Economic and incentive model behind Cardano Proof-of-Stake

The decentralized public network is based on its economic and incentive model. This model is embedded in the network consensus and has a direct impact on the key features of the network, which are the level of decentralization and the security budget. The economic and incentive model is often overlooked, which is a pity since it is probably the most important part of the public decentralized protocols. Let’s see why is the model so important and how Cardano Ouroboros Proof-of-Stake is designed from the point of view of users.

A cup of coffee has value in the physical world. If you can pay for it by ADA then also that has a value.

The link between the digital and physical world

The economic and incentive model links the digital and physical world. The model is designed by a team. It is based on knowledge about people’s behavior and their motivation to act honestly. The design of the model is then rewritten into the source code of the protocol. The source code is available on GitHub and everyone can review it. The source code is used as an input for the creation of a full node. You can imagine the protocol as a set of algorithms that basically describes how to react to internal and external events. Protocol lives in the digital world so by the external events we mean every related event in the physical world. For example, it is easy for the protocol to verify whether a received block, including all transactions, is valid. Verification happens fully in the digital world. However, people are able to prevent block propagation or they can intentionally change the source code to try to commit an attack. A well-designed protocol should be able to deal with all possible fraud attempts.

The majority of people accept money as a motivation for honest behavior. The link between the digital and physical worlds is based on the ability of the protocol to provide people with a physical reward. Not directly, but indirectly. Cryptocurrency needs to have something that is valuable in the physical world. ADA is a native coin of the Cardano protocol and has a market value that can be expressed in fiat money. There is a limited number of ADA coins so they are naturally scarce. To be precise, there will be only 45,000,000,000 ADA coins. As far as there is a demand for the ADA coins the Cardano protocol has a digitally scarce resource that can be used to reward people for…