Incentivizing Small Institutional Nodes for Enhanced Decentralization

Node
1

I’d like to propose a new node policy that could significantly enhance the decentralization and institutional adoption of Concordium without negatively impacting the earnings of standard node operators. This proposal aims to incentivize small nodes—particularly those run by government departments, banks, or other trusted institutions—by allowing them to handle a proportion of total transactions while maintaining fair rewards for all participants.

Rationale for the Proposal

As Concordium continues to grow, it is vital that we ensure a high level of decentralization across the network. One way to achieve this is by encouraging participation from a diverse range of node operators, including institutional entities such as government bodies and banks. These institutions bring added trust, credibility, and compliance benefits to the network, especially given Concordium’s focus on regulatory alignment. However, many smaller institutions may lack the incentive to run nodes unless they are given an opportunity to benefit from transaction processing.

To strike a balance between incentivizing these smaller institutional nodes and ensuring fair rewards for standard node operators, I propose the following framework.

Key Components of the Proposal

  1. Selected Nodes for Transaction Allocation

Selected small nodes (e.g., institutional nodes run by government bodies or banks) would be given a proportion of total network transactions to process. These selected nodes would be incentivized to join and run nodes, contributing to network decentralization.

  1. Transaction Allocation Cap

A cap would be placed on the percentage of total transactions that can be handled by selected nodes. For example:

10-20% of total network transactions could be allocated to these institutional nodes.

This ensures that standard nodes still process the majority (80-90%) of transactions.

  1. Separate Transaction Pool for Special Nodes

To avoid reducing the pool of transactions available to standard nodes, Concordium could create an additional pool of transactions specifically reserved for selected nodes. These transactions might include:

Government-regulated transactions, such as compliance-heavy or cross-border payments.

High-value or compliance-sensitive transactions, which may require additional trust and regulatory oversight.

By keeping these transactions in a separate pool, standard node operators would not see a reduction in their transaction volume or earnings.

  1. Tiered Reward Structure

We can implement a tiered reward structure where selected nodes are compensated at a higher rate for processing specific types of transactions (e.g., those requiring regulatory oversight). This would create a balanced incentive model, where selected nodes are rewarded for their institutional importance, while standard nodes maintain a steady stream of income from the general transaction pool.

  1. Performance and Uptime Incentives

To ensure the network remains secure and efficient, both selected and standard nodes would receive performance-based incentives. Nodes with higher uptime, faster transaction processing, and reliable performance would receive a slightly higher proportion of rewards, regardless of their size or affiliation. This encourages high standards across the network, ensuring that institutional nodes do not dominate purely based on affiliation.

  1. Subsidized Staking for Institutional Nodes

To lower the entry barriers for small institutions, we could offer subsidized staking requirements for these nodes. This would incentivize participation from government departments and banks without impacting the competitive nature of the network for standard nodes.

Protecting Standard Node Operators

One of the primary concerns with this proposal is the potential impact on the earnings of standard node operators. To mitigate this, the following measures are proposed:

Capped transaction allocation: Ensuring that no more than 10-20% of total network transactions are routed through selected nodes.

Separate transaction pool: High-value or regulatory-specific transactions would be handled by selected nodes without affecting the standard transaction volume for normal nodes.

Increased rewards for standard nodes: If selected nodes take on a larger share of compliance-heavy transactions, standard nodes could see increased rewards from standard transactions, as well as additional incentives for performance and uptime.

Expected Benefits

  1. Enhanced Decentralization: By bringing in smaller nodes from institutions, governments, and banks, we reduce the risk of centralization and increase the trust and security of the network.

  2. Institutional Participation: Institutions that are incentivized to run nodes are more likely to use and promote Concordium, driving real-world use cases and fostering trust with regulators and businesses.

  3. Maintaining Fairness for Standard Nodes: By carefully managing transaction allocation and rewards, we ensure that standard nodes continue to earn competitive rewards while benefiting from a more decentralized and secure network.

  4. Boosting Network Credibility: Institutional nodes, especially those run by government bodies or banks, could enhance Concordium’s image as a blockchain that is serious about regulatory compliance and real-world applications, aligning with its core principles.

