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Incentives or Fees

Abstract

Consortial blockchains are public-permissioned blockchain networks, that are institutionalised by entities (individuals, companies, organizations or governments) who participate in the network, are dedicated to a specific purpose in order to achieve a common goal.

A consortium has to define why an entity can have an interest in participation or incentive scheme to run the network. Fees can avoid spam, but since it is a permissioned blockchain, it is questionable whether this is a problem at all. Fees can also be used to create incentives to reward certain activities or actions.

Motivation

Nowadays, it has become normal to use supposedly free services on the Internet. This makes it particularly easy to carry out manipulations and cause damage. However, most services are not free, but are financed with personal data. With this background, it is difficult to establish business models that use a different form of financing. The infrastructure and computing power are associated with costs that have to be refinanced. Therefore, incentives and fees are particularly suitable, as these mechanisms are already widespread and have worked well so far.

Of course, it is particularly important that all incentives and fees are communicated transparently. This is the only way to ensure the long-term success of a network. In addition, incentives and fees also offer a good perspective for all members involved, as values are created from which everyone benefits and this ensures long-term commitment.

Elaboration

The fundamental question is whether a consortial blockchain network needs a cryptocurrency or rewarding system based on a token economy to provide membership incentives.

The governance has to define how tokens or cryptocurrencies are used, e.g. as utility token, security token or stable coin.

Incentives could be based on the intent for monetisation, a professional interest or other incentives.

A native currency and tokens Incentives and tokens may be necessary for a blockchain network to pay for transaction fees and prevent spamming of the network.

In case of blockchain technologies using a native token, e.g. Ethereum, there has to be a mechanism of distribution (e.g. a faucet) even if the token is for free.

Monetisation

Crypto incentives

  • Validators or miners can earn rewards for their activity (i.e. creating blocks, including transactions)
  • Allocation of tokens to (founding) entities through pre-mining or initial token allocation
  • The consortium should be cautious about using initial token offering (ICO) as a vehicle for fundraising and get prior legal advice

Fiat incentives

  • Applications providers can earn money with their services on top of the blockchain
  • Supply of technical infrastructure as a service (e.g. hosting servers)

Professional interest

  • Entities can support the network to make use of the utility of the blockchain, e.g. cooperate with business partners in joint use cases
  • Membership and industry organisation may be assigned by their members to support a specific infrastructure

Other incentives

  • for research purpose
  • for marketing and reputation
  • for increasing own influence in the consortium or on the network adaption

Internal references and dependencies

(Lists of internal references and dependencies)

References to best practice, examples

Bitcoin and Ethereum as public permissionless networks use transaction fees to incentivise minders or validators for the block generation. Ethereum uses GAS when it runs smart contracts as a reward for the nodes executing the smart contracts.

Using a blockchain without crypto currency like hyperledger indy or trustchain can follow a pay per use model that is bound to fiat currency. These mechanisms do not have to deal with regulatory issues.

The Energy Web Chain is a public permissioned Ethereum blockchain with a native token called Energy Web Token (EWT) listed on exchanges. Users can buy EWT for fiat and use it for paying transaction fees. Validators earn those fees plus the block rewards and can sell them for fiat on those exchanges. Further information can be found at the Energy Web Foundation: https://www.energiewirtschaft-blockchain.de/projekte/energy-web-foundation-blockchain/

Further, the regulation by banking supervisors should also be taken into account. In Germany, in particular the following information: Initial Coin Offering and Security Token Offering: https://www.bafin.de/SharedDocs/Downloads/DE/Merkblatt/WA/dl_wa_merkblatt_ICOs.pdf?__blob=publicationFile&v=1

RFC-0711 Contributing authors: Mirko Mollik, Sebastian Posth, Zoltan Fazekas, Daniel Theis, David Maas
Status of this document: work in progress
Last day modified: 2021-05-26