Understanding CKB's Economic Model and Its Ingenious Design

Detailed Explanation of CKB’s Economic Model

As of February 28, 2024, according to statistics from ckbdapps.com, the issuance of CKB is 44.318 billion tokens (this figure includes 9.718 billion CKB locked in the Nervos DAO):

These CKB tokens mainly come from three sources:

• Genesis block
• Primary issuance (basic issuance)
• Secondary issuance

In the genesis block, a total of 33.6 billion CKB were issued. To pay homage to Satoshi Nakamoto, 8.4 billion CKB were initially sent to Satoshi’s address (this can be considered a black hole address, unless Satoshi “resurrects” and retrieves these CKB with the private key):

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The remaining 25.2 billion CKB from the genesis block were mainly allocated to institutional investors, the ecological fund, the development team, and public investors, etc., with these CKB having a time lock but now all unlocked.

After the genesis block was created, CKB’s issuance was divided into two parts: primary issuance (basic issuance) and secondary issuance.

The total amount of primary issuance is also 33.6 billion, mainly awarded to miners, with an issuance mechanism similar to Bitcoin, halving approximately every four years until all are issued. Last November, CKB experienced its first mining output halving.

The secondary issuance issues a fixed 1.344 billion CKB each year, distributed proportionally to:

• Miners: Proportional to the on-chain state occupation.
• Nervos DAO: Proportional to the ratio of CKB locked in Nervos DAO to the total issuance.
• Treasury: Proportional to the ratio of CKB in circulation to the total issuance, which is currently directly destroyed due to an unfinished governance mechanism.

For example, assuming 60% of the issued CKB is used for on-chain state occupation and 20% is locked into Nervos DAO, miners will receive about 806.4 million CKB of secondary issuance rewards per year, and Nervos DAO depositors will share about 268.8 million CKB. The remaining 20%, or 268.8 million CKB, will be directly destroyed.

According to CKB explorer data, currently in the secondary issuance, the CKB awarded to miners accounts for 11.5%, the CKB awarded to Nervos DAO depositors accounts for 19.1%, and the destroyed CKB takes up the majority at 69.5%, with over 4 billion CKB destroyed to date.

The Ingenuity of CKB’s Economic Model

In Byte Master’s view, the design of the CKB economic model has four ingenious aspects:

1. Through secondary issuance, miners continue to safeguard CKB

Many friends might wonder: Why does CKB need a secondary issuance when there’s already a primary issuance? Wouldn’t it be better to follow Bitcoin’s model?

In Bitcoin, miners’ income comes from two parts: block rewards (which currently constitute the major portion) and transaction fees (miner fees). The block reward approximately halves every four years until all bitcoins are mined by the year 2140; transaction fees mainly depend on the chain’s activity level.

Let’s imagine, a decade or several decades later, after numerous halvings, Bitcoin’s block rewards become negligible, leaving miners to rely solely on transaction fees. However, Bitcoin’s performance is limited, which inevitably caps the chain’s activity level. Therefore, BTC’s price must soar to very high levels to motivate miners to continue investing computational power to protect the network’s security. Conversely, a very high BTC price would restrict the chain’s activity level, as high transaction fees would lead people to reduce their transaction frequency or switch to trading on Layer 2 solutions or other chains.

CKB’s secondary issuance ensures that after multiple halvings of mining output, even when all the CKB from the primary issuance are mined, regardless of the transaction volume on CKB’s chain, miners will still be compensated for perpetually safeguarding the network’s security.

2. Restricting Global State Growth, Solving the State Explosion Problem

CKB constrains the growth of the global state by binding data storage with its native token, CKB. The CKB token represents the right to occupy the global state, where one CKB token is equal to one byte of space on the blockchain. This means that the state of the blockchain is limited by the supply of CKB tokens, making it a scarce resource.

As of February 28, 2024, the total supply of CKB is approximately 44.3 billion, meaning the CKB blockchain’s storage capacity limit is about 44.3 GB. After the first halving event in November 2023, its inflation rate is about 3.444 billion CKB per year (actually lower, since CKB given to the treasury is directly destroyed), meaning the CKB blockchain’s size can only expand by about 3.444 GB per year. Future halving events every four years will further reduce the rate of state growth, eventually reaching an increase of 1.344 GB in storage capacity per year.

The state on the CKB chain is directly owned and controlled by users, essentially privatized. State storage is in cells similar to Bitcoin’s UTXO, a first-class citizen on the chain. The storage space on CKB is like land; its total size is limited, and users must own and lock CKB to occupy it.

