The Value of Storage Rent: Mining on Ergo

Changing Assumptions Post Hard Fork

On block № 417,792 Ergo implemented a hard fork that supported traditional mining pools.

Ergo had to adapt and support pooled mining to protect the chain’s consensus as unfortunately the non-out-sourceable puzzles concept was broken with smart contracts.

The resulting hard fork required some changes to the original assumptions.

Forced solo mining offered a natural incentive to build value in a network. The majority of miners who participated in solo mining had a longer term focus as the odds of mining a block were lower than the rewards paid via mining pools. This created a natural incentive to build value on the chain.

However, we now need to take into account that pooling brings in a set of shorter-term miners that may have no interest in the long term viability of the network.

Short-term miners are therefore not as likely to participate beyond consensus — which is the current norm.

Long-Term Economic Sustainability in Extended UTXO

The long term goal of the Ergo emission schedule is to create an open/decentralized network run by miners. Ideally, governance in a PoW network should be run by miners that have a balance between profitability and the survivability of the network.

Extended UTXO by design supports a variety of on and off chain infrastructure.

There is a natural incentive for the development and decentralization of the rewards associated with infrastructure support; we feel this is the answer to the largest outstanding question in PoW.

It is a priority to build payment mechanisms into infrastructure and services that make maintaining the base network security economically viable.

Building value on the blockchain aligns with long-term oriented miners. It also extends their role as decentralized actors using consensus and game theory to create solid security assumptions.

Simply put, the decentralized nature of mining and the associated rewards should be brought on top of the network to participate in trustless and decentralized infrastructure.

Mining isn’t just about computation. It is about independently agreeing on the order of things. Everyone agrees beforehand that the chain with the most cumulative work is the source of truth.

This basic mechanism of creating independent truth through network assumptions can extend beyond the base layer. It has value in supporting network infrastructure and hardens what developers build on topof the base network.

It may be beneficial to look at this from two separate aspects.

Aspect 1: Incentivized Consensus: State Preservation

TX fees
A fee that is charged to users when transferring coins from one account to another.

Storage Rent
If an output remains in state for 4 years without being moved, a miner may charge a small fee for every byte kept in the state.

Aspect 2: Incentivized Trustless Infrastructure: Onchain/Offchain Services

Oracle Data
https://github.com/abchrisxyz/OraclePoolHub/wiki
https://github.com/Emurgo/Emurgo-Research/blob/master/oracles/Oracle-Pools.md

The ability to collectively batch and participate in oracle data aggregation hardens data. Trustless oracle data is needed to harden the security assumptions in most DeFi applications.

Transaction Batching
https://github.com/ergolabs/ergo-dex-backend

UTXO concurrency issues are fixed by collecting batches of transactions and clearing them in a single transaction. This is an incentivised service. As more actors participate, the security assumptions of the batching increase.

Headless dApps
https://github.com/ergoplatform/ergo-headless-dapp-framework

Miners have the ability to host multiple frontends connected to a single backend contract or set of contracts. This creates multiple UIs, each with the ability to bring a new user experience.

Potential Future Revenue Streams

  • Sidechain Rewards
  • Bridge Infrastructure
  • L2 Infrastructure

Next Generation of Proof of Work

Ergo is one of the most miner friendly PoW ecosystem’s created, but that requires engagement from miners and mining pools.

Ergo Miners have the ability to adjust the block size which increases the amount of transactions per block. This increases potential rewards but also adds additional storage requirements.

Ergo Miners have the ability to adjust the emission macroeconomics, meaning the long term economic security of the protocol is up to miners to decide. A 90% supermajority is required to prevent forks.

Ergo Miners control burns through storage rent. This is something we will get into below. It is a very powerful tool for mining pools that is not well understood at this point.

We hope to provide tools so that miners can optimize the network, not just for short term gains but for long term crypto-economic security. I would like to think of this as “Perpetual Proof of Work.”