Conclusion

This proposal seeks to introduce a fair and balanced approach to decentralization, ensuring that Concordium attracts institutional participation while maintaining the interests of standard node operators. By implementing a capped transaction allocation, separate transaction pools, and performance-based rewards, we can enhance the network without compromising its decentralized nature.

I look forward to hearing the community’s feedback.

2

Interesting proposal. I have a couple of comments on the rationale. On one hand, it seems you believe the network needs more node runners, such as governments and banks, to add trust. On the other hand, you mention them as smaller?, but I would generally consider this category to be larger and more powerful than many of the current node runners. Nevertheless, the rationale is to bring them in under a different policy. Also, are there any examples of institutional entities that want to become node runners but are dissatisfied with the current model? Additionally, could this lead to a situation where all node runners might want to switch to the newly proposed policy?

3

The idea I’m proposing centers on the potential for banks to adopt blockchain as a substitute for SWIFT, with Concordium being the best-suited platform for this transition.

I refer to these banks as “smaller nodes” because if multiple banks were to embrace blockchain, they could potentially run nodes from each branch. However, they might not engage in price speculation by acquiring significant amounts of CCD (e.g., 10 million CCD per branch). Instead, they would likely acquire a more moderate amount of CCD, distributed across their branches.

The primary motivation for banks wouldn’t necessarily be to profit from an increase in the price of CCD (though that could happen later). Instead, their focus would be on making money by finalizing specific high-value transfers on the Concordium blockchain.

This approach could drastically increase the number of active nodes. I believe banks might be cautious about Concordium’s current relatively low node count (~160), with many nodes inactive. By adopting this model, we’d see a win-win scenario: banks gain a clear path to monetizing their activities on the blockchain, and in doing so, they help decentralize the network.

While this is just an initial concept and might need further refinement, it could have legs, especially when combined with portable KYC solutions and potentially Hitachi’s biometric ID solution, which could also be run in part by banks.

I’m aware there might be aspects I’m overlooking, but I wanted to throw this idea out there to gauge whether it’s viable or if there could be a path forward. The goal is to establish smaller nodes in many locations, which would ensure the decentralization of Concordium while adding credibility to the network.

4

Regarding the term “smaller,” I meant it more in the sense of individual nodes rather than the overall size or power of the institutions running them. While these entities (governments, banks) are indeed large and powerful, the nodes they would run—especially if they implement nodes across many branches—could be considered smaller in comparison to some of the existing validators that might stake significant amounts of CCD and run larger-scale operations. So the “smaller” aspect is more about the individual node operation rather than the institution itself.

Regarding whether there are examples of institutional entities dissatisfied with the current model, I haven’t heard specific cases publicly. However, from the perspective of banks or governments, I can imagine concerns about trust and compliance when it comes to joining a blockchain with fewer active nodes, or perhaps uncertainty over how they would benefit economically in the current framework. This proposal aims to make it clearer how they could generate revenue from transaction validation and data services without needing to engage in large-scale speculation on CCD. I think having a tailored incentive structure could encourage their participation by aligning more with their operational goals (compliance, security, and facilitating payments) rather than the speculative elements typically associated with cryptocurrencies.

As for your question about whether this could lead to all node runners wanting to switch to the new policy, it’s a valid concern. That’s why I believe any new policy for institutional nodes would need to be carefully managed, with strict limits or conditions on which nodes qualify and a cap on how much of the transaction volume they can handle (as I mentioned earlier). The goal is not to shift the entire network to a new model but to create a parallel track that works for institutions while maintaining the existing incentives for other node runners. For example, institutional nodes could handle a specific subset of compliance-related or high-value transactions, leaving the bulk of everyday transactions for the standard nodes.

In short, I see this proposal as an addition to the current structure, designed to enhance decentralization and trust by bringing in powerful institutions—without taking away opportunities from the existing node runners.

5

Thanks for elaborating on this. Involving banks or larger corporations as node runners will definitely enhance trust and stability.