impossible to achieve together.
Essentially, the BOS is grounded in blockchain technology but broadens its application by acting as a universal layer, making it adaptable to different blockchain frameworks. One of its primary features is the provision of a decentralized platform for front-end development. This platform aims to simplify the creation of blockchain applications by emphasizing clarity and flexibility.
One of the core advantages of BOS is its potential to decentralize user interactions, improve security protocols, and enhance the modularity of components. Additionally, it prioritizes compatibility across diverse blockchains, presenting developers with a more intuitive and straightforward development environment.
NEAR Technologies
Blockchain Operating System (BOS)
In March 2023, the NEAR protocol introduced the Blockchain Operating System (BOS), an open-source platform empowering developers with the flexibility to build across diverse blockchain environments using familiar programming languages and equipping crypto users with a familiar Web 2 UX. The BOS is designed to be inclusive and democratize the open, catering not only to seasoned web3 enthusiasts but also to the broader audience who might be newer to the decentralized web. A significant breakthrough in the system is eliminating the immediate need for a new user to own any cryptocurrency, substantially reducing the friction of user onboarding.
Additionally, the BOS interface streamlines access and navigation, making it more user-friendly for both developers and the general populace. Moreover, it enables users to search through a portal to diverse communities and applications, all the while prioritizing data privacy. Further, the BOS's user-centric design, coupled with its focus on accessibility, does not just simplify the onboarding experience but also bolsters the discovery of new applications.
Remarkably, the BOS functions both as a development platform and a social network. It’s an environment where users can both deploy and unearth new applications. In delivering straightforward onboarding procedures, unmatched security, and fluid interactions across all chains, the BOS is reshaping the framework for constructing Web 3 applications.
BOS Under the Hood
The Blockchain Operating System (BOS) by NEAR seeks to redefine the landscape of Web3 applications through its unique architecture based on three pivotal elements: components, blockchains, and gateways. Here, we will delve into the significance of each element and examine how they collectively shape the BOS framework.
Components: The Building Blocks of BOS
Components exist at the decentralized application (dApp) layer and can be equated with notable platforms such as Lido, Uniswap, Compound, and others. They stand out for their on-chain storage, high degree of transparency, and their ability for developers to fork these applications, harnessing their functionalities and composability to craft comprehensive web applications. Storing the entirety of a component's code on-chain not only ensures auditability but also bolsters security. With the code readily available for scrutiny in blockchain explorers, users can operate these applications locally, enjoying resilience against potential censorship and a streamlined user experience. This ability to natively audit and locally run the applications represents a paradigm shift in the user-app relationship.
Blockchains: The Underlying Infrastructure
The versatility of components and the BOS becomes apparent in their ability to interact with numerous blockchains and smart contracts instead of just one chain. Currently, BOS offers compatibility with all EVM chains, such as Ethereum, Polygon, Arbitrum, and Optimism, as well as, the native NEAR platform. As EVM chains dominate the TVL in the DeFi space, the BOS’ ability to work across nearly all enables users to tap into nearly all the liquidity and top dApps in the crypto economy. NEAR's capability to efficiently and cost-effectively store HTML/CSS/JS makes it the preferred choice for hosting app source codes.
Gateways: Bridging the Gap to Decentralization
Gateways, the third pillar of the BOS, facilitate the delivery of decentralized front-ends to a broader audience. Each gateway is underpinned by a bespoke virtual machine (VM) equipped to load and run frontends for protocols, be they Ethereum-based, Layer 2 solutions, oralt-L1 platforms like NEAR. All code pertaining to these frontends finds its home on the NEAR blockchain. The gateways are diverse, ranging from wallets and portfolio tools to distinct applications like SWEAT. They cater to tasks as rudimentary as adding swap functionality or as intricate as erecting decentralized app stores. Integrating this expansive functionality requires just the addition of a JavaScript library, followed by a selection of desired app front-ends. Prominent gateway exemplars include near.org, bos.gg, near.social, Cantopia, and nearpad.dev.
The decentralization of composable front ends enabled by the BOS is unique to Near, filling a conspicuous and much-needed void in the crypto arena. Instead of relying on centralized data servers, these front ends are blockchain-stored, promoting both composability and resistance to potential censorship. Historical instances, such as Uniswap's token delisting and the sanctions imposed on Tornado Cash, underscore the vulnerabilities of front ends. BOS’s decentralized approach allows developers the flexibility to fork these front ends and build in the truly OSINT environment that the cryptocurrency movement was built upon.
