Dialogue with Mysten Labs Chief Economist How to design appropriate network economic incentive measures?

Recently, we had a conversation with Alonso de Gortari, the Chief Economist of Mysten Labs, discussing how to find a balance of incentives between network operators and participants, and how the economy of Sui keeps evolving.

Below is the content of the interview:

Q1. What made you choose to apply your background in economics to the blockchain and Web3 field?

Initially, I was a researcher in international trade. I focused on global value chains, which are essentially international supply chains. But I wanted to get more involved in my work. The academic world is full of theory, but I hadn’t built an import-export platform or any other products, so I wanted to apply my ideas in practice.

Blockchain is actually highly relevant to supply chain management. In today’s world, there are few methods to transparently trace the manufacturing process of the products we use daily. An iPhone may be designed in California, but we all know it is assembled in China, with raw materials and components coming from all over the world. Blockchain is immutable, so it is a valuable way to record the collection and assembly of any final product. This technology is very intriguing, and I think it’s more interesting to jump in and try to build products rather than sit in an outdated office and observe it from the outside.

Q2. Can you describe the decisions needed to design the economic model of Sui?

The blockchain economy is a perfect blend of theory and practice. Just as engineering needs to follow the cutting edge, economics also needs to keep up with the forefront. Token economics balances the incentive mechanisms of three key economic participants on the chain: operators (i.e., Sui’s validation nodes), token holders, and users.

Validation nodes want to earn revenue from gas fees by operating their nodes. Therefore, they prefer higher gas fees. Users want to use the blockchain just like any other product or service, so they prefer lower and cheaper gas fees. Token holders want to either stake their tokens to secure the network and earn rewards or use their tokens to pay gas fees. Therefore, they are somewhat in the middle. They believe in the product, so they want their tokens to appreciate and want people to use the blockchain. Thus, they are interested in low gas fees, like users building applications and products on Sui, but at the same time, they want higher gas fees to make the network sustainable in terms of operation. Ultimately, the key is to set the gas fees appropriately and find a balance of interests among all parties.

Therefore, in designing the blockchain, the key is to find the right alignment that satisfies the interests of all parties without favoring any one side. It must be ensured that validation nodes can maintain stable operations, while users and token holders can afford to participate.

Q3. What are the key innovations in the token economics of Sui?

The unique gas price design of Sui is based on several key factors. First, Sui has horizontal scalability, which means that validation nodes can increase block space (i.e., supply) during peak demand, keeping gas fees low. On other blockchains, supply is fixed, so when demand increases, gas fees for the entire network skyrocket because there are no other adjustable forces. If the number of block space is fixed, the only possible thing that can happen when demand increases is a price surge. In contrast, on Sui, block space is variable. With horizontal scalability, supply can expand correspondingly with increasing demand, so even as the usage of the network increases, the price of using the blockchain remains unchanged. Overall, as validation nodes scale, their costs increase, but since processing more transactions allows them to earn more revenue, their income remains unchanged without the need to increase prices to compensate for costs.

The reference gas price brings transparency, predictability, and price pressure to the market. Each validating node must publicly declare the fee they are willing to accept to process transactions. The reference price is set at two-thirds of the cost that the validating nodes are willing to operate at to ensure the security of the network. The competitive market is a key component of this design, as validating nodes need to operate sustainably, which sets a lower limit on gas fees. At the same time, since the network operates in a permissionless manner, anyone can become a validating node, which limits the upper limit of gas fees. If a validating node sets the gas fee too high and earns a lot of profit, new validating nodes will enter the market to compete at a lower price and obtain those profits. The market operates elegantly, just like Adam Smith’s invisible hand, where market forces shape the price and ensure that gas fees are neither too high nor too low.

Another innovation is the storage fund. Since the blockchain is immutable, any content stored in it needs to be permanently preserved. On most blockchains, this can be very expensive for certain types of data, such as JPEGs. Therefore, many data are actually not directly stored on the chain. However, on Sui, block space is more like a commodity than a luxury. The problem is no longer how high the cost of storing data is, but rather who should be responsible for paying these fees. For future validators and full nodes joining the network, they should not bear the burden of storage decisions made in the past, which seems unreasonable. Especially because in such a case, these costs will be transferred to future Sui users. As economists often say, if current Sui users store data without paying fees, they create negative externalities for future users who will be forced to bear these costs. This is unfair, and more importantly, it will lead to unsustainable financial conditions for the network in the long run.

Sui solves this negative externality by allowing users to pay storage fees in advance and permanently. The storage fund retains these fees and adjusts them proportionally as staking rewards to validating nodes, compensating them for their storage costs. Additionally, if the entity that initially stored the data determines that it is no longer needed, it can be deleted and most of the original fee refunded. This puts Sui in the best position, with an economically sustainable storage model and encourages people to use storage only when truly needed.

Q4. People often talk about whether certain network economies are inflationary or deflationary. Can you explain what this means and how it applies to Sui?

I believe these terms are not always used correctly in many crypto circles. People often say that if the token supply continues to increase, the chain is inflationary, and if the token supply is limited or reduced, the chain is deflationary. But inflation and deflation are not only about token supply or tokens in circulation. It involves the relationship between network activity levels and available tokens. If the on-chain activity of a network grows faster than newly introduced tokens in circulation, there will be pressure to lower gas prices (i.e., deflation) to allow each token to be used for more transactions. On the other hand, an active network with a large number of available tokens will exert pressure to raise gas prices (i.e., inflation).

When designing Sui, the token supply is set to have an upper limit. Currently, only a small portion of tokens are in circulation, with the rest being unlocked according to a predetermined release plan. In the long run, the total supply of SUI will reach 10 billion. It is this transparency and predictability that can help interested parties understand the state of the Sui economy. The goal of Sui is to continue increasing network activity. Whether Sui is inflationary or deflationary depends on the comparison between the growth rate and the token unlocking speed. The advantage of this approach is that it eliminates the ability for anyone to manipulate the currency rules, which are limited in the long term, thus providing market certainty for the long-term operation of the token economy.

Q5. How do you view the future development of the Sui economy?

The mainnet is still very young. Just like the technology itself, the token economy of Sui will need to adapt to the use and development of the network. For example, Sui recently encountered some issues in storage, which may require fine-tuning of the storage fund design. This is an interesting part where theory is tested in practice. The goal of Sui’s token economy remains consistent, which is to collectively align the incentives of everyone towards a thriving network.

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