Author: Daolectic Research

Compiled by: Linqi, Chain Catcher

Ethereum is undoubtedly the most widely used smart contract platform in the entire blockchain ecosystem. However, its scalability issues have paved the way for the development of other blockchains, all of which aim to achieve the same goal: to serve the needs of the public while maintaining characteristics such as trustlessness, immutability, permissionlessness, transparency, and censorship resistance.

The problem is that many platforms do not have as many developers, users, and projects as Ethereum. Although new public chains have potential, they are somewhat "immature." Therefore, they turn to compete for the key attention share of blockchain participants, and due to the lack of key interoperability technologies, the potential ecosystem development has been delayed.

Of course, these issues are not insurmountable, and NEAR provides a new perspective. The following will mainly guide you to understand the evolution of the NEAR protocol and its main features.

Team

The NEAR public mainnet was launched in October 2020, created by Illia Polosukhin and Alexander Skidanov, two engineers who entered the cryptocurrency field between 2017 and 2018.

Illia has extensive expertise in deep learning and language understanding research, which relates to his previous role as a technical manager at Google. Alexander previously served as an engineering director at Microsoft and MemSQL, specializing in non-blockchain sharded databases.

At the end of 2017 and the beginning of 2018, the team researched programmable smart contract systems and cryptocurrency payments. They later found that the existing technological state could not meet their goals, so they began designing their own. In August 2018, Illia and Alex assembled an engineering team to create the NEAR protocol.

As the team previously stated: "We assembled a dream team of developers: 3 ICPC gold medalists (Mikhail is a two-time world champion), 3 early MemSQL engineers (building sharding for distributed databases), and 4 Xooglers (building distributed systems at scale)."

Partners and Investments

NEAR's performance in the tech industry attracted investors like a16z. In March 2020, NEAR raised $21 million in funding led by a16z. After shifting to cryptocurrency, their widely circulated white paper series demonstrated a deep understanding of blockchain scalability and sharding, including the pros and cons of Ethereum 2.0 and Polkadot methodologies. Other investors include Libertus, Blockchange, Animal Ventures, and founders of Ethereum projects. Other investors are shown in the image below:

Technology

The NEAR protocol aims to differentiate itself from other smart contracts by highlighting its developer-friendly features as much as possible.

The platform attempts to provide a scalable, trustless blockchain through sharding in a shared security environment. Once sharding is enabled on NEAR, the network is expected to regularly change the number of supported shards based on user demand. The project refers to this demand-based scaling strategy as "dynamic re-sharding," as it allows the network to only pay for the infrastructure and scalability it needs at any given time. Dynamic re-sharding may be a more cost-effective way to scale and protect the sharded network, as the storage requirements for nodes may change based on demand.

The platform claims that when used with a block creation mechanism called Doomslug, its usage limit is 100,000 TPS. According to the authors, it allows the network to achieve a certain level of practical finality after a single round of communication, using decomposed components to achieve BFT after a second round of communication. In Doomslug, practical finality (or Doomslug finality) refers to the irreversible state of a block until at least one participant is blocked. Furthermore, as long as more than half of the validators are online and honest, Doomslug will allow the network to continue creating and confirming blocks, while if less than two-thirds of the participants are online, the termination mechanism will abort.

NEAR has established its own variant of PoS: a method called Thresholded Proof-of-Stake (TPOS), which supports 1-second block times and 2 to 3 seconds of irreversible transactions without a built-in delegation mechanism. The consensus mechanism of NEAR is called Nightshade, and the system is modeled as a single blockchain. The transaction list of each block is divided into entity parts, with each shard corresponding to one. All parts combine to form a block. It is important to emphasize that data blocks can only be validated by nodes that manage the shard state.

Each logical block should theoretically contain all transactions from all shards. However, due to the high cost of broadcasting a logical block across the entire network, it has never been initiated. Instead, each network member retains the state of their validated transactions' shards and additional shards they selectively monitor.

Once a miner creates a block, it collects signatures from validator nodes. Thus, the weight of a block equals the total stake of all signers included in the block. The weight of a chain equals the sum of its block weights. Additionally, the consensus utilizes an irreversible device, adding extra slicing conditions to enhance the chain's security.

NEAR's inflation block rewards are locked at an APY of 5%. Since spending is proportional to staking, there is no advantage to centralized staking tokens in TPOS. Theoretically, this can enhance the network's decentralization by eliminating incentives for resource pools. Each shard has a maximum of 100 "slots" for validators. The cost of purchasing a slot is proportional to the total amount staked in NEAR, and validators and participants can continuously unstake.

