NEAR Protocol: Scalability through sharding

NEAR stands out as a developer-friendly blockchain with a central focus on scalability. Unlike many other blockchains facing issues like network congestion and high transaction fees, NEAR’s architecture leverages “sharding” to achieve scalability without compromising on speed, low costs, and decentralisation. Despite the challenging market conditions, recent developments have led to a spike in NEAR’s network activity.

Launched in 2020, the NEAR protocol mainnet serves as both a high performance blockchain and a smart contract platform, allowing developers to build customised decentralised applications and blockchain solutions.

NEAR operates as a standalone Layer-1 blockchain, known for its unique scaling mechanism, dubbed Nightshade sharding. This essentially means breaking the blockchain into smaller parts, called “shards”, to achieve scalability and handle large amounts of transactions. Currently, the protocol is processing around 1.3 million transactions per day with near-instant transaction finality in about one second (1-1.3 seconds). NEAR is also actively working on interoperability and cross-chain features through solutions like the Rainbow Bridge, which allows users to move their assets (ERC-20 tokens) between the Ethereum and NEAR ecosystems.

With an initial exchange offering (IEO) that raised USD 21.6 million and subsequent funding exceeding USD 530 million secured by the NEAR Foundation, the platform should be well-positioned for continued growth and innovation.

Ecosystem growth

NEAR’s ecosystem is expanding across various sectors, comprised of various DAOs, blockchain tools, sector-specific applications and partnerships (more below).

For instance, in April this year, NEAR officially launched as a Blockchain Operation System (BOS), serving as an application directory, and simplifying DApp development across various blockchain networks. Meanwhile, NEAR is preparing to implement its Nightshade Sharding Phase 2, which is expected to scale the network to 100 shards by early next year.

Last month, NEAR experienced substantial user growth, averaging 690,000 daily active users. Much of this growth was driven by popular apps like Sweat Economy, which incentivises physical activity to earn tokens, and the newly launched Kai-Ching, an e-commerce app for Cosmose AI. Cosmose AI, known for using AI analytics to track in-store customer traffic, partnered with NEAR to develop a new crypto payment system earlier this year (after terminating its previous partnership with Stripe). Popular stablecoin issuer, Circle, has recently launched its USDC stablecoin on the NEAR protocol, allowing the NEAR ecosystem to leverage USDC for transactions, DApp development, lending and trading purposes.

NEAR Protocol’s market cap vs. daily active users

Despite the bear market, NEAR’s network activity remains active, with around 750 active projects within its ecosystem. The most active sectors are AI, DeFi, Infrastructure, NFTs, and Gaming.

Value proposition

NEAR prioritises user-friendliness and collaboration, achieving this through unique features like human-readable accounts, parallel transaction processing for enhanced speed and cost-efficiency, and strategic partnerships with industry leaders like Consensys, Alibaba Cloud and Google Cloud to strengthen its infrastructure. Earlier this year, a new roadmap was launched for the NEAR Digital Collective (NDC), a decentralisation effort to bring stakeholders, users and projects together to create a new form of community governance.

For NEAR tokenholders, its proof-of-stake (PoS) blockchain offers an opportunity to earn rewards by staking their tokens to secure the network. The NEAR protocol relies on a decentralised pool of validators that process the transactions, each requiring a minimum stake of 26,000 NEAR tokens (this may adjust frequently) to set up a validator node. Tokenholders can delegate their tokens to these validators, who in turn, have the flexibility to create or customise their own contracts to encourage tokenholders to stake with them. Unlike other PoS networks, NEAR uses a staking pool factory with a whitelisted staking smart contract to ensure delegators’ funds are safe.

NEAR tokenholders can also participate in governance decisions, like community elections and spending proposals for allocating funds from the NEAR Community Treasury.

Token supply model

NEAR has an inflationary token supply model, with a 5 percent fixed annual inflation rate. From these newly issued tokens through inflation, 90 percent (4.5 percent of the total supply) goes to validators as rewards for securing the network, while the remaining 10 percent (0.5 percent of the total supply) is sent to the protocol treasury.

NEAR also implements a burning mechanism, where 70 percent of transaction fees are burned, permanently removing them from the circulating supply. The remaining 30 percent is refunded to the contracts responsible for the transactions. This set up means that, as the NEAR network grows in usage, the net issuance rate can become negative, potentially resulting in deflation.

The protocol treasury, which is currently managed by the NEAR Foundation, holds around USD 900 million in funds, including USD 249 million in fiat reserves, 315 million NEAR tokens and USD 90 million in loans and investments. These funds are dedicated to reinvesting in the development and growth of the NEAR ecosystem.

Summary

With a solid financial foundation and a core focus on scalability and interoperability, NEAR protocol is taking on an ambitious challenge. Sharding is a relatively new and complex technology, and it requires a gradual rollout in multiple phases. Even Ethereum has opted to address its scalability needs through Layer 2 solutions, deviating from its original sharding plan. If NEAR protocol succeeds in this endeavour and sustains its recent surge in network activity, its ecosystem has the potential to see future growth.

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