BOS Advantages
The BOS aims to integrate decentralization with discoverability and developer flexibility. Central to the BOS framework is its array of Web3 development tools that are crafted with the intent of pushingWeb3 mainstream. From the onset, the system is designed to enhance user onboarding, improve cross-chain development and app discoverability, and create a seamless UX for Web3 users.
This last point on abstracting away different blockchains for a seamless Web3 experience has benefits beyond simply improving UX. It can potentially also reduce the liquidity fragmentation and tribalism associated with a fragmented crypto economy built around disparate, siloed blockchains. The BOS proposes a solution to this by striving for a consistent user experience across multiple blockchains and allowing developers globally to access and implement various Web3 components. With users and developers now(potentially) unable to discern which blockchain they are using, there is no longer a need to promote one over the other.
None of this is possible without the composability offered by the BOS. The system aims to be chain and language-agnostic, allowing developers to reuse and adjust different components while utilizing the language of their choice. The BOS supports a variety of languages for smart contract development, including JavaScript, Rust, Assembly Script, and Solidity. Complementing this are their collaborations with established cloud providers, namely Google, Seracle, and Alibaba Cloud, to make transitioning from Web2 to Web3 as comfortable as possible.
In addition, NEAR has initiated the NEAR DevHub, a platform envisioned as a resource hub for developers. Preliminary outputs from this initiative include sponsored hackathons and the establishment of community groups.
Thresholded Proof of Stake
The NEAR Protocol operates on a distinctconsensus mechanism known as "Thresholded Proof of Stake" (TPoS).Similar to other PoS implementations, TPoS still uses validators, who muststake NEAR tokens to participate, to validate transactions and ensure theintegrity/security of the network. However, within the TPoS environment,validators can assume one of four pivotal roles:
- Chunk Producers: Their primary responsibility is to authenticate transactions on individual shards, subsequently crafting a chunk, often referred to as a "shard block", from their designated shard.
- Block Producers: These validators gather chunks from their chunk-producing counterparts associated with discrete shards. Their function culminates in the production of a block, which is then added to the primary chain.
- Hidden Validators: Operating under a veil of confidentiality, these validators authenticate random shards — shards whose identity remains a secret to them and is undisclosed to the public. This veil serves a dual purpose. Firstly, it considerably complicates the task for any malevolent entities attempting to compromise them. Secondly, it robustly augments the chain's overall security measures.
- Fishermen: Actively overseeing certain chain segments, these validators act as the guardians against fraudulent activities. They constantly monitor, ready to flag any nefarious activities. Interestingly, their operational requirements are modest — a minimal stake. However, this role, though critical, doesn't confer any rewards.
Central to TPoS is its innovative auction system employed to select validators. This methodology, in essence, discourages the practice of pooling. When validators amass resources, they not only amplify their individual rewards but also consolidate control over the chain. Such centralization runs counter to the foundational principles of blockchain, which emphasize distributed control. The TPoS design confronts this challenge head-on by placing natural barriers against pooling.
Additionally, TPoS tackles the issue of consensus forking — a scenario in which multiple validators simultaneously contribute blocks to the chain. Such events can elongate the time required for transaction finality. By minimizing the possibility of these forking instances, TPoS ensures swifter transaction finality.
Validator Requirements
Validators bear the critical responsibility of validating and executing transactions across the entirety of NEAR's sharded blockchain. Additionally, they monitor their peers (other validators), ensuring no invalid blocks are produced or alternate chains are formed. Validators found compromising network stability undergo "slashing," where part or all of their staked assets are confiscated. To compensate for their services and inherent risks, NEAR validators receive a inflationary protocol rewards, amounting to 4.5% of the total supply annually.
Given the complexity of the validator role, there are stringent hardware requirements (e.g. costs) for anyone looking to run one. To effectively run a validator, a robust system configuration, consisting of an 8-Core CPU, 16GB of RAM, and 1 TB SSD storage, is necessary. Current estimates indicate that the monthly expenditure for hosting a block-producing validator node stands at $330+.
Potential and existing validators can gain insights into the current active validators by visiting the Explorer. For those considering becoming a block-producing validator, the seat price is a crucial factor. This price is derived from the 300th proposal and is subject to real-time updates, which are also available for viewing on the Explorer. Notably, only validator nodes that stake an amount surpassing this seat price are eligible to join the active validator cohort.
