Building core infrastructure to power the tokenized economy and next generation of capital markets.
When Swarm launched the first security token platform in January 2018, we began a period of intense learning and discovery. We wanted to build a model of a network that coalesced all the marketplace participants in launching and operating the tokenized economy. To start, it was essential to establish a first iteration of Swarm and discover the landscape of roles, obligations and needs of the connected actors — Token Issuers, Investors, Compliance Service Providers, Regulators, Exchanges and more. This discovery was valuable to do in an environment with a high degree of curation, control and vertical integration, as it allowed faster iteration and deployment.
Six months later, we’ve been inundated with projects wanting to list their security tokens and raise capital from investors. And there is a tidal wave coming. Now that the pilot phase has been a success, it’s time to scale.
Together we are on the path to define the future of security markets, and we all have challenges to overcome. But it’s become clear to us that key market infrastructure cannot be owned by profit seeking organizations, but needs to be owned and built by the community, for the community.
That’s why at Swarm we have put so much focus on execution, while not losing sight of the goal of delivering a trustless, transparent, compliant, highly decentralized and self-regulating network that can grow long into the future. We are convinced the industry needs core market infrastructure that is open, modular, and efficient. We believe this task should be performed by a non-profit-organization. We need to mobilize a broad community that will maintain this infrastructure, govern it, and benefit from it. And we’re ready to do that now, with you.
Why a security token framework needs decentralized infrastructure?
Decentralization is the oft-communicated goal of many a crypto project, yet it can feel like insufficient thought and argument has been given to its purpose and value. In the framework of security tokens, why did we feel that a decentralized and dedicated infrastructure a necessity?
Institutional Partners: Operating a dedicated blockchain has been helpful in the interactions with institutional partners, who look at this favorably from a compliance and regulatory perspective and who have had critical views of permission-less infrastructure. Once we have better line of sight on the actors in our ecosystem and the evolving regulations, we can easily design towards evolving requirements and introduce interoperability. It’s far easier this way than the alternative path where you would have to fix and remedy later what is not working.
Customization and Interoperability: We were able to leverage lots of core principles and modules that were built on top of what Stellar provides. Yet our custom layer on top allowed us to build more specifically towards our dedicated use case. We could design our own protocol, our own incentives, custom rules, dedicated user interaction and subsequent interoperability into other blockchains.
Power to the People: Decentralized infrastructure provided by a distributed network of Masternodes, run by SWM token holders, fully completes the model that we are trying to build. In this way we are delivering a gradual transfer of power, influence and capacity from the Swarm Foundation to the community, and providing additional ways that individuals can participate in and profit from the tokenized economy.
Robustness and Security: Centralized networks are by their nature more susceptible to malicious activities by potential bad actors. Moving towards a highly decentralized network both increases trust in the network — due to the reduced influence of any individual participant — and security — due to the redundancies achieved by multiple nodes hosting the distributed ledger of transactions.
Future Proof: Building dedicated infrastructure allows us to maintain a flexible system that remains insulated from the stresses that may affect existing networks in the future.
Decentralized infrastructure further allows the community to govern the evolution of policy and mechanics of how the network functions, and opens it up to participation by external parties outside of Swarm, which would go a long way to achieving the open framework we feel it needs.
Until now, the Swarm network has been powered by four nodes which have been operated by our dev team and have been processing all transactions on the Swarm blockchain. This was essential for us to efficiently trial, launch and grow. Based on the what we’ve learned, we are re-architecting these to be self-sufficient, respectful of privacy, safe and encapsulated with a governance that is fit for long term development. For the reasons mentioned above, we need to adopt a path toward greater decentralization, building trust and transparency along the way.
Swarm’s current implementation is based on Stellar’s stack and consensus protocol, but we are introducing an evolution from there. Stellar offers fast transactions but lacks the incentive structure to foster fast adoption. We asked ourselves, how do we incentivize broader decentralization, while maintaining the benefits of Stellar and at the same time increasing trust in the network.
With Swarm masternodes we feel we have found an elegant solution that combines all the elements above. It creates the network effects we require to scale and that rewards those who help us build out the infrastructure, long into the future.
Introducing Swarm Masternodes
A masternode is a compute resource that meets the minimum technical and network requirements to run the Swarm core software and validate transactions. As the network grows, masternodes will also provide resources for other data services relevant to the network.
A collection of interconnected masternodes forms the distributed infrastructure that powers the Swarm network. Running a masternode requires resources, resulting in hardware and network costs. In order to bootstrap the process and create a sustainable operational model we needed to first create an appropriate model of incentives and rewards. Decentralization is not free!
