After fungible tokens, NFTs are the single biggest innovation of the crypto ecosystem. The first level of NFT innovation has been around its use cases as work of art. While the primary use case will remain as a work of art (NFTs are beautiful, you cannot deny that), it’s time for us to come up with more use cases for NFTs.
To the outside world, NFTs come across as a JPEG but to all of us in Crypto, NFT is one of the major building blocks of a decentralized ecosystem (ignore the naysayers who are stuck on Web2). While we’re seeing attempts at various new use cases for NFTs, we haven’t seen any NFT use cases deeply embedded into a Layer 1 blockchain.
What I’m suggesting today is a push towards making NFTs an integral part of the Layer 1 ecosystem. I hope to see the majority of L1s implement this sooner than later and make NFTs even more power packed.
What is PoN?
The core idea is very simple. To run a node in a blockchain network, you would need an NFT (over and above the PoS or PoW consensus mechanisms). PoN adds a ‘pseudonymous identity’ layer for nodes without compromising on privacy of the node operator participants.
The advantages of PoN are manifold. A few ideas at the top of my mind are:
- Nodes will now have an identity while maintaining privacy and decentralization
- A blockchain network can keep track of good nodes, bad nodes, new nodes and old nodes
- Based on long term node behavior data, the network can reward or punish a particular node
- You can introduce variable node rewards based on the rarity of the NFT of a particular node
- The motivation of nodes to behave positively increases exponentially as they now have an identity on the network
- Nodes can launch their own blogs, have social media presence etc without compromising on privacy. NFT helps them verify to their followers that they really are the node they claim to be.
- Community can easily tip good node operators
- New token projects can airdrop their tokens to node operators
Why did I think of PoN?
PoS + PoN = PoW
I’ve liked Proof Of Work. It’s an amazing gamification of consensus to ensure participants are always motivated and there’s dopamine hit for the participants. Apart from randomizing the reward, PoW also ensures that coins are not concentrated in the hands of a few miners. Miners need to sell the coins in order to upgrade and buy more hardware.
However, PoS is fast gaining adoption as the new consensus mechanism and definitely the most popular option right now.
The problem with PoS is that you just need to keep accumulating more coins in order to keep earning more rewards. It’s one of the reasons why PoS is often seen as a rich gets richer consensus mechanism.
This put me on the path to finding an elegant solution that would replicate the hardware requirement of PoW without compromising on the speed and efficiency of PoS. And at the same time bring in variable reward to keep that dopamine hit alive.
How does PoN help bring in variable reward?
There are various ways to bring in variable rewards using NFTs. Let’s look at one such example below:
- Launch a PFP (a 10K project called Lazy Ant, Hill Club)
- Some of the traits could be:
- Eyes [Red: 0.1%, Blue: 1%, Green: 10%, Brown: 88.9%]
- Species [Eciton Hamatum: 0.1%, Trap Jaw: 1%, Siafu: 10%, Bulldog: 88.9%]
- Color [Silver: 0.1%, Blue: 1%, Yellow: 10%, Red: 88.9%]
Write a reward randomizer function in the consensus reward mechanism. This randomizer function would use the NFT traits to find the lucky NFTs. The nodes that own (or lease) the lucky NFTs, win the variable reward.
100 coins are to be rewarded per block or per hour (in Shardeum we may go for hourly rewards). You can split based the 100 coins as below:
- 80 coins distributed to all the nodes that are staking
- 20 coins distributed based on the lucky NFT attributes
If the hourly lottery picks [Eyes: Red, Species: Trap Jaw, Color: Blue] then the reward would look for NFTs that have these attributes and reward them.
This would encourage nodes to lease out multiple NFTs in order to maximize their chances of winning the hourly reward draw.
How is PoN similar to the hardware requirements in PoW?
Why do you buy more h/w as a node operator? To increase your hash power and in turn increase your chances of validating the next block. This is also the reason why miners cannot HODL for too long. They have to liquidate their coins in order to buy more h/w. This reduces the centralization of tokens in the hands of a few miners.
In PoN, holding more NFTs per node would provide you with a higher probability of winning the variable reward. Which means, node operators would be incentivized to sell their coins in order to acquire more NFTs from the market.
How does this Scale?:
As the network grows and number of nodes required in the network increases, one of the two could be done:
- Inflationary NFT: The NFT smart contract could be programmed to create and release more NFTs. Due to this, you will have regular NFT auctions as the network grows in order to support more nodes
- Deflationary NFT: The network would increase the number of nodes you can run per NFT once existing capacity is reached. This leads to an increase in the value of the NFT as the network grows.
Node operators can even encourage NFT holders to loan their NFT and promise them a portion of the rewards they earn (similar to pooling of h/w that happens today for PoW)
I hope this helps you get a broader understanding of using NFTs as a first class participant of the Blockchain ecosystem. There’s a long way to go before the Crypto ecosystem saturates. Everyone is full of new ideas and these new ideas are how we’ll onboard the Internet to Crypto.
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