Like IOTA, Nano is a designed to be a distributed ledger that’s not strictly based on blockchain. It was conceived strictly as a payment system with transactions strictly peer to peer, settled directly between remitter and receiver. The way it’s supposed to work, every network participant has his own mini-blockchain. The participants keep their own records of all the transactions they were involved in, whether remitting or receiving. And it’s all recorded with a data architecture that Nano developers call “block lattice.” In theory, the concept is brilliant: Both remitters and receivers are empowered to keep a record of their own transactions. And since they’re the only ones aware of their transactions, the system design is extremely decentralized. Plus, it would also be an innovative way to scale: Unlike the vast majority of cryptos, the entire ledger does not have to process all activity on the network, and that makes it a lot easier to speed things up. In actual practice, however …
Nano Faces Three Vexing Challenges
To create a cryptocurrency network in which each user efficiently and fairly verifies other users — all without central coordination — may be a worthy goal. But we believe Nano developers underestimated how truly hard it is. So, when they ran into unexpected roadblocks, they chose a series of band-aid solutions. And this has come back to haunt them.
Here are three prime examples of the vexing challenges that have emerged:
- Challenge #1. Vulnerability to cheating
You ask: If only remitter and receiver are required to be aware of a transaction — with no one else overseeing it — isn’t it possible that these two parties could collude to cheat the system? You’re damn right it is! Indeed, without anyone overseeing, you should also ask …
What would stop a bad actor from double-spending? A Nano user could spend the same amounts repeatedly, without anyone being the wiser.
What would stop a bad actor from forging his account balance? The network would not be able verify that a particular user actually has the funds he’s attempting to spend.
A number of crypto projects, especially those that don’t use blockchain, have wrestled with these issues, and the reason is clear: Without a blockchain for transparency, developers are pressed to come up with some other creative set of rules to prevent cheating. This is why, as we discussed earlier, IOTA relied on a Coordinator for so long and only recently began to map out a plan to phase it out. Separately, it’s also why another non-blockchain crypto we’ve reviewed extensively, Holochain, has no consensus at all, simply trusting each member of the community to police every other member they interact with. How does Nano deal with this problem? By adding a layer of delegated Proof of Stake (DPoS). But therein lies the dilemma: Nano had little choice but to establish a group of validators (which it calls “Representatives”) to verify all of the activity on the ledger. And as we typically see in Proofof-Stake solutions, token-holders vote for candidates to fulfill that role. The validators then use the tokens that have been delegated to them to vote on the validity of transactions. If this sounds a lot like plain-vanilla DPoS, it’s because it IS plain-vanilla DPoS. To make matters worse, Nano doesn’t limit Representatives to a small handful — the mechanism most DPoS cryptos use to accelerate processing speeds. Quite to the contrary, it has no cap on the number of Representatives; and currently, there are already 210 of them. Result: Processing speed is only about 300 transactions per second.
- Challenge #2. Validators can’t get paid
All transactions on the Nano ledger are free, and all the tokens that will ever exist were created on day one. Again, in theory at least, this made sense for a strictly peer-to-peer network; it made it lightweight and cheap to use. Moreover, if there are no validators, why bother issuing new tokens to reward them? So, it all seemed to fit together nicely. But that neat construct crumbled when Nano tried to patch up the system with the added DPoS layer. So now, it does have validators. But with no new token issuance and no fees on the ledger, how in the heck are the validators going to get paid for the work they do? Oops. The fact is they don’t get paid. And that leads us to …
- Challenge #3. Back to Semi-Centralized Control
Since they can’t get paid, validators who are voted in have no incentive to run a node. In fact, only folks with a vested interest in the network have any motive for keeping the network running. Who might those people be? You guessed it! None other than the Nano founders themselves. End result …
Only three accounts control the overwhelming majority of Nano tokens. This gives them a huge controlling stake. They do whatever they want, and no one has standing to oppose them.
Let’s step back for a moment and look at what’s happened here: Nano was conceived to be one of the most decentralized ledgers on Earth. But a series of challenges and ad-hoc patches have reduced it to a semi-centralized ledger, run by just three big account holders. It started off by promising a radical, innovative approach to decentralization, peer-to-peer transactions and scalability (based on its “block lattice”). It all sounded cool when they said it. But in actual practice, it was pie in the sky. And now Nano has effectively admitted defeat, retreating back to an approach that’s same old, same old. What a far cry from the promise it once had!
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