Each shard is protected by a subset of validator nodes, which broadcasts the current state of the shard as part of each new block.

Interoperability

NEAR actively encourages interoperability, most notably with the ETH-NEAR "Rainbow Bridge." This bridge consists of an Ethereum light client NEAR contract written in Rust and an Ethereum light client Ethereum contract written in Solidity.

The promise of fully trustless cross-chain transactions is quite appealing. However, there are certain limitations on irreversibility. As NEAR points out, "The ETH->NEAR interaction delay equals the speed of generating X Ethereum blocks, meaning that 25 blocks take about 6 minutes." The current delay between NEAR and ETH is 4 hours, but it will be reduced to about 14 seconds after adopting EIP-665."

Four hours is not long, but EIP-665 (Ethereum Improvement Proposal) will significantly improve this issue.

However, for certain applications, a 4-hour delay is too long, and third parties can alleviate friction by allowing faster withdrawals to the ETH chain.

The Rainbow Bridge was launched in early April 2021: the entire team spent a significant amount of time on implementation details and refining the technology, making it more secure. With the establishment of The Rainbow Bridge, NEAR has become a low-cost, scalable alternative among many projects on Ethereum's Layer 2 platforms.

Governance

NEAR introduced several components of on-chain governance: the white paper expresses reservations about over-reliance on on-chain governance methods, noting that "the requirement to precisely specify each case may encounter issues due to a lack of 'human common sense' in certain decisions, making it vulnerable to certain attacks, which off-chain decision processes are not."

Due to the lack of clear specifications, NEAR's governance mechanism appears relatively immature. Currently, only validators have the ability to vote on proposals. Their support paves the way for NEAR's unrestricted mainnet deployment.

The governance of the network is open to the community, and any individual or organization can submit improvement suggestions or comments; governance-related discussions can take place in the NEAR forum.

Typically, proposals go through a draft phase, during which they are subject to community comments and reviews. If the suggestion receives sufficient support, the NEAR development team will incorporate modifications. The implementation date of the proposal will be determined by the significance of the modifications (for example, a critical bug fix patch will be executed immediately). Validators will ultimately decide whether to accept the new protocol version by executing the latest client version.

Ecosystem and Use Cases

NEAR has worked hard to market itself as a developer-friendly platform. Its nodes can run the WASM standard supported by most browsers. Smart contracts can be written in Rust or JavaScript equivalently. The NEAR team has developed an ecosystem that includes one-click deployment, unit testing, and other essential tools to facilitate developer growth. Additionally, NEAR has designed a creative mechanism to reduce transaction costs: similar to meta-transactions on Ethereum, developers can subsidize user fees through accounts managed by DApps.

Aurora is an Ethereum L2 protocol that simulates the Ethereum experience for developers and consumers on top of the NEAR protocol. Aurora integrates two different technologies to provide a seamless experience: a fully functional EVM and a robust cross-chain bridge. Developers can connect Ethereum decentralized applications (dApps) to other Ethereum contracts and assets and deploy them on Aurora within minutes. Due to the increase in global network activity, Ethereum's transaction costs have reached historic highs.

Aurora is continuously controlling the rise in gas fees, even bringing the average transaction cost down to a few cents. Aurora enables developers to reuse existing Solidity and Vyper contracts, while consumers can smoothly access these applications through MetaMask and other Ethereum wallets. Meanwhile, Ethereum ERC-20 tokens and contract data will be transferred to Aurora through the trustless Aurora bridge (based on the Rainbow Bridge). Aurora redefines the possibilities of the Ethereum ecosystem with its low transaction costs, top-notch transaction finality, and scalability, while also expanding NEAR's ecosystem by incorporating every EVM-based application.

Case Studies

With the introduction of the Rainbow Bridge, DeFi has now launched on NEAR and is open to users worldwide, allowing any information that can be cryptographically verified on NEAR to be used in Ethereum contracts and vice versa. All Ethereum-based assets, currently valued at hundreds of billions of dollars, can now operate normally within NEAR applications. Below are two major cases:

Flux

Flux is a native DApp on NEAR, a secure trading platform that rewards validators for their work (including fees for open contracts). Using Flux, stakeholders can collaborate to create a decentralized, user-friendly, and scalable ecosystem. Flux's decentralized prediction market uses derivatives to price the likelihood of events. It is currently unclear what oracle technology Flux will adopt to predict market outcomes.