On the other hand, the more specialized chunk-only producers, introduced in September 2022, have lower hardware and stake requirements. The introduction of chunk-only producers increased the network's validator capacity ~3x, with ~120 chunk-only producers. This rise invalidating entities can be attributed to the lowered operational requirements for these validators (an 8-core CPU, with 16GB of RAM, and 500 GB SSD of storage) and a consequent reduction in the validator seat price.
Validator Selection and Seat Price
Thresholded Proof of Stake (TPoS) forms the backbone of the NEAR Protocol’s consensus mechanism. Designed to foster increased network engagement, TPoS distributes rewards equitably by capping them per shard relative to the staked NEAR quantity. This system, in theory, curbs the dominance of larger validator pools by proffering higher rewards for shards with minimal stakes.
Furthermore, the concept of storage staking is integral to the NEAR ecosystem. Here, account owners pay for smart contract storage through tokens. These tokens, corresponding to the volume of stored data, are locked, consequently reducing both the tokens available for general staking and the overall circulating supply. As of Q3 2023, approximately 600 million NEAR tokens have been staked, encompassing about 51% of the entire supply. This staked amount is distributed among 217 validators, seemingly highlighting the protocol's decentralized nature.
TPoS endeavors to cultivate an extensive participant pool, comprised of witnesses (an individual participant) that are designated for election during consensus deliberations. These elections follow a prescribed structure over a 24-hour period, segmented into 1,440 slots, implying a slot a minute. An impressive tally of 1,024 witnesses is allocated per block, cumulatively providing 1,474,560 individual witness opportunities (seats). The price of each seat is inherently anchored to the aggregate NEAR staked by the aspiring witnesses. A compulsory lock-in period of three days is imposed on any NEAR earmarked for this purpose.
This design, while intended to promote decentralization, is not immune to centralizing forces. Let’s look at an example. If each of the 1,474,560 witnesses pledged 10 NEAR, the requisite seat cost would be 10 NEAR. However, if this stake were concentrated among ten individuals, each staking in 1,474,560 tokens, the seat value would still remain unchanged at 10 NEAR, but the distribution and power skew dramatically. In the latter scenario, while the price-per-seat is comparable, each of these ten participants holds a staggering 147,456 seats.
Actual Validator Decentralization
NEAR Protocol has ~ 217 validators, a relatively small absolute number when compared to some other blockchains. This inevitably leads to a certain level of centralization, especially if a significant percentage of these validators are hosted by a few entities. The empirical results regarding the efficacy of TPoS’ ability to mitigate pooling and enhance decentralization are mixed. Data from 2023 highlights that the lion's share (~35%) of the stake is held by the top eight staking pools in NEAR. Such concentration is arguably similar to Bitcoin’s PoW hashrate distribution and other PoS designs, like Ethereum. However, a retrospective glimpse to early2022 shows that approximately 33% was under the control of just six entities, suggesting a gradual yet positive trajectory for overall stake distribution.
This model certainly accentuates network involvement but seemingly falters in promoting true decentralization. While incentivizing widespread participation potentially aids in spreading block validation tasks across the NEAR Protocol, it doesn't necessarily decentralize the decision-making authority. The inherent design of NEAR’s TPoS ensures that seats are apportioned based on the NEAR amount each entity stakes. Consequently, entities with large stakes invariably dominate the majority of the available seats. Additionally, the concentration of validators among a few hosting sites can introduce central points of failure and diminish the decentralized ethos of blockchain. Per the image below, three hosting services account for over 50% of Near’s validator set. Because Near’s hardware requirements and seat price (~26,600 NEAR or ~$26,600 USD at the time of writing) preclude most individuals from becoming a validator, a more balanced distribution among several providers would be preferable.
Nightshade Sharding
The NEAR Protocol's solution to scalability isa sharding technique, which seeks to alleviate computational strain bysegmenting the network's data into more manageable fragments, termed"shards." While many sharded blockchain architectures operate eachshard as an independent blockchain with its unique set of validators, NEAR hasintroduced an innovative variant dubbed "Nightshade."
To fully appreciate the intricacies of shardedarchitectures, it's essential to delve into the functions of nodes within ablockchain network and the accruing resource demands they shoulder over time.Nodes, in their quintessential role, shoulder three primary responsibilities inthe decentralized expanse of a blockchain:
- Compute: Engaging in the processing of incoming transactions.
- Consensus: Disseminating validated blocks to the interconnected nodes spanning the network.
- Storage: Chronicling the comprehensive state and historical tapestry of the entire network.
