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The Merit approach to mining is one of its core innovations. As a refresher, the design goals with the Merit mining system are as follows:
A more level playing field
Instead of favoring the financial and technical elite, Merit strives to allow people from any background to benefit.
Better for the planet
Instead of utilizing huge amount of power and producing large amount of heat, Merit strives to be just as secure while running cool and on less power.
Instead of requiring users to have a personal computer, Merit strives to be truly accessible to all users worldwide, including those that only have smartphones.
To accomplish this, the Merit team invented Growth Mining. This new concept redefines how mining happens in a network: instead of only focusing on security, Merit mining covers both security and stewardship of the network. (For additional information around mining, read our Mining Primer here.)
To do this well, Merit considered a number of possible solutions.
First, the Merit team considered changing the consensus algorithm. This is the algorithm used by all the nodes on the network to choose to the winner of the ‘block generation’ award known as a Coinbase. (Different than the wallet/exchange provider with the same name.) The most common consensus-algorithm today is known as Proof-of-Work (PoW), which was introduced originally by Hashcash and later popularized by Bitcoin.
Proof-of-work involves all of the nodes on the network working to solve a computational puzzle. The difficulty of this computational exercise varies over time, and scales in proportion to the total compute power on the network at any given time. The first node to find a valid solution to this mathematical challenge earns the right to create the next block and earn the mining reward for it. This PoW approach helps to secure the blockchain by making it computationally expensive to falsify data. Furthermore, the more miners there are on the network, the lower the probability is that any one miner will win. Without being able to reliably win, a bad actor attempting to falsify data would be hard-pressed to meaningfully gain an advantage in the system.
There are a number of competing consensus algorithms adopted by other currencies, with the next most popular being Proof-of-Stake (PoS). Proof-of-Stake does not rely on computational puzzles to choose the creator of the next block. Instead, this node is chosen by a combination of their total wealth (in the form of the currency) and the amount of time they have held it. (Also known as Coin Age.)
The positives with Proof-of-Stake are largely related to it being less CPU-intensive, and thereby less power-hungry and better for the planet. The negatives are related to security and the vulnerabilities it creates on the blockchain. Because there is no technical cost to falsifying the data (like there is with Proof-of-Work), it is possible that a bad actor (with a large stake) could meaningfully impact the system negatively, even if they are economically incentivized not to do so.
Merit created a new approach to distributed consensus called Proof-of-Growth (PoG). Proof-of-Growth operated with similarities to Proof-of-Stake, but didn’t simply reward people for their own wealth. It instead, takes into account a nodes impact in growing the network through bringing in new members to the community. In essence, it considers not only the amount of Merit a user has, but also the Merit that they have helped to bring into the network by inviting new members.
Digging deeply into changing the consensus algorithm yielded a number of significant challenges. First and foremost, the risks to security felt less than ideal. While it is true that users in PoS and PoG systems have an economic incentive not to hurt the currency, the notion of it being easier to attack the system was unacceptable to the Merit team. Relying on a bad actor to have rational motivations did not feel like enough. Further, a bad actor might be able to compromise the account of a good actor, and therefore gain a possible foothold from which to attack the network.
Perhaps the biggest criticism of Proof-of-Stake (and transitively, Proof-of-Growth), is the nothing-at-stake problem. This problem manifests when nodes in the system break into multiple factions, creating what is known as a “fork” of the blockchain. Typically, these forks exist temporarily until all the nodes reach consensus that one is more accurate and valid than the other. From an incentives point-of-view, miners have the highest expected value if they mine on both forks of a chain. This way, they will earn the reward no matter which fork wins out in the end. Because there is no computational cost in mining both chains, economically-interested miners could unknowingly perpetuate false data without knowing it.
Further, because there is no significant computational cost to create blocks in PoS systems, there are other possible vulnerabilities. Malicious actors could generate a chain of blocks that is far ahead of the current block height (by millions of blocks, even). Without proper safegaurds in place, the other nodes may go along with this being the longest valid chain. While proponents of PoS algorithms argue that the chance of attack in these systems is still very small, any level of additional risk over PoW was concerning to the Merit team.
Finally, Proof-of-Growth could have fuzzy consensus problems, especially in extreme race conditions. Because PoG goes much further than simply taking into account one members coin-age, deciding on who should create the next block can get tricky when large amounts of Merit are moved from account to another. Say, for example, that one user sends 1,000,000 MRT from one account (referred by Miner A) to another account (referred by Miner B), if that transaction has not yet propagated to all nodes on the network, they may disagree about which Miner has the right to create the block.
Merit created a proof-of-concept of the Proof-of-Growth algorithm. The early simulations, testing, and discourse within the team, led us to strive for a better approach. We plan to open-source the proof-of-concept and early simulations in the near-future
The power of this approach is that Merit can reward those who are most impactful to the growth of the network while maintaining an inclusive reward ecosystem. The key here is to understand that PoS and PoW fundamentally incentivize different things. PoW is incentivizing users to get as much compute power as they can, which helps to make the network more secure and resilient to attacks. PoS, on the other hand, incentivizes users to buy as much of the currency as they can and hold it.
Either approach could make a credible argument that its incentive system is better for the overall community. Merit believes that, ultimately, both of these core sets of incentives is good for the community. Any good ecosystem wants to have both very high-security as well as stewards who help make the community better through their actions. One should not come at the expense of the other.
As a result, only the wealthiest will earn the large mining reward. The obvious challenge with this approach is the dynamic of the rich getting richer. The compound effect here is that the wealthiest people can simply pull away from the pack, making it very difficult for regular members of community to earn any kind of reward.
The Merit approach works to incentivize both security and stewardship, all while rewarding more users in the process and making the playing field more level. With Merit, the creator of the each block is chosen based on finding the winning solution to a cryptographic puzzle (Proof-of-Work). The cryptographic puzzle is based on an innovative algorithm that is more friendly to users with normal PCs, instead of favoring those with large data centers and application specific hardware. The mining reward is split between the miner and selected ambassadors, allowing many people to earn a reward each block.
Ambassadors are chosen based on who has helped to grow the Merit network the most. This selection is done as a lottery each period, with the most impactful ambassadors essentially earning more tickets to the lottery. As of today, there are five winning ambassadors each period. This lottery-based approach helps to provide great community-focused incentives, while still ensuring that even modest growth activity is rewarded.
Safety is a critical pillar of the Merit community. To create a digital currency that is approachable by real people, Merit needs to provide non-experts with a way to keep their money safe. The primary challenge in accomplish this is the decentralized nature of digital currencies. The core design goals of the vaulting protocol are as follows:
Preserving the Power of Decentralization - The perceived safety that we’ve come to expect from traditional currencies and banks comes in the form of a central source of power that will make things right. While relying on a similar dynamic would have made vaulting easier-to-implement, it would have broken the integrity of a truly decentralized system.
Being Easy to Use - One of the most challenging things about cryptocurrency today is how difficult the best-practices of security and safety are to implement. Even for technical experts.
Practical, but Optional - One of the most freeing things about digital currencies is that they put the user back in control of their own money. Merit aims to preserve that freedom, while providing users with the ability to enhance their security if they choose to.
The Foundation for More - While vaults are a powerful security feature in their own right, they can be the foundation for so much more. Merit believes that many practical personal and business applications to currency can stem from the building blocks of Vaults.
To reach the above goals, Merit created a number of important innovations in its protocol. First and foremost is the creation of Vaults at the protocol level. Vaults are the building blocks to so much more; the Merit roadmap includes new concepts that push the boundaries of safety on the blockchain.
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