The launch is imminent. Learn in one article why SWARM’s economic model is so innovative?

Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

1 Why was SWARM created?

For a long time, the Ethereum network has had the problem of over-centralized data storage. According to data from Ethernodes, as of June 19, 2021, 63.32% of the nodes on the Ethereum network are hosted on third-party cloud servers, and 31.5% of the nodes are on Amazon. This means that nearly one-fifth of the Ethereum network needs to rely on Amazon to operate, which undoubtedly goes against the original intention of decentralization.

To this end, the Ethereum Foundation supported the development team to develop the Swarm project using distributed storage technology, with the goal of providing fully redundant and decentralized space, large enough and stable bandwidth, for data storage and information interaction of various DApps on the ecosystem. It is a decentralized storage and distribution system built on the Ethereum ecosystem. It is worth noting that it not only has storage functions, but also distribution functions, which requires each node to have a huge bandwidth, which is the biggest difference from other distributed storage projects.

2 How does SWARM distribute rewards (mining)?

According to official information, the economic incentive mechanism of the Swarm network is different from the Ethereum protocol and technology. Two important limited resources, storage and bandwidth, are fully realized in its incentive plan.

1. Storage incentives: Swarm’s storage space is limited by the sum of all individual nodes’ storage contributions to the network. The stamp system increases costs by uploading fees to the network, thereby allocating the right to write to Swarm in the best possible way.

Using this signal, storage nodes can decide what to keep and what to ignore, allocating storage space in a way that preserves the most valuable blocks. For example, A, B, and C upload their own files at the same time, but the storage space is limited and there must be a sequence. At this time, the three users have to decide for themselves how many stamps they are willing to pay for uploading the file. If A thinks that his file is not urgent and is only willing to pay 1 yuan stamp, he is willing to pay 2 yuan stamp, and C is the most urgent and is willing to pay 3 yuan stamp. Obviously, when there is not enough storage space, the data uploaded by C will be accepted first, followed by B and A. This 3 yuan stamp is the advance payment for the storage node. The Swarm network will collect all the stamps and redistribute them according to the space size of each node. As for how stamps are exchanged for Bzz and the incentives such as post-destruction, it has not yet been made public.

2. Bandwidth incentives: Users can build nodes through Swarm's client software Bee, and interact with the nodes of other network participants to upload private and secure content to build a trust relationship of bandwidth exchange. There are three types of participants in both data uploading and downloading: sender, forwarder, and receiver. In the scenario of uploading data, the sender sends the uploaded data, which reaches the receiver through the forwarder. After the receiver receives it, the receiver replies with confirmation information, which is then sent back to the sender through the forwarder, and the upload operation is completed. In the scenario of downloading data, the sender sends a download data request, which reaches the receiver through the forwarder. After the receiver receives it, the receiver replies with the corresponding data requested, which is then sent back to the sender through the forwarder, and the download operation is completed. In the above two operations, both the forwarder and the receiver can get rewards, and the official has stated that there is no block reward for incentive rewards, only traffic fees between nodes and temporary data storage. The upper limit of the traffic fee that a node can receive is related to the bandwidth. The higher the bandwidth, the higher the upper limit of the traffic fee. The traffic that a node can transmit is also limited by the system bottleneck of the node. In the Swarm solution, the system bottleneck is the disk IO performance.

3. Discovery incentive: Users can discover new nodes joining the P2P network or the process of nodes in the network connecting to nodes to establish connections. The official attitude is that for distributed networks, the more nodes that work normally, the more robust the network is. From the perspective of the single node's own interests, providing node discovery message forwarding for other nodes can maintain better connection quality when its own connections are reduced. In layman's terms, this is an incentive to attract people, but the reward is not directly issued.

3 What is the Token economic model of SWARM?

The distribution of tokens is as follows: 7% for the foundation, 42% for private placement, 8% for public offering, 10% for DApp subsidies, 20% for the development team, and 13% for ecological construction.

Ecosystem construction here refers to mining, of which 1 million will be distributed through the testnet airdrop, totaling 62.5 million. There are two important information at present: first, the official has confirmed that there is no need to pledge to participate in Swarm ecosystem construction; second, except for the 8% public offering and the 1 million airdrops, the rest will be released after the launch, and it is unknown whether it will be released instantly or linearly within the specified period.

This form of token distribution is somewhat similar to the early Ethereum, which is also an additional issuance model. The difference is that the additional issuance of Bzz follows the Bonding Curve mechanism, that is, the joint curve. When the price of Bzz is higher than the public offering price, that is, US$1.92, the additional issuance of Bzz will be activated and distributed in proportion to the above distribution. When the price of the currency falls, the system will automatically destroy Bzz to reduce the circulation. Simply put, under the Bonding Curve mechanism, there is a certain correlation between the circulation volume and the currency price, and its purpose is to stabilize the currency price. The stability of the currency price is not equivalent to the stable currency. Calculated by the functional relationship of the Bonding Curve, when the currency price reaches US$10, the total circulation of Bzz is 70 million; and when the currency price reaches US$674, the total circulation of Bzz is only 80 million.

In short, when the circulation exceeds 70 million, the issuance rate of Bzz will stabilize. Since it is necessary to maintain a fixed functional relationship between the price of the currency and the circulation, Bonding Curve is given a function similar to a decentralized exchange. At present, Swarm will issue Bzz on the Ethereum main chain and the xDai side chain respectively, and the two sides are connected by a bridge. When users need to upload data, they need to buy stamps on the xDai chain, and then exchange the stamps for Bzz on the Ethereum main chain through the bridge, and finally destroy the stamps. Therefore, there will be a certain arbitrage space between the Bzz traded on the chain and the Bzz on the centralized exchange. Therefore, the acquisition of Bzz is different from the mining model of other cryptocurrencies. Traditional mining, whether it is PoW, PoS or PoC, is essentially to obtain the right to record accounts through a consensus mechanism, and the difference is only in the consensus method. The issuance of Bzz requires on-chain users to pay actual compensation for space when uploading data. This compensation is converted into Bzz through the mechanism described above and rewarded to ecosystem builders who provide traffic bandwidth and storage space.

4. Similarities and Differences with Filecoin

The Filecoin mainnet has been online for more than half a year, but it does not actually store much useful data. Currently, the useful data stored are some front-end engineering files of blockchain projects, such as some js, cs, html and other static data, so Filecoin is still in an early stage of development.

Once the Swarm network is launched, its ecological value may be immediately reflected, because as a project invested by the Ethereum Foundation, it is born with the responsibility of carrying the operation of Ethereum smart contracts. The operation here refers not only to the storage of static data, but also to provide basic services for information interaction for DApp development. This is why in addition to hard disks, stable bandwidth support is also required during its mining process.

The equally popular Chia is not actually a distributed storage project. It just obtains tokens through the PoC consensus mechanism. Therefore, it cannot be compared with Filecoin and Swarm. Whether it is Filecoin or Chia, the proportion of hard disk size in their hardware configuration is very high, but it is obviously not the case with Swarm. The ecological construction principle of Swarm is more focused on computing and node interaction, so it pays more attention to the efficiency of data transmission. This economic model is highly innovative, and we can wait and see how it will develop in the future.