Each facet of a node's operation, however, isaccompanied by escalating demands. A surge in transactional volume necessitatesenhanced computational prowess, the relaying of blocks and transactionsamplifies bandwidth requirements, and an expanding ledger accentuates storageprerequisites.
Within a typical sharded blockchain infrastructure, each shard becomes a custodian of its localized state, ensuring it only broadcasts transactions intrinsic to its jurisdiction. This delegation inherently lightens the resource commitment on individual nodes and augments scalability. Nevertheless, it also ushers in an intricate challenge - the need for efficient cross-shard collaboration. In a dynamically sharded environment, it's imperative for shards to remain cognizant of the location of all or specific states continuously and synchronize in tasks like validator selection and punitive measures.
Frameworks such as Ethereum and Polkadot have sought to streamline this coordination by anchoring their architecture around a central Beacon or Relay chain, respectively. These serve as epicenters of communication, ensuring fluid interoperability and coordination among the myriad shards. However, there are limiting factors around the scalability of such a design.
However, the ingenuity of NEAR’s Nightshade implementation lies in its differing approach to shards and cross-shard consensus. Here's a more granular look into why it stands out:
● Unified Blockchain Sharding :Unlike some sharding methodologies that segment the blockchain into multiple states, NEAR's approach ensures the blockchain remains sharded as a single-state entity.
● Inter-shard Transactions: Every block within the NEAR protocol can accept transactions from all other shards. This not only promotes interoperability but also enhances the holistic functioning of the network.
● Synchronized Shard States: An intriguing feature of NEAR’s protocol is its synchronized state mechanism. When the state of one block undergoes a change, other shards within the network are triggered to adjust their states correspondingly.
Instead of segmenting the chain, Nightshade functions as one cohesive blockchain. In this setup, every block amalgamates transactions from all shards and synchronously updates the complete state of every shard. This design choice ensures no single node is responsible for downloading the entire network state.
The implications of Nightshade's design are profound, conferring NEAR with three distinct advantages:
● Enhanced Network Stability: With fewer opportunities for network forking, security gets a substantial boost.
● Optimized Speed: Since network participants manage only their respective shards, the network operates at an expedited pace.
● Improved Cross-Shard Composability: This feature allows for better interoperability between different shards.
NEAR validators are relieved from constantly downloading data whenever the complete state of a block undergoes changes. Instead, they efficiently maintain the state of individual shards, treating them as distinct data segments specific to each shard.
Ethereum, with its Beacon Chain model, mandates that each transaction receives confirmation by the beacon chain itself. This architecture inherently caps scalability, contingent on the beacon chain's throughput capacity. Contrarily, NEAR's interblock sharding method removes such constraints. It's independent of a central chain for transaction validation, thus eliminating the bottleneck prevalent in Ethereum’s system.
Stages of Nightshade
The Initial Phase: Simple Nightshade
The maiden phase, termed "Simple Nightshade," aimed to shard the blockchain's state without altering its processing. Validators remain obligated to process each transaction individually, but the protocol bifurcates the network into four separate shards. This first step was notably executed in November 2021, marking the Phase 0 launch, which expedited transactions for validators by a commendable fourfold.
The Evolution to Phase 1
Phase 1, released in Q3 2022, added a fresh validator type to the protocol's arsenal: chunk-only producers. Their primary contribution lies in enabling individuals, who might not possess ample NEAR to operate a full validator node, to produce 'chunks'—partial blocks derived from a shard. These chunk-only producers, in essence, resonate with NEAR's core philosophy of emphasizing usability. They effectively level the playing field, removing some of the biggest obstacles that prevented many from actively participating in the validation process.
The Anticipated Phase 2
The subsequent phase, Phase 2, is poised to define the final stage of network validators. In this advanced stage, both the state and its processing will be comprehensively sharded. This transformation ensures validators are no longer tethered to tracking every shard, thereby lowering the hardware prerequisites for running a block producer on NEAR. This not only democratizes participation but also underpins the broader goals of decentralization and fortification of the network's security.
The Pinnacle: Dynamic Resharding in Phase 3
The final frontier, Phase 3, is charted for a~2024 rollout and promises dynamic resharding capabilities. This essentially confers the network with the agility to merge or split shards based on real-time resource utilization. Underutilized shards can seamlessly integrate with peers to optimize network efficiency.