Developers can use Flux to build markets on commodities, real-world events, or anything else.

It is the first cross-chain oracle on the blockchain to provide economically protected data feeds. Flux announced its connection with Aurora shortly after its upcoming debut, which helps expand the ecosystem's DeFi.

Flux announced a partnership with Aurora shortly after its debut on NEAR to assist in the expansion of the ecosystem's DeFi.

As of the time of writing, the TVL of Near DeFi is approximately $150 million.

Mintbase---NFT Marketplace

NFTs are digital products on the NEAR blockchain, where creators can receive notifications during transactions and earn subsidies for each transaction. Mintbase is a broad NFT marketplace that focuses more on the entire NFT space rather than a specific niche market like gaming or art. Mintbase started on Ethereum and recently secured $1 million to expand to NEAR.

Additionally, NEAR's website mentions that many well-known Ethereum DeFi DApps are currently being deployed and developed on NEAR, including AAVE, Maker, Chainlink, and Balancer. Chainlink and Balancer are currently making the fastest progress, with Chainlink oracles now running on NEAR, and Balancer has provided integration authorization to accelerate deployment.

Token Economics

NEAR is the native token of the protocol and the unit of account. Its main functions include:

Security Purposes: Staked users earn rewards by staking tokens and help secure the network. NEAR uses a PoS mechanism to protect against Sybil and DDoS attacks.

Network Fees: The network stores application data and allows changes through published transactions. The network charges transaction fees to update this data. NEAR collects and burns these fees: thus, as usage increases, more tokens will be burned. Developers receive a small share of the costs associated with using smart contracts, and early application development effectively increases network consumption. When a contract is called, one percent of the network transaction cost belongs to the contract. System-level parameters can be set to determine the minimum value from which developers can choose.

Token Distribution:

Token Release:

• Community grants and programs: Token distribution lasts for 60 months.
• Each core team member has a 4-year lock-up period, after which the tokens will be gradually released over 12 months.
• Early supporters: Each early supporter has a lock-up period of 12 to 36 months, mostly 24 months.
• Community auctions were conducted in different phases in August 2020. During this period, over 120 million tokens were sold. Of these, 25 million tokens have been released, while the rest are linearly locked for 12 or 24 months.
• Early ecosystem: Lock-up periods typically range from 6 to 12 months, but some are shorter or longer.
• Foundation donations: This donation is divided into two parts. The first part is not locked and will be used to ensure the successful operation of the network's first phase, while the second part is locked for 24 months.
• Operating funds: Grants will begin to be distributed in the second half of 2020 and early 2021, and this portion of tokens requires a 60-month linear lock-up period.

The NEAR protocol launched its mainnet on April 22, 2020, with a genesis block of 1 billion NEAR. Each year, 5% of the new supply is allocated as epoch rewards to sustain the network's development, with a total circulating supply of 60 million tokens, of which 90% is allocated to validators (totaling 4.5%), and 10% is allocated to the protocol treasury (totaling 0.5%).

Conclusion

When evaluating a new platform entering the crypto space, it is essential to assess potential risks and limitations.

Each NEAR block is composed of these shards, contrasting with the "beacon chain" strategy, where a main chain (like the relay chain in Polkadot) ensures the security of individual shard blockchains. This sharding approach has a significant advantage: validators do not need to download the entire state of the blockchain. This minimizes hardware requirements for nodes, simplifies the development of light clients, and benefits the decentralization of the network.

This theoretically helps simplify the creation of mobile-friendly clients, which is also a goal of NEAR. Currently, NEAR has only one shard but is preparing for more shards to accommodate growing demand. This will put NEAR to the ultimate test, as cross-shard communication is one of the biggest challenges in maintaining sharded blockchains.

Users propose and debate governance in NEAR's community council. In this regard, NEAR seems to be replicating the social layer of Ethereum. It will be interesting to see whether the community can add more substance to this governance framework in the future; for now, everything seems somewhat makeshift and poorly defined.

Starting in 2021, value and data began to flow freely in the cryptocurrency ecosystem. How consumers will use bridges and what kind of congestion they will encounter remains unclear. While solutions are not yet apparent, widespread adoption will certainly expose the challenges of interoperability to users.

Overall, there are relatively few projects in the NEAR ecosystem. To gain traction in 2022, it will need to attract more DApps and developers; otherwise, it risks becoming a ghost town of a blockchain. Making this scenario less likely to happen, the ecosystem's appeal to consumers and developers is crucial.