Dear hairen
Thank you for raising this topic. Three very healthy questions have been raised based on this thread:
- How decentralized is NEAR?
- How does NEAR Foundation ensure fair funding allocation?
- What delegations does NEAR Foundation do to validators?
These questions are essential to raise and address. Decentralization matters to ensure that the NEAR Protocol functions in a trustless manner. Moreover, NEAR Foundation has been entrusted large amounts of funding by its backers and was tasked to deploy the NEAR Token Treasury to the NEAR Ecosystem to support the adoption of the NEAR Protocol. A well-structured process of funding deployment is in the interest of all stakeholders of the NEAR Ecosystem. This post is going to address these questions.
Before we dig in, one request to keep things fair: You have emphasized certain individual transactions to kick off the debate. Given the public nature of the NEAR Protocol, this is easily possible. Of course, it is essential to look at specific properties of individual transactions to understand the state of decentralization and fairness. However, please raise your questions while avoiding putting up specific transactions for public debate to respect the beneficiaries and preserve their privacy.
So, let’s get into the questions:
How decentralized is NEAR?
NEAR has the edge over other protocols as it has excelled at balancing advantages and disadvantages concerning protocol design choices. There is a tradeoff between decentralization, scalability, and security (the “Blockchain Trilemma”). Therefore, maximizing decentralization means sacrifices in security and/or scalability. Compromises in security are hardly acceptable. Balancing between decentralization and scalability makes sense with the target that the decentralization remains sufficient to exclude collusion between actors with appropriate (very, very high) certainty. The target shouldn’t be maximizing decentralization, but optimizing it. For example, with Ethereum, several hundred thousand validators came online over the last two years. These validators didn’t validate a single ETH transaction before the Merge. That was an overly well-decentralized network while it had zero throughput. We’re glad the Merge went through successfully meanwhile to give use to the Ethereum Proof-of-Stake (PoS) network. Also, there is not just one area to look at for decentralization but many. For example, with Bitcoin, there are about 1 million miners (which looks decentralized), but more than 50% of the hash rate is controlled by 3 to 4 mining pools (which doesn’t look decentralized at all).
Let’s look at the notion of “optimal decentralization” vs. maximal decentralization. PoS networks typically require less decentralization than Proof-of-Work (PoW) networks to avoid attacks. This is because the PoS validators typically have more skin in the game than PoW miners. Validators need to control a third of the network to collude. They risk destroying their stake by trying to steal from the rest of the network. Even if an attack is successful, the rest of the network could fork and exclude the attacker and roll back unjustified transactions. This makes collusion impractical. Optimal decentralization is when collusion is so extremely unlikely that it is practically safe, while negative consequences of decentralization are in check.
NEAR has been increasing its validator decentralization with its adoption. When transactions became possible on the NEAR Network two years ago, 60 validators were online to validate the network. One year ago, this number increased to 100 validators with the NEAR Protocol upgrade Simple Nightshade, Phase 0 of the roadmap to a fully sharded network. This week, NEAR Protocol upgraded to Chunk-only Producers, Phase 1 of the roadmap to a fully sharded network, which opens the capacity for up to 300 validators.
On https://near-staking.com/ it can be observed that the top 9 validators could take over the NEAR network. This number has been gradually going up, which is excellent. Moreover, people familiar with the NEAR Protocol will know that this includes a good set of parties that are well aligned on the vision and mission of NEAR, and will under no circumstances collude but rather alarm the community if they stumble over any respective efforts.
Validator decentralization is also in the NEAR Community’s hands. Every NEAR Token holder can delegate their tokens to the validator of their choice. Four validators in the top 9 have received delegations from several thousand token holders. While this delegation concentrates power with these validators, it is the power that the NEAR Community entrusts with explicit dedication.
The very large portion of the initial NEAR Token supply given to the NEAR Foundation has been structured very diligently. Various measures have been put in place to ensure funds are used towards the adoption of the NEAR Protocol. Measures include an allocation plan, token lockup, a large part of tokens not being stakeable, and a robust and sound governance framework for long-term token allocation. Thus, NEAR Foundation has always kept an eye on improving decentralization when allocating NEAR Tokens.
Now, how does NEAR Foundation ensure fair funding allocation?
NEAR Foundation’s governance framework includes a NEAR Foundation Council, an Executive Management, a Leadership Team, a Grants Team, a Legal Function, and a Finance Team. The composition of these bodies has been stable since their inception. All Board Members and most of the team members that have joined and contributed to building up the Foundation structure and the process of funding allocation since inception are still around. This has contributed to consistency, good governance, and diligence. All funding allocations have to undergo an approval process. Depending on the size of the allocations, there is a path to approval. Depending on the size and type of allocation, various procedures up to approval apply, including preparation of a deal memo, a grants review, technical review, legal assessment, contracts review, NEAR Foundation Council approval, and sign-off by the Executive Management. The Finance Team checks if procedures have been followed before the implementation of any transfer. Finally, NEAR Foundation undergoes an annual internal controls and financial reporting audit.
What delegations does NEAR Foundation do to validators?
Since the inception of the NEAR Protocol, NEAR Foundation has restricted itself from delegating NEAR Tokens to validators for several reasons. A target is to avoid redirecting staking rewards from delegators and validators to NEAR Foundation. Moreover, it is a measure to remove NEAR Foundation’s power over the network and to ensure that NEAR Foundation is not becoming a centralized party to control it. NEAR Foundation currently delegates 100K NEAR Tokens each to 28 validators that have qualified based on a structured application process and best met a set of criteria in the areas of transparency, sustainability, and stability as part of the last year’s protocol upgrade. These delegations are planned to be removed while implementing the new Stake Wars delegation of 4.5M NEAR via three token pools. Beyond that, NEAR Foundation has implemented a handful of temporary delegations to strategic partnerships that have passed the above-described rigorous funding allocation and approval process instead of making direct token payments to the respective partners. Each delegation passed the assessment to ensure that it was aligned with the mission of driving the adoption of NEAR Protocol to achieve 1 bn users within five years. Certain large token transfers to validators appear to come from NEAR Foundation that don’t seem to fit the above descriptions. Over time, token claims collected by financial backers fall into this category and are made from accounts associated with the Genesis Block.
Thank you again for raising the topic. We believe that transparency concerning the decentralization of the NEAR Protocol and the funding allocation by the NEAR Foundation is essential. This report is a stab at providing more insights. Fostering the research to optimize the NEAR Protocol’s decentralization further is on our minds. Moreover, the recent NEAR Community initiative to build the NEAR Digital Collective will help refine the funding allocation structure within the NEAR Ecosystem.