NEAR Token
Purpose/Use Cases
The protocol's native token, NEAR, powers the smart contracts that get executed on the network. NEAR tokens are somewhat analogous to ETH in the Ethereum network in this way. However, a distinct fee-burning mechanism is employed where 70% of transaction fees are burned, and the remaining 30% are directed to the originating contract (developer rewards).This is a critical distinction when compared to other smart contract blockchains, as they do not have direct developer incentives “baked into” the protocol. As the image below illustrates, the amount of gas used by the network has seen a dramatic increase in Q2 2023, translating to more NEAR burned and more developer rewards all around.
Transaction fees in NEAR are gauged based on network compute and bandwidth capacities, diverging from Ethereum's auction-centric approach. Storage fees, an additional expenditure, are attributed to the consumption of storage space.
NEAR incorporates both inflationary and deflationary dynamics without a predetermined token supply cap. The network enforces an annual inflation rate of 5%, directing the lion's share (90%) of the rewards to validators and apportioning the remaining to the protocol treasury. Current data reveals that about 84% of NEAR tokens are in circulation. The expected complete treasury unlocking is slated for October2025. However, the market introduction of these tokens depends on treasury distribution decisions.
For stakeholders, NEAR offers an annual yield of 9.4%, translating to a real yield of 4.4%.
Governance and Decentralization
Governance in any blockchain ecosystem is a nuanced and intricate process. The mechanism determines how decisions are made and who gets to make them. NEAR’s governance approach is bifurcated into two realms: technical and resource governance.
Technical Governance
Technical governance is paramount for the security of the blockchain. It helps create the check-and-balances that dictate who can make regular protocol changes and updates but also who may be able to respond to bugs and hacks. Technical governance encompasses:
- Bug Fixes: Rectifying any issues in the code that could be detrimental to the functioning of the network.
- System Updates: Introducing new components or improving existing ones to enhance the network's performance.
- Code Enhancements: Refining the existing codebase for efficiency and effectiveness.
The challenge with technical governance lies in its decentralized nature. Since every node (regardless of its capacity)needs to adopt and implement these changes, achieving consensus is paramount. Failure to adopt these changes risks creating a network fork, where nodes operate on different versions of the blockchain.
A unique feature of NEAR’s governance model, the Reference Maintainer, plays a crucial role in technical upgrades. Chosen by the Foundation Board, this entity essentially acts as the steward of technical evolution. However, to ensure checks and balances, there's a provision for the community to intervene. A two-week window allows token holders to veto major upgrades, ensuring community sentiments are considered.
Resource Governance
This revolves around how the funds and resources of the NEAR ecosystem are allocated and utilized. Proper resource governance helps grow the ecosystem, prevent corruption, and promote the development of key infrastructure.
- Protocol Treasury: This is where the funds originally assigned to the NEAR Foundation are held. These funds are at the disposal of the Foundation to distribute as they see fit.
- Grants Program: A notable initiative by the NEAR Foundation, the program saw a substantial allocation of grants, with a prominent focus on gaming, metaverse, and infrastructural undertakings.
Prominent beneficiaries of the grant include:
- AERX: Venturing into the realm of decentralized social media.
- Solace: A unique wallet proposition with a focus on user-friendliness and security.
- Deep Skills: A DAO initiative aimed at bridging the employment gap in the decentralized space.
- Arcnes: An incubator to foster gaming innovations on the blockchain.
NEAR Digital Collective
The blockchain world has witnessed a rapid shift towards decentralized governance and funding in recent times, and NEAR Protocol has been at the forefront of this movement. With the establishment of the NEAR Digital Collective (NDC) and a shift towards community DAOs, the NEAR Foundation is making significant strides towards creating a more democratized and decentralized ecosystem when compared to the previous system with a standard Board.
The NDC was conceived as an essential step towards democratizing decision-making within the NEAR network. Formed in Q32022, this entity seeks to improve transparency with clear treasury management and a commitment to decentralized governance via an on-chain voting process.
This emphasis on transparency is made evident by the weekly On Chain Data Report, which presents aggregated analytics and other key metrics within the Near ecosystem. The NDC also has goals to foster validator decentralization and promote core protocol and infrastructure development.
The NDC's architecture comprises five pillars:
- Voting Body: This includes every active NEAR account.
- House of Merit: A body of recognized community members chosen by their peers.
- Council of Advisors: Experienced advisors to guide the House of Merit.
- Transparency Commission: Ensuring checks and balances.
- Community Treasury: Financial support for grassroots initiatives.
The NDC’s first elections were held in 2023,with results expected in early October, which looked to fill the roles outlined in the table below.
