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What Is NEAR Protocol?

A Step-by-Step Guide to A Key Challenger Blockchain to Ethereum

What Is NEAR Protocol?

Many developers have earned valuable blockchain experience by working on Ethereum. Some moved on to Cardano and others to NEAR Protocol. What does it look like to create a competitive dApp network from scratch without being first?

NEAR Protocol is a public Proof-of-Stake (PoS) blockchain that aims to bring DeFi to the masses with low transfer fees and fast transactions. NEAR competes with Avalanche, Solana, Cardano, Algorand, the new version of Ethereum, and other PoS networks.

NEAR Protocol’s Origin and Purpose

NEAR’s founders are Alexander Skidanov and Illia Polosukhin, who hail from Ukraine and were educated in computer science and mathematics. They have been working on NEAR Protocol since 2017 after contributing to Ethereum’s open-source code. NEAR mainnet came online in August 2020.

Polosukhin also worked on Tensor Flow, an open source machine learning library. They based the company in San Francisco, which is typical for most developers pushing the software envelope. Skidanov and Polosukhin aimed to create a better Ethereum, without relying on Layer 2 scalability.

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In contrast, NEAR Protocol relies on making the mainchain (Layer 1) scalable. As such, it offers enterprise-grade performance from the get-go, offering up to 100,000 transactions per second once it’s fully upgraded. As a result, it has gained popularity across all continents to mainstream dApp/Web3 deployment, attracting 1,700 monthly active developers.

Venture capitalists backed NEAR to the tune of $566M so far, led by Andreessen Horowitz, DCG, Coinbase Ventures, Tiger Global, Accomplice, Pantera Capital, Electric Capital, Blockchange, Dragonfly Capital, Blockchain.com, and others.

NEAR Protocol’s Impressive Performance

NEAR Protocol network has 18M wallets and daily transactions, 400,000 transfers at 2.4s finality, and a remarkable $0.01 fee. Although NEAR’s daily transaction count is three times lower than Ethereum’s, it completes transactions five times faster. Most importantly, the protocol’s fees are comparable to Ethereum’s Layer 2 Arbitrum or Polygon networks.

On paper, this makes NEAR more streamlined, less complicated, and ready for mass DeFi adoption. The question is, how is this scaling possible without taking advantage of Layer 2 networks to spread the traffic load, the key driver for Ethereum’s high gas fees?

It turns out, the same technology Ethereum will implement in its Surge upgrade following The Merge — sharding. But, before delving deeper into sharding, it is important to understand the problem all blockchain networks face.

Decentralization Compromise

The key distinction between Web2 and web3 is centralization. Case in point, a Web2 company like Google can offer lightning-fast services because it has full control over its server farms.

Each server node is geared for performance, and controlled by Google. In turn, Google can grant or revoke access to its cloud services at will. With public and permissionless blockchain networks, it is possible to offer Google-like services but without the centralization baggage.

That’s possible because everyone can turn their computer into a network node, which then syncs up with other nodes to validate transactions and store the blockchain’s entire transaction history — a public ledger. Because validators need to confirm transactions across other nodes, this makes blockchains less efficient unless they are equally centralized as Google’s server farms.

In short, all blockchain networks have to find ways to optimize network traffic, so their performance is close to or equal to a centralized computer network. NEAR Protocol accomplishes this optimization through sharding.

Sharding: NEAR Protocol’s Big Advantage

Splitting validators. Source: NEAR Protocol

At the core of NEAR’s coding design is sharding. Even before blockchains were popularized, sharding has been in use to optimize computer network activity. Sharding works by breaking the blockchain into sections (shards), where each shard handles only a fraction of the network’s total load.

NEAR further tweaked the concept of sharding with its unique Nightshade solution, launched in November 2021 as Simple Nightshade. Because validators no longer have to process all incoming transactions, but only those within shards, Nightshade facilitates infinite scaling.

