Contrary to popular belief, the primary innovation of the Bitcoin protocol was not advanced cryptography, but its groundbreaking application of economic theory to distributed systems. The economic incentives it employed to align its "miners" in achieving consensus created an elegant, simple machinery for network security that no previous protocol had achieved. Similarly, Aleo's tokenonomics is engineered to align incentives across all of the stakeholders in our system in as simple a way as possible in service of the Aleo network.
In addition, we want to ensure that our system achieves the following properties:
- The native token of the network represents meaningful value
- The system incentivizes the actors on the network to contribute to its security
- The incentives do not inadvertently encourage dishonest or malicious behavior
- It promotes the development and use of an ecosystem of useful applications
- It fosters decentralization, such that no single party can control the entire system
With these principles in mind, we lay out Aleo’s economic framework below. We invite any thoughtful feedback in line with the principles outlined above. Please note that while we are committed to this general framework (which has been deliberated at length), we do reserve the right as a team to make necessary tweaks as we iterate towards mainnet.
Aleo Economics Overview
First, what is the native unit-of-account in the Aleo network? We dub these Aleo credits. These credits are used to pay transaction fees (similar to Bitcoin), and are anticipated to be the preferred currency of "provers" who we expect to run as L2 providers on top of the network (more on that later).
Similar to AWS credits being exchanged for cloud services, Aleo credits enable access to a key computational resource of the next generation: zero-knowledge compute. This is defined as any computation inside of snarkVM, which inherently uses zero-knowledge cryptography to provide fully private and performant applications. Zero-knowledge cryptography uses proofs, which describe & attest to an outcome of a program represented as a “circuit.” The circuits themselves are sub-denominated in “gates”, so an Aleo credit represents the cost of computing some fractional portion of a zero-knowledge proof. Since mining in Proof-of-Succinct Work (our consensus algorithm) is proving, Aleo credits are a natural way for the market to price the value of a zero-knowledge proof for an arbitrary program. Therefore, the price of that asset should roughly represent the demand for zero-knowledge compute overall.
PoSW mining is a special case of an application within the broader Aleo programming model. One critical difference between Aleo and other networks such as Ethereum is that fees on the Aleo network are calculable beforehand. On Aleo, there is no concept of "gas" which is what makes programs unpredictably expensive to run on Ethereum. Whereas in Aleo, everyone knows ahead of time exactly how many Aleo credits will be needed to run a given program.
Given the number of potential applications for this technology, we expect zero-knowledge compute to be a critical computational resource (similar to bandwidth, storage, etc) for the next generation of decentralized, scalable networks. At launch, Aleo credits will be distributed between early backers, builders, and community members as well as a foundation or other entity that will provide grants and ensure the continued development of the network. From genesis, new credits will be minted and distributed to miners on our network via the block reward. Table 1 (below) summarizes the details of the overall economic model (note: current block times are approximately 20 seconds).
Inflation & Mining Rewards
Aside from the starting supply of tokens that is be divided between the Aleo team, early backers, and community members there will also be a portion set aside for a broader distribution at some point after the launch of our mainnet. The point of this broader distribution will be to further decentralize control and increase the quality of the open source community, all while complying with applicable laws and regulation.
Aleo's inflation schedule favors early adopters of the network. This will help ensure we achieve a high degree of security for the network sooner rather than later. To achieve this, we’ve set a relatively higher inflation rate at the beginning, which then halves twice in the first decade. After year nine, a final halving will result in a tail emission of 12.5 Aleo credits per block will be awarded simultaneously to ensure the security of the network, as well as the stability of the economy that it will support.
Table 2 below shows the inflation curve for Aleo for the first 15 years.
Why a tail emission? Two reasons.
First, a tail emission ensures that there will always be a reliable source of revenue for miners who perform the essential work of securing the protocol. Miners (if they are assumed to be economically rational) will only operate if revenues to be gained are greater than cost to be incurred. The implication is that without a tail emission, miners will only produce blocks infrequently and unpredictably; e.g. blocks will only be mined when the cumulative sum of transaction fees is high enough to cover costs to mine a single block. The tail emission ensures that there will always be a reliable source of revenue for miners who perform the essential work of securing the protocol and in turn that miners will participate in a robust way in securing the network.
The second reason is that a low, predictable inflation rate is healthy for an economy. If an asset is purely deflationary, then owners of that asset are incentivized to hold it rather than spend it. While potentially desirable for a pure store-of-value, it isn't practical for a medium-of-exchange that unlocks a real use case. After all, the purpose of the tokens is to enable people to interact with applications on the Aleo network. If people are incentivized to hold (rather than spend) those credits, demand for those applications goes down and by definition the value of the credits which provide access to this ecosystem do, too.
Distribution & Decentralization
Over time, as new credits are minted, the distribution will change. Table 3 (below) describes the distribution of Aleo credits assuming the block rewards outlined above. Keep in mind that this chart only accounts for inflation, and does not account for the case where any of the initial holders sell their tokens. As a result, the actual distribution of tokens will likely be wider than the simple representation below.
One important strength of Aleo using a proof-of-work variant instead of alternate consensus mechanisms such as proof-of-stake is that, especially in the early phases of the network, tokens will be more widely distributed. Control will be decentralized from day one and the Aleo network will survive with or without the Aleo core team. This is the "tried and true" route that other blockchains have used to scale while ensuring network security.
It's also important to note our model has a slight but important twist from traditional proof-of-work models. Proof-of-Succinct Work is an example of what we can call a proof-of-*necessary-*work system, where the proof generated is actually a useful computation as opposed to a random puzzle that exists solely for the purpose of determining the winning miners. Thus the marginal energy consumption of mining activity in this framework is significantly limited because the work being done is required for validating changes in state – even in a system that had no blockchain at all, it would need to be done anyway. We'll publish another post discussing the concept of necessary work in more detail soon.
Our goal at Aleo is to create a decentralized, open-source network that will offer robust support for building, deploying, and running private applications on the web. We believe that the open, decentralized nature of this foundation will provide a far stronger incentive to participate. And just like Bitcoin’s economic model was critical to it’s success, a stable token economy with predictable prices provides the perfect underpinning to enable the next generation of computing based on zero-knowledge cryptography.