Another big development for Near governance in2023 was its transformation towards DAO-driven governance. These DAOs,including Marketing DAO, Developer Governance DAO, and Creatives DAO, willhandle significant aspects of decision-making, including:
- Marketing DAO: Concentrates on content and social media.
- Developer Governance DAO: Works towards decentralizing the developer ecosystem.
- Creatives DAO: Provides a platform for artists and creators to thrive.
To ensure a smooth transition and effective governance model, the Governance Working Group (GWG) has been set up. It includes community members dedicated to refining governance paradigms, with the NEAR Foundation providing support and resources.
The NEAR protocol's shift towards decentralized governance and community-driven funding is a promising evolution. The establishment of entities like the NDC and community DAOs indicates a commitment to building an inclusive, transparent, and decentralized ecosystem. It's a significant stride towards ensuring that all stakeholders have a voice in the evolution and administration of the NEAR platform. As blockchain technology continues its march into mainstream adoption, NEAR's initiatives seta commendable example for other projects in the space.
Roadmap and Progression
Since its inception in 2018, the NEAR Protocol has undergone numerous significant changes in its pursuit of industry-leading scalability and robust decentralization.
The Past
Mainnet Rollout
- Phase 0 (April 2020): This marked the initiation of the NEAR mainnet, albeit in a restricted Proof of Authority (PoA) format.
- Phase 1 (September 2020): This phase began the process of onboarding third-party validators, removing the restrictions in the PoA model.
- Phase 2 (October 2021): Full community governance was realized as token holders could now participate in on-chain votes, thereby decentralizing decision-making.
Nightshade Sharding: A Journey in Phases
- Simple-Nightshade (Phase 0, November 2021): The introduction of the sharded architecture and foundation for future phases.
- Phase 1 (Q3 2022): With the introduction of chunk-only producers, NEAR further decentralized its network. This approach aimed to break away from the previous restriction of 100 validators, paving the way for enhanced network performance.
The Present
- Phase 2 (Projected 2023): This phase aims to redefine the roles and responsibilities of validators. By eliminating the need for validators to monitor every shard, it's poised to lower hardware prerequisites, thus making network participation more inclusive and accessible.
The Future
- Phase 3 (2024): The introduction of adaptive scalability in which the network will be able to merge or split shards based on usage. This dynamic reconfiguration is expected to significantly optimize network efficiency.
Below are a few of the additional milestones, beyond Nightshade, that the Near protocol looks to release in the near future.
Meta Transactions: Aiming to enhance user onboarding, meta transactions will empower third parties to cover the transaction costs. This ensures that newcomers to NEAR apps can start their journey without initial NEAR tokens, breaking barriers to entry.
Zero-balance Account: By allowing zero-balance accounts, NEAR intends to simplify the account creation process. This move is particularly strategic for apps and wallets that wish to ease the onboarding process for new users.
Secp256r1 Keys: With this initiative, iPhone users will enjoy an unprecedentedly smooth onboarding experience. By supporting Secp256r1 keys, iPhone users can gain an implicit on-chain account without the traditional hassle of account creation via wallets. This approach is poised to set a new gold standard in user experience, surpassing even some of the best Web2 practices.
Global Storage: Addressing inefficiencies in storage costs, global storage is NEAR’s answer to redundant storage staking costs arising from deploying identical smart contracts multiple times. By allowing developers to burn tokens for a one-time deployment, subsequent uses won’t incur additional storage staking costs. It’s a solution that's not only economical but also resource-efficient.
Running wasm in wasm: Enhancing smart contract interactions, this feature will enable native NEAR contracts to load and execute another smart contract within its execution seamlessly. It’s a nod to synchronous interactions, mirroring the capabilities present in Aurora.
Conclusion/Final Thoughts
The NEAR Protocol, through its sophisticated sharded architecture and commitment to offering a Web 2-like user experience, has firmly positioned itself at the forefront of the L1 landscape. By incorporating unique sharding methodologies like Nightshade and launching progressive platforms like the Blockchain Operating System, NEAR consistently demonstrates its dedication to merging usability with the inherent security of decentralized systems. Moreover, with the establishment of the NEAR Digital Collective and its shift towards more transparent and democratized governance, NEAR embodies a vision that transcends traditional blockchain constraints. As we anticipate the advancements slated for 2024, it becomes clear that NEAR's trajectory is one of continuous innovation and commitment to refining the decentralized landscape for developers, users, and the broader community.
Disclaimer: This report was commissioned by the NEAR Foundation. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.
