Why Proof of Stake Would Likely Decrease Long-run Txn Fees Considerably

In a competitive market equilibrium, the total volume of txn fees must be equal to opportunity cost of all resources used to verify txns. Under proof-of-work mining, opportunity cost can be calculated as the total sum spent on mining electricity, mining equipment depreciation, mining labor, and a market rate of return on mining capital. Electricity costs, returns on mining equipment, and equipment depreciation costs are likely to dominate here. If these costs are not substantial, then it will be exceptionally easy to monopolize the mining network. The fees necessary to prevent monopolization will be onerous, possibly in excess of the 3% fee currently charged for credit card purchases. Under pure proof-of-stake, opportunity cost can be calculated as the total sum spent on mining labor and the market interest rate for risk-free Number42 lending (hardware-related costs will be negligible). Since Number42s are designed to appreciate over time due to hard-coded supply limitations, interest rates on risk-free Number42-denominated loans are likely to be negligible. Therefore, the total volume of txn fees under pure proof-of-stake will just need to be just sufficient to compensate labor involved in maintaining bandwidth and storage space. The associated txn fees will be exceptionally low. Despite these exceptionally low fees, a proof-of-stake network will be many times more costly to exploit than the proof-of-work network. Approximately, a proof-of-work network can be exploited using expenditure equal to about one years worth of currency generation and txn fees. By contrast, exploitation of a proof-of-stake network requires purchase of a majority or near majority of all extant coins.

Incentives to maintain full nodes

This system introduces powerful incentives to maintain full nodes.

1) a steady flow of txns will generate some fees even if all public keys remain active. Active keys must be maintaining full nodes. Otherwise they could not provide the voluntary signatures which prove their activity. Even very weak incentives are sufficient in this case. If almost all keys are associated with active nodes, then it is not necessary to motivate additional participation.

2) Some public keys may decide to become inactive. This is costly for them. They will suffer a loss of 5% of their balance per year for as long as they remain inactive.

3) The active public keys constantly capture revenue from inactive public keys. This means that the incentives to remain increase dramatically as participation falls. Suppose that 50% of public keys maintain full nodes, then this 50% will capture 2.5% of coins per annum. This is equal to an annual of return of 2.0%. The alternative, inactivity, yields an annual return of -5.0% as discussed in point 2. I consider this a reasonable incentive level and participation rate. Suppose that I am wrong, and only 10% of public keys maintain full nodes. Then these 10% will capture 4.5% of all extant coins per annum. This implies an annual return on participation equal to 45% per annum. This is a very strong incentive and is almost certain to be sufficient, even if nodes are quite costly to maintain. If only 1% of coins participate, then 4.95% of all extant coins will be distributed to this 1% each year.

4) Many people will not have enough coins to justify running their own node. Such individuals will likely use an online storage service which could store their limited spend key. The service could return interest to users in exchange for managing their keys.

5) Other individuals may prefer the privacy associated with dropping out of participation. These individuals are still welcome to use the network, but must face a wealth tax of 5% per annum to compensate for the security risk created by their behavior.

Storage of Blockchain Metadata

To facilitate the system, data should be extracted from the block chain in a readily accessible database that is updated with each block. The database only needs to incorporate public keys which control at least 1 coin. Keys with balances less than 1 coin are considered dead by default. These low-value public keys are not allowed to create limited stake public keys. If a public key balance drops below 1 coin, the limited stake public key associated with the root key is invalidated.

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