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What makes a Good Network Custodian w.r.t Incentive Alignment

Just like software requires regular updates for efficient functioning, similarly, decentralized platforms and applications deployed on it follow a similar pattern. The most researched topic recently has been defining, designing, and building a good decentralized network custodian concerning incentive alignment. Open-source platforms in majority to date have been able to build and deploy platforms and applications in small clusters. For resolving the issue of upscaling economically, the most appropriate solution that has come across has been the intermixing of centralized and decentralized platforms.

In layman words, a network custodian is someone who administers the overall functioning of the network. The para-phrased definition mentioned (prior line) is majorly for a centralized network. But for a decentralized network, a definite definition hasn’t been coined yet as the topic is still in its early days of research and experimentation.

Broader perspective that is being considered at the moment is that the custodian becomes one after every mode in the grid approves of him/her via some consensus algorithm(s)/proof(s). A custodian from BFSI (banking, financial services, and insurance) banking perspective holds the customer’s securities for safekeeping. This piece dwells into figuring out what exactly an appropriate decentralized network custodian network is keeping incentive alignment in mind.

Technology is getting interlinked with daily activities so much that policies have started getting made and changed according to the latest technological architectures. One example among others is the decentralized platform “Blockchain”. A practical proof is a transfer from top-down governance to state-run governance as mentioned in this piece. Early technology like Cloud Computing and some recent ones like Artificial Intelligence, Machine Learning, etc have entered into daily human activities.

Few industries have already started experiencing benefits like the Healthcare Industry and Financial Services Sector. One hiccup besides others in the decentralized ecosystem from miners, users (to name a few) were that as the functioning happens in open-source many times scenario’s become chaotic as there isn’t a proper structure (yet). A somewhat similar hierarchical structure like a centralized governance structure which has entered the market recently (2016) is DAO (decentralized autonomous organization).

Its functionality is to perform and record repetitive activities on a peer-to-peer, cryptographically encrypted, and rely on voluntary contributions of respective internal stakeholders for administering, and updating the organization via a democratic consultation process. The two governance components which it executes are internal governance component and the external governance component. Internal governance component encompasses non-hierarchical modes and quasi-democratic characteristics.

In external governance component, the emphasis is on dependability on clusters of servers as well as individual nodes for running of the network and decision-making also. Figure 1, 2 and 3 showcases the difference between centralized, semi-centralized, and decentralized models for governance. To view the difference(s) of figures 1, 2, and 3 together, figure 4 indicates it through distinct actors like power relations, function, and alternative names a well. Let’s now check some illustrations.

TEX, is a front-running, adaptable, non-custodial exchange functioning via a layer-two settlement system. The proposed system showcases that the mechanism works without much hustle (speaking metaphorically) through PoW (proof of work) consensus algorithm. At the backend, it (TEX) functions by utilizing cryptography at multiple levels.

The mechanism uses a time-lock puzzle where the data needs to be decrypted within a time interval which may be uncanny if one doesn’t have the required key for decryption. Zero-knowledge proof’s (ZKP) of knowledge allows the prover to validate to verifier a specific statement without disclosing any revealing information. Payment channels establish private and secure peer-to-peer channels that are safeguarded through blockchain escrows. In short, the infographic shown below depicts how TEX operates at the backend.

order-book image

The moonwalk order is a combination of employing cryptography at multiple levels as discussed above (ZKP + Time Lock Puzzle + Merkle Tree data appendment). After the completion of moonwalk order, the encryption order gets initiated by sending it to the exchange, which is followed by the construction of a Merkle Mountain range by adding new leaves on the tree (by appending data into it).

After new leaves getting added, the user (the one who sent the encryption order) will receive a key with the correct decryption order. The process [(2) to (6)] keeps on getting executed to scrutinize if the exchange tries to inspect order. To view the workflow of the Merkle tree(s), check figure 4. Let’s look at another piece of research which dwells into a broader perspective of blockchain technology from its inception to date encompassing the ups-and-downs it experienced.

Rightly mentioned in this piece, is that truth is complicated. Multiple layering of contexts has become pre-requisite for explaining specific case/scenario across the world. With a broader perspective as mentioned here onwards and the previous example of a specific decentralized network custodian, you will be able to get a better understanding of why blockchain is the right choice for a decentralized network custodian in the coming days.

technical-property-for-blockchain image (Custodian)

The infographic showcases the technical properties in blockchain technology. In a nutshell, it shows how the combination of decentralized governance and distributed ledger offers more open and consortium governance. A semi-open sourced and/or decentralized governance assists in defining and validating as well as building rules with the consensus of people which isn’t entirely the case in a centralized governance process.

As rules are built-in consensus with the people, decentralized applications seem viable and practical in usage like “append-only data structure”. Another hurdle which gets diverted is the interference (in many scenario’s) of intermediaries. If you are interested in knowing in more depth about the capabilities blockchain technology would represent in coming times, then figure 2 will help with that aspect.

After going through some illustrations (mentioned above), it seems common-sensical that building and imbibing a decentralized network custodian is a not so unimaginable task. With the intensity and diversity that blockchain technology and its related applications are getting productive, achieving a decentralized network custodian with regards to incentive alignment seems like a “piece of cake”.

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Last modified on August 10th, 2023 at 4:18 pm