We've designed Ergo with long-term economic sustainability in mind, and storage rent is one of the ways we're ensuring miners stay profitable well into the future. This can be thought of as 'on-chain garbage collection' that reduces the problem of blockchain bloat – and even makes it profitable.
- An important consequence of storage fees is that they provide additional rewards (besides block and transaction rewards) for miners.
- Storage fees decrease the storage load and eliminate extra costs that could be added during unreasonable state growth.
- Storage fees encourage coin flow and prevent deflation, which can cause illiquidity and the congestion of a currency system.
The 2020 block reward reduction was the most important halving event Bitcoin has experienced. This was the point where the narrative of programmatic scarcity and digital gold was truly be proven in the context of the sharpest economic downturn in living memory. In previous halvings, Bitcoin has still been in its infancy, a niche experiment. Future halvings will confirm the principle. But this one is the watershed.
Looking ahead, though, what happens in 20 or 30 years, when block rewards have fallen so far that miners have to rely on transaction fees and potentially other sources of revenue? Will Bitcoin be sustainable? What will be the impact on the ecosystem?
The simple answer is that we don't know.
Mining rewards are a key feature in maintaining the security of proof-of-work blockchains like Bitcoin and Ergo. And so, while we have deliberately kept many of Bitcoin's tried and tested features, we have updated this one to give miners a boost when block rewards have fallen to zero.
Fees will be deducted slowly, over time – the unmoved UTXOs will not simply be appropriated by miners. Anyone who wants to avoid this simply needs to move their balances once every four years, which is not an onerous requirement for helping incentivise miners and avoiding the deflationary consequences of lost coins. You can read more about how fees will be levied in this paper.
In this way, Ergo seeks to ensure a balance between maintaining digital scarcity, on the one hand, and giving miners long-term incentives to secure the blockchain, on the other – long past the point where new coins have ceased to be released.
Digital scarcity is an important feature of Ergo. Like Bitcoin, ERG is designed to be a finite resource and long-term store of value. We do not agree with the principle of infinite inflation.
And yet, this has to be balanced against the need to pay miners to secure the blockchain and process transactions. Without adequate compensation for miners, there is no viable blockchain at all. Ergo approaches this by slowly recycling lost coins, in a feature we call 'Storage rent'.
Studies suggest that as many as 4 million BTC may have been lost forever. These are coins that were mined in the early days of Bitcoin and stored on hard drives that were subsequently thrown away or destroyed because the owners forgot about them or thought they were worthless, as well as coins in addresses for which the private keys have been lost. (And, of course, there are Satoshi's estimated holdings of 1 million BTC, which may never move.)
Where coins have genuinely been permanently taken out of circulation in this way, it makes sense to have a mechanism to recover them and put them back into the blockchain economy. That way, we can preserve digital scarcity without unnecessarily accelerating it. In other words, by attempting to stick to the intended algorithmic supply for any given point in time.
Ergo's halving schedule is faster than Bitcoin's. Block rewards start at 75 ERG and decrease steadily after the first two years. There is no 'long tail' of emission, and after eight years, block rewards will fall to zero. After that, the total supply will be fixed. The number of ERG in existence will never be more than 97,739,925.
A Systematic Approach To Cryptocurrency Fee
This article is a continuation and summarization of A Systematic Approach To Cryptocurrency Fees (hereinafter referred to as the paper) by Alex (Kushti) Chepurnoy, Vasily Kharin and Dmitry Meshkov. In the paper, the authors address the problem of storage resources utilization. There is a concern that once an element of the state is created, it exists forever and inevitably balloons node disk space. This will lead to unreasonable state growth of the blockchain.
While cryptocurrencies address transaction fees as an atomic concept, the paper suggests that it is reasonable to take this into account on a 3-dimensional scale.
Proof of Work blockchain technology relies on miners to guard the integrity of the blockchain. Miner resources, such as memory and electricity, are costly, and therefore a revenue scheme is needed to incentivize miners. Miner incentives are currently comprised of block rewards and transaction fees. Transactions fees are an important component in preventing spam attacks that exhaust miner resources.
Besides network utilization, transaction processing requires a miner to spend resources to maintain all the original blockchain data. In the case of Bitcoin, this might be less of a problem because it has yet to implement smart contract functionality. Cryptocurrencies that support smart contract languages, such as Solidity (Ethereum), however, may require a lot of computations, and corresponding costs will be included in the transaction fee.
The 3-dimensional scale shown above is based on storage-oriented load, computational load and network load.
- Storage-oriented load refers to the additional cost of storing old data in the blockchain.
- Computational load is created by the execution of smart contracts.
- Network load is all the transactions that do not exist in the current block but will be added to the next block.
In Ergo, the total size of the state is the sum of the sizes of all UTXOs. That is to say that this data contains the execution of smart contracts, all the transactions and nodal information. Because the memory resources provided by miners are limited, a state deterioration fee should be added to miners' revenue streams in order to encourage decreasing the system load while securing future miners' contributions.
Unreasonable state growth is an economic problem, and it can lead to spam attacks and network congestion. Another problem could be the deflation of a cryptocurrency if coins are lost and/or forgotten. So instead of being used as the base for smart contracts, the currency becomes unreasonably scarce, making the system heavy and limiting coin flow.
This leads to a perpetually increasing state (e.g. the Bitcoin's total UTXO size), and the state may grow faster during spam attacks. For example, 15 million outputs were created during spam attacks against Bitcoin in July 2015. An attack on Ethereum created 18 million new accounts added to the state - which previously held only 1 million - and performed successful "denial of service" attacks against the nodes.
To tackle the problem of unreasonable state growth, a "storage rent" fee is proposed by the paper. Storage rent is a scheduled fee that is based on the continuation of each UTXO created in the blockchain. This is achieved by the use of scheduled payments, which will eradicate the unused bytes after a certain time.
Additionally, the use of blockchains as cloud storage is gaining attraction, so permanently storing objects in the state without some form of recirculation procedure of the old data is not a plausible option.
For the purposes of research and this article, it is worth noting that the concept of storage rent was also proposed in 2014 by Freicoin:
"Demurrage forces freicoins to circulate at deliberately high rates. Separation of money's roles as store-of-value and medium-of-exchange allows money to flow when it is needed, in good times and bad. "