This is how it is possible to simultaneously have negligible fees and fast transaction speeds. Moreover, NEAR’s Nightshade is revolutionary for the following reasons:

  • The blockchain is sharded as a single-state blockchain. 
  • Every NEAR block accepts all transactions from other shards. 
  • When one block changes its state, other shards change their states as well. 

In practice, when it comes to physical information transmission, NEAR validators don’t have to download data whenever the block’s full state changes. Rather, they maintain shard states, as split data chunks per shard.

Altogether, Nightshade sharding solution delivers near-instant transaction speeds without sacrificing decentralization.

NEAR Tokenomics

Like all public Proof-of-Stake networks, NEAR Protocol incentivizes its decentralization with its own coins called NEAR. When validators process transactions, they receive NEAR as reward, just like Bitcoin miners. In turn, by processing transactions and receiving NEAR, validators issue new tokens into NEAR’s circulating supply.

This token issuance rate is called inflation, quite similar to when the Federal Reserve stimulates the economy with trillions of dollars. The difference is that the NEAR tokenomics is more predictable:

  • Maximum supply of NEAR coins is 1B.
  • NEAR’s circulating supply is at 77%, so there is less than 235M NEAR left to be issued as staking rewards.
  • NEAR’s all-time-high market cap reached $12.39B, at $20.2 per NEAR coin.

At the present rate, NEAR Protocol has 100 block-producing validators and thousands of delegators. The latter are simply NEAR holders who don’t run their own validator nodes. Nevertheless, delegators stake their coins to a selected validator to receive staking rewards.

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On a yearly basis, 45M NEAR is issued to validators and delegators at around 5–6% APR (annualized percentage rate). Like Ethereum, NEAR Protocol has a token burning mechanic as another counter-inflationary source. All the fees that are collected from transactions are burned instead of redistributed further.

NEAR developers plan to increase the number of validators after the introduction of Chunk Only Producers.

Validators must have NEAR funds, called Seat Price, often above the minimum threshold of 67,000 NEAR. Outside of that and some degree of computer networking experience, anyone can become a validator. The platform’s Discord server is the best place to get into the nitty-gritty technicals.

NEAR’s Ecosystem

The NEAR Protocol community consists of over 550,000 members. They have funded 125 DAOs to the tune of $5M, helping propel a wide range of dApps, from lending and NFT trading to gaming, launchpads, and exchanges. AwesomeNear is the main tracker and aggregator for all dApps launched on the NEAR blockchain.

Here are some of the most popular NEAR dApps:

  • Paras: NFT marketplace utilizing IPFS decentralized storage, with its own PARAS token. Interestingly, NEAR has its own version of CryptoPunks called NPunks.
  • Flux: Open predictive market protocol using FLX tokens
  • Burrow: Lending protocol similar to Ethereum’s Aave.
  • Ref Finance: Token swap exchange like Uniswap.

To easily interact with Ethereum’s dApp ecosystem, NEAR launched Rainbow Bridge, allowing for the exchange of crypto funds between the networks. Once a user deposits tokens on Ethereum, they are locked. The Rainbow Bridge then creates new tokens on the NEAR Protocol, accessed via NEAR’s Wallet.

NEAR Protocol’s Future

In Q3 2022, NEAR’s Nightshade sharding will be improved by fully sharding both state and processing of data blocks, marking the completion of Phase 2. Because of this, hardware validator requirements will be lowered, which you can find here.

After Phase 2, NEAR Protocol will have a fully sharded mainnet, something that Ethereum plans to do in late 2023, at the earliest. The next step in Phase 3 is to make sharding dynamic, by splitting and merging shards depending on the network’s utilization. Phase 3 should complete by the end of 2022.

NEAR is well on its way to be fully scaled for mass DeFi adoption, while Ethereum may be years away. This may seem like a big advantage. But one has to keep in mind that Ethereum has over 415,000 validators vs. NEAR’s 100. This large decentralization discrepancy is likely to give Ethereum the necessary momentum, despite lacking Layer 1 scalability.

Series Disclaimer:

This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.

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