CKB’s secondary issuance is actually a “state rent” levied on state occupiers, as secondary issuance continuously incentivizes miners based on the state occupation situation. Long-term holders of CKB (who do not store data on-chain) can lock their CKB in NervosDAO to receive a subsidy from this part of the secondary issuance (to avoid dilution by the secondary issuance). When “state occupiers” no longer need to use the scarce state space, they can destroy the cells occupying that space (state pruning), release the locked CKB, and deposit it into NervosDAO to stop paying state rent.

Thus, CKB addresses the common economic misalignment issue where users pay once to occupy the chain state permanently by imposing targeted inflation as a means of collecting rent on the state.

3. Value Capture and Realizing the Flywheel Effect

If Bitcoin is considered digital gold, then CKB is like digital land, where one CKB is equivalent to one byte of space on the blockchain.

The land in a city is used for various purposes—schools, parks, malls, office buildings, etc. Once developed, the land is “locked” for a while, unable to be traded or circulated. Similarly, CKB operates as an asset storage network. As more ecological projects on the chain and more on-chain assets emerge, more CKB will be locked. This is because storing anything on the CKB blockchain (states, contract information, scripts, etc.) requires occupying space on the chain.

Here are a few examples:

• For a new CKB address, storing CKB in it requires deploying related information, using at least 61 bytes of on-chain space, thus locking 61 CKB. For Nervos DAO, it requires locking 102 CKB since Nervos DAO needs to store more information on-chain, requiring a larger capacity cell.

• Storing account information on the CKB chain for a .bit account also occupies certain on-chain storage space. Therefore, each .bit account is charged a storage deposit of 206 CKB and locked.

• Assets issued on the CKB chain, whether fungible tokens or NFTs, need to occupy on-chain space. For instance, the first inscription project based on the Omiga inscription protocol, with its token MEMES essentially issued on the CKB chain as xUDT (fungible token), requires a cell of 145 bytes, thus needing to lock 145 CKB.

• In the foreseeable future, assets issued based on the RGB++ protocol and contracts deployed, NFT assets issued based on the Spore protocol, and other ecological applications will occupy a significant amount of CKB on-chain space, necessitating the locking of a substantial amount of CKB.

Therefore, the more prosperous the on-chain ecological projects of CKB and the more on-chain assets there are, the more CKB will be locked. This will decrease the circulation of CKB, further increasing its scarcity and realizing a flywheel effect.

4. Providing a Value Floor for On-chain Assets

As mentioned earlier, one CKB is equivalent to one byte of space on the blockchain, and occupying space requires the locking of CKB. This mechanism provides a value floor for many CKB on-chain assets.

Take the Spore protocol as an example. It is an NFT protocol with all data stored on-chain, supporting a variety of content types including but not limited to offline links, images, audio, video, and text. The amount of CKB required for each Spore NFT depends on how much on-chain space is needed to store its content (since every Spore NFT is a cell, it depends on the cell’s size).

Let’s assume we have a Spore NFT named Test, which occupies 200 bytes of on-chain space, thereby locking up 200 CKB. Its intrinsic value is then 200 CKB, and its price is the intrinsic value plus the NFT’s brand premium. An increase in the price of CKB would also lead to an appreciation of the NFT’s value. If the price of Test falls below 200 CKB, arbitrageurs or users could massively buy in and then melt it down to retrieve the 200 CKB locked in each NFT.

Summary

As a Proof of Work (PoW) public blockchain, the inflation rate of CKB was relatively high in its first four years. However, after its first halving event, the nominal inflation rate has dropped to below 6.2%, and the real inflation rate (for Nervos DAO depositors) has further decreased to below 3.8%. Besides the primary issuance, CKB also features an original secondary issuance mechanism. This ensures that miners are compensated for perpetually securing the network’s safety, even after all the CKB from the primary issuance has been mined, regardless of the on-chain transaction volume. Additionally, by tying data storage to its native token CKB, the growth of the global state is constrained, endowing CKB with the ability to capture value, achieve a flywheel effect, and provide a value floor for many other assets on the CKB blockchain.

Disclaimer:

1. This article is reproduced from Byte Element CKB, originally titled “Understanding CKB’s Economic Model and Its Ingenious Design” by author [Byte Jun]. Copyright belongs to the original author. If there are any objections to this reproduction, please contact the Gate Learn team. The team will handle it according to the relevant procedures as quickly as possible.
2. The views and opinions expressed in this article represent only the personal views of the author and do not constitute any investment advice.
3. Other language versions of the article have been translated by the Gate Learn team, and without mentioning Gate.io, no copying, dissemination, or plagiarism of the translated articles is allowed.