Building a better incentive model
To accomplish this goal and incentivize a long-term reward system to operate the network infrastructure, the Swarm Foundation is proposing to set aside a budget of 20 million SWM tokens, equivalent to 20% of all tokens.
Most incentivized tokenomics models evoke the concept of diminishing returns to encourage the initial seeding of the network. High returns for early adopters, lower returns for those who are late to the party. Since Swarm’s core tenet is to democratize finance, this doesn’t go far enough.
Therefore, in addition to offering common block reward structure, we’re proposing to incorporate an additional mechanic that provides a long-term benefit for infrastructure providers and that is core to Swarm’s model
Dual Incentives — The Hare and the Tortoise
Incentive 1 — Block Rewards (The Hare) –
To encourage the fast deployment of core infrastructure, the Swarm Foundation proposes to set aside 10 million SWM tokens as block rewards for Masternodes for maintaining the network and validating transactions.
- Initial Reward Pool: 10,000,000 SWM tokens
- Annual Rewards : 25% of the initial pool, reducing by 25% each year, for 100 years.
- Distribution: Evenly distributed amongst all eligible masternodes.
- Payout Terms: Rewards are paid at each block, round-robin
Incentive 2 — Market Development Fund Rewards (The Tortoise) –
One of the best known and frequently used quotes on the power of compound interest is attributed to the world-renowned physicist and scientist Albert Einstein. He is believed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
The Swarm Foundation proposes to set aside an additional 10 million SWM tokens to establish the Swarm Market Development Fund (MDF). The MDF is a pool of capital that is managed by Masternodes through Swarm’s Liquid Democracy Voting Module for the single purpose of funding investment opportunities on the Swarm network.
Subject to further legal review and structuring, the MDF is proposed to work like this:
- In sync with with the block rewards, the MDF receives the same amount of SWM tokens (10 million) to be made available for deployment by Swarm Masternodes
- Deployment of SWM tokens towards investment opportunities is voted on monthly. Swarm Masternodes that do not participate in votes lose their position in the block reward queue
- 30% of the annual returns from these investments is paid on a pro-rated basis to participating Swarm Masternodes
- 70% of the returns are used to purchase SWM tokens from the market and these are added to the following year’s Swarm MDF pool
The Swarm MDF seeks to achieve the following objectives:
- Ensure long-term maintenance of the Swarm infrastructure
- Accelerate funding of quality investment opportunities
- Create a self-sustaining honeypot of funds to deploy
- Sponsor the core functionality of Swarm
- Transfer governance outside of the Foundation
Anyone can run a Swarm node. Current estimated technical requirements to run a node are CPU: 4-Core, RAM: 8GB DDR4, SSD: 128GB
Yet, in order to activate a node as a Swarm Masternode, the operator will be required to stake 50,000 SWM tokens. 15 days after the staking and activation, the Swarm Masternode will start participating in the rewards. Swarm Masternodes will be required to run the latest release software release version in order to receive rewards.
Other than the natural limits of total supply of SWM, there is no limit to the number of Masternodes that can be set up.
In order to stay true to Swarm’s tenet of democratizing finance, for those for whom 50,000 SWM is not attainable, we will simultaneously launch the Swarm Masternode Token (SMN), which represents fractional ownership in Swarm Masternodes, granting token holders the same rights in proportion to their holdings. As a result, individuals that cannot afford the 50,000 SWM token minimum will still be able to help maintain the network, govern the deployment of the MDF, and receive rewards in doing so.
- The first step is to obtain approval from the community of SWM token holders to set aside these large amounts of SWM tokens. A vote will be held in Q3 2018 to ask the community of SWM token holders to ratify this proposal.
- www.swarmmasternodes.com will become the central hub for all information regarding Swarm Masternodes. You can go there now to register your interest in operating a Swarm Masternode.
- We intend the pilot version of Swarm Masternodes to be available for deployment within Q3 2018.
- As for the MDF, our goal is to launch it in 2018, but will communicate more concrete plans for its structure and deployment along the way and after full legal review.
The Future is Decentralized
We are incredibly excited to be taking this important step in Swarm’s development. A decentralized, trustless network has been core to our design and concept from the start. Decentralization allows us to complete the important work we have begun. Swarm Masternodes are a key step in this direction. We invite you to join us as we build a core component of the financial infrastructure of the future.
Go to www.swarmmasternodes.com now to sign-up and register your interest in a Swarm Masternode.
(This article is originally posted by Philipp Pieper on Swarm Blog.)