Dialogue with Mysten Labs Chief Economist: How to Design Appropriate Network Economic Incentives?

Recently, we spoke with Alonso de Gortari, Chief Economist at Mysten Labs, about how to find the balance of incentives between network operators and participants, and how Sui’s economy continues to evolve.

The following is the content of this interview:

Q1. What made you choose to apply your background in economics to the blockchain and Web3 fields?

At first, I was a researcher of international trade. I focus on global value chains, that is, international supply chains. But I want to be more deeply involved in my work. Academia is full of theory, but I haven't built an import/export platform or something, so I want to put my ideas into practice.

And blockchain is actually very relevant to supply chain management. In today's world, there are few ways to transparently trace the manufacturing processes that make up the products we use every day. The iPhone may be designed in California, but we all know it's assembled in China, with raw materials and components sourced from all over the world. Blockchain is immutable, so it is an invaluable way of recording the collection and assembly of any end product. The technology is so compelling that I thought it would be more interesting to just jump in and try to build something instead of sitting in an old office and watching it from the outside.

Q2. Can you describe the decisions required to design Sui's economic model?

The blockchain economy is a perfect combination of theory and practice. Just as engineering needs to keep up with the cutting edge, economics needs to keep up with the cutting edge. Token economics is the incentive mechanism that balances the three key economic actors on any chain: operators (i.e. Sui’s validators), token holders, and users.

Validators hope to earn money from gas fees by operating their nodes. Therefore, they expect higher gas fees. Users want to use the blockchain like any other product or service, so they want lower and cheaper gas fees. Token holders want to either stake their tokens to secure the network and earn rewards, or use their tokens to pay for gas, so they are sort of in the middle. Because they believe in the product, they want their token to appreciate in value, and they want people to use the blockchain. They are therefore as interested in low gas fees as users building applications and products on Sui, but at the same time want high gas fees to make the network operationally sustainable. Ultimately, the key is to set the gas fee just right and find a balance between the interests of all parties.

Therefore, when designing a blockchain, the key is to find the right alignment that serves the interests of all parties without taking sides. It must be ensured that validators can maintain a stable business while users and token holders can afford to participate.

Q3. What are the key innovations in Sui’s token economics?

Sui's unique gas price design is based on several key factors. First, Sui is horizontally scalable, meaning that during times of peak demand, validators can increase block space (i.e. supply), keeping gas fees low. On other blockchains, the supply is fixed, so when demand increases, gas fees across the network skyrocket because there is no other adjustable force. If the amount of block space is fixed, the only thing that can happen is a price spike when demand increases. On Sui, by contrast, the block space is variable. Due to horizontal scalability, the supply can expand accordingly as demand increases, so the price of using the blockchain remains the same even as usage of the network increases. Overall, when validators scale up, their costs increase, but since processing more transactions earns them more revenue, their earnings stay the same and don't need to increase prices to cover costs.

Reference gas prices bring transparency, predictability, and price pressure to the market. Each validating node must disclose the fees they are willing to accept to process transactions. The reference price will be set at the fee that two-thirds of the validating nodes are willing to run to ensure the security of the network. A competitive market is a key component of this design, as validators need to operate sustainably, which sets a floor on the gas fee floor. At the same time, since the operation of the network is permissionless, anyone can become a Sui verification node, which limits the upper limit of gas fees. If a validator sets the gas fee too high and makes a lot of profit, new validators will come in to compete at a lower price and take those profits. The market works gracefully like Adam Smith's invisible hand, with market forces shaping prices so that gas costs are just right, neither too high nor too low.

Another innovation is storage funds. Since the blockchain is immutable, anything stored on it needs to be preserved forever. On most blockchains, this can be prohibitively expensive for certain types of data such as JPEGs. Therefore, a lot of data is not actually stored directly on-chain. But on Sui, block space is more of a commodity than a luxury. The question is no longer how much it costs to store data, but who should be responsible for paying those costs. It seems unreasonable that validators and full nodes joining the network in the future should not bear the burden of storage decisions made in the past. Especially since in a case like this, those costs would be passed on to future Sui users. As economists often say, if current Sui users don’t pay to store their data, they create a negative externality for future users who will be forced to bear those costs. This is unfair and, more importantly, it will lead to an unsustainable financial situation for the network in the long-term.

Sui addresses this negative externality by making users pay for storage up front and in perpetuity. The storage fund keeps these fees and scales the staking rewards to validators proportionally, compensating them for their storage costs. Additionally, if the entity that originally stored the data determines that it is no longer needed, it can be deleted and returned as a refund for a substantial portion of the original fee. That way you're in the best possible position, Sui has an economically sustainable storage model and encourages people to use storage capabilities only when they really need them.

Q4. People often talk about whether certain Internet economies are inflationary or deflationary. Can you explain what this means and how it applies to Sui?

I think these terms are not always used correctly in many crypto circles. It is often said that the chain is inflationary if the token supply continues to increase, and deflationary if the token supply is constrained or reduced. But inflation and deflation are not just about token supply or tokens in circulation. It involves the relationship between the level of network activity and the available tokens. If a network's on-chain activity grows faster than new tokens in circulation, there will be pressure to lower gas prices (i.e. tighten) so that each token can be used for more transactions. And an active network with a large number of available tokens will have pressure to increase gas prices (i.e. inflation).

When Sui was designed, the token supply was set to be capped. At present, only a small part of tokens are in circulation, and the remaining tokens are unlocked according to the scheduled release plan. In the long run, the total supply of SUI will reach 10 billion pieces. It is this transparency and predictability that can help interested parties understand the state of the Sui economy. The goal of Sui is to continuously increase network activity. Whether Sui is inflationary or deflationary depends on the comparison between the growth rate and the token unlocking rate. The beauty of this approach is that it removes the ability for anyone to manipulate the rules of the currency, which are bounded in the long run, thereby providing the market with certainty that the token economy will function in the long run.

Q5. What do you think about the future development of Sui economy?

Mainnet is still very young. Like the technology itself, Sui's token economy will need to adapt to the usage and evolution of the network. For example, Sui has had some recent issues with storage, which may require fine-tuning the design of the storage fund. This is the fun part, practice testing theory. Sui's token economic goal remains the same, which is to collectively direct the incentives of all to a prosperous network.