Nano Unique ORV Consensus and Decentralization Game Theory

Nano has a fairly unique decentralization and consensus mechanism with the Open Representative Voting (ORV). Each owner, according to their liquid share of XNO's total supply, can actively determine whether the network has a more or less decentralized consensus.

This creates very interesting dynamics with an innovative game theory and decentralization incentives, which I’ll address in this article.

How does nano validate transactions?

Like most decentralized networks, nano is made of individual nodes (or servers) running the nano-node and connecting with each other to agree on the final state of its ledger. This agreement is reached through 66% of open votes broadcasted by voting nodes, also known as Representatives.

Notably, the votes are measured according to the live balance of each nano account directly voting as a Representative, or delegated by account to a Representative of choice. No staking is required and votes change as nano is spent or received in each account.

Anyone can run a voting node and become a Representative, by linking the desired nano account to the task. For safety reasons, most Representatives use a different account than the one they keep their holdings with. Thus, delegating the relevant voting weight of other accounts they control to the Representative account, as well as possibly receiving delegations from other participants.

Any Representative with 0.1% or more of the online voting weight is a Principal Representative, with a meaningful impact while validating transactions.

The game theory of nano for an increased decentralization over time

If users want to have a more decentralized network, they can achieve that by running a voting node and setting a representative account; or properly delegating to one, while keeping the liquidity of their holdings.

This is different from what a proof-of-work (PoW) or proof-of-stake (PoS) system would require.

How does ORV differ from PoW and PoS systems

In the former, users have no direct say in the consensus unless they run relevant mining setups. It does not matter if you run a large business using a proof-of-work coin, or have a large personal stash for savings. The network decentralization state will depend on third parties spending energy in an attempt to win the lottery system and become the lucky CPU to find the next valid block.

In the latter, users will need to stake and lock the amount of coins they want to contribute for decentralization. Giving up liquidity is a risky endeavor and requires good financial management, not possible for every user. For example, businesses might not be able to lock up their cash flow, leaving this flow outside of the corresponding voting weight, no matter how large it can be.

Both models have considerable barriers for most users and create a special subgroup of people directly involved in the network’s decentralization.

Moreover, PoW and PoS require a strong rewarding mechanism, considering the high costs and risks involved in mining or staking. Often, this leads to the creation of a professional business model for validators, with the profit of the activity being the core motivator, instead of the network maintenance. 

The higher the share an entity has on consensus, the higher the rewards it will receive over time and the higher its reinvestment capacities are to improve its validation business and future profitability.

However, improving the “validation business” also means increasing the individual share of the consensus. Each entity is encouraged to centralize the consensus on them as much as possible, so they can profit more. This inevitably leads to an Economy of Scale dynamics where large entities become bigger over time, while small entities become smaller until they are forced to close – leading to a gradual centralization, inherent to these incentives.

Nano has no fees and no inflation to reward validators, and that’s a good thing

Now, in the case of nano, users have a direct say on the consensus according to their monetary exposure to the network. 

Additionally, as there are no rewards (through mining or staking), validators are not incentivized (through an increased profit) to continuously increase their voting power or their share in the consensus, which inevitably centralizes any network.

All nano Representatives need is enough delegation to become a Principal Representative (0.1% of the online voting weight) and that's it. Enough for voting sovereignty, while not being too big to become a target or raise centralization alerts among users.

“Nano’s decentralization argument is strong because it’s the easiest and least risky system for people to participate in consensus. From an economic standpoint: requiring capital expenditure and giving monetary reward will result in economies of scale trying to minimize capital cost and maximize return which results in centralization.”
— Colin LeMahieu

What can I do to improve nano’s decentralization?

As of now, the nano network is still in its early phases and there are significant amounts of XNO sitting on custodial wallets, concentrating a relevant part of the consensus on these entities. Also, we have good-reputation Principal Representatives with far more than 1% of the voting weight, which is not ideal.

Vote weight distribution of PRs and entities. Source: NanoCharts.info 

To help improve nano’s decentralization, you can either run a reputational Representative in a strong node setup; or delegate your accounts’ voting weight to one (or more) who meet this criteria (or other personal criteria you may have).

If you own some nano and keep it under third-party custody, please, consider withdrawing at least part of it to a self-custody wallet where you can properly delegate to increase the network decentralization and, with that, the fundamental value of your XNO holdings.

As usual, it is the community of users who decide how decentralized, secure, and valuable nano is. Stop waiting for others to do something and take action right away in contributing to improve nano’s decentralization.