Perpetual Proof of Work starts with giving miners control over the ability to Burn Tokens. Recently, the burning mechanism in Ethereum was used to effectively steal rewards from miners which has led to a certain distrust between developers and the mining community.

Storage Rent charges a fee on stagnant UTXO’s. This creates one of the most interesting long term potentials for Perpetual Proof of Work that in my opinion has yet to be discussed, explored or appreciated in the mining community.

I want to cover what Perpetual Proof of Work looks like and how this empowers miners.

If an output remains in state for 4 years without being moved, a miner may charge a small fee for every byte kept in the state.

Storage rent is essentially garbage collection.

The problem of “storage rent fee” is this “fee” part — which may look like a disadvantage. However, programmers can quickly realize the importance of it by just imagining life without garbage collection in their language of choice.

Storage Rent is nominal (.14ERG per 4 years from an unmoved box) + transaction fees.

Fees sound great… But what happens if a UTXO cannot pay the fee?

Miners can take over assets inside a UTXO if there are not enough ERGs to pay for rent.

This feature is one of the most interesting reward mechanisms a PoW blockchain can offer miners… The relevance of this is particularly important in a blockchain that has the capacity to have a wide variety of assets.

To summarize, there is a potential for user assets to be seized if they are not active or cannot pay network rent due to inactivity and/or a lack of ERG.

How Can We Protect Users?

For the average active user that periodically consolidates their UTXO set, this should not be an issue.
UTXO consolidation features will be added into wallets. For the average long term ERG holder the fee is very small and only charged every 4 years.

Users usually do not know the “box” structure of their funds. They just know that they have 1k ERG and 1M USDT, whereas it might happen that these 1M USDT are kept in a box with just 0.001 ERG in it. In this scenario, the USDT will be seized to cover the storage rent, as storage rent is only payable in ERG.

The example above is an extreme situation but is something that could potentially occur. We need to put safeguards in place to protect users. The reality is if miners abuse storage rent they will destroy their own network by pushing away users.

If you look at this over a long period of time (since storage rent is quite small), miners will control what is burned.

As an example, if we created a keyless burn wallet for assets without ERG to pay future rent, those assets will be available for miners to seize.

The storage rent protocol does not know or care about wallets… Only UTXO’s. This creates two things:

1. An incentive for network users to be active, which benefits miners from an increase in transaction fees.

2. It encourages users to consolidate UTXOs, which is a feature that can be easily added to wallets. The natural incentive for UTXO consolidation by users keeps the chain state light and dust collection via storage rent assists with bloat.

Ergo has the capacity to not only be secured by miners for a reward. Infrastructure can also be built/secured on the application level for a reward. Via storage rent, the UTXO set will be subject to perpetual digestion by miners rewards. This digestion process unlocks value for miners.

Storage Wars? How Storage Rent Creates a New Revenue Stream for Miners

What happens when Mining Pools start getting seized?

This is actually an open question that will be up to individual pools to decide. Why? Because this is a PoW ecosystem for miners. It creates an entirely new marketplace for ideas and incentives. I will share my initial thoughts on this:

Pools may liquidate the assets as a mechanism for boosting the mining reward. This may be on a per block basis or proceeds may go into a reserve that is redistributed to their miners at a stable rate.

Pools may actively trade assets using arbitrage techniques which makes pricing more efficient and potentially builds rewards. This may be on a per block basis or proceeds may go into a reserve that is redistributed to their miners at a stable rate.

Pools may actively act as Liquidity Providers earning passive income for the pool. This may be on a per block basis or proceeds may go into a reserve that is redistributed to their miners at a stable rate.

Additional means of revenue and different collective strategies can be deployed by pools to optimize their incentives which will attract miners, increase hash rate, block production, and storage rent. This is an entirely new economic model for mining pools; ergo, Perpetual Proof of Work.

There are some additional things to consider when it comes to sidechains and how they add additional value/storage fees — but we will leave that for a future discussion

Ethereum gained massive traction among the mining community from MEV rewards.

I believe storage rent is a value mechanism for miners that brings a unique value proposition to miners and also creates a sustainable network.

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