Protocol Tokenomics

Insaanity solves the tokenomics challenges that other decentralized protocols face in terms of ensuring economic security. Below are the broad approaches followed by decentralized protocols at present, and their respective drawbacks.

Overcollateralization

The protocol would require nodes to stake fungible tokens as collateral against the customers’ assets it has in custody. The aim here is to ensure a negative expected value of malice by slashing the stakers collateral in response to his malicious behavior. This is dependent on the price of the fungible token used as collateral relative to the price of the asset(s) in custody. An overcollateralization ratio is determined (usually extremely high) such that the value of the assets in custody is always lesser than the value of the collateral staked, even in case of price fluctuations. This has two main drawbacks — choice of collateral and scalability. Choosing a suitable token as collateral is difficult, subject to the nature of its price relationship with the assets in custody. Moreover, the overcollateralization introduces a huge opportunity cost for stakers for which they must be compensated. Also, the sheer capital requirement for participation is a barrier to entry for nodes.

Honest majority assumption

This idea is derived from the fact that consensus mechanisms often rely on a certain majority of the stakers to be honest, for eg. Bitcoin 51% attack. Similarly, in a multiparty-computation scheme, a certain proportion of the stakers can be assumed to be honest. When we pick a sample of stakers from these, and a certain threshold of the sample is required to perform the task, probabilities of the task being corrupted can be calculated using the hypergeometric distribution where population size (M) is the total number of stakers, number of successes in the population (N) is the number of malicious stakers, a sample size is (s), and the number of successes in the sample (k) is the number of malicious stakers in the sample. The main drawback here is that probabilities change vastly depending on the values of M, N, s and k. Moreover, it is possible for a malicious staker to acquire enough proportion of the nodes and corrupt the system profitably. While Bitcoin works well with the honest majority assumption, smaller networks are vulnerable to attack.