What Is NEAR Protocol? The Sharded Layer 1 Blockchain Explained
Understanding the technical side of blockchains can be difficult, but NEAR Protocol makes it so users don’t have to.
- NEAR Protocol is a Layer 1 network that has implemented sharding to scale its transaction throughput.
- The network strives for accessibility and user-friendliness, abstracting away the technical side of blockchains.
- NEAR is working on interoperability with existing Layer 1 networks through its Ethereum-compatible Aurora Network.
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NEAR Protocol is a scalable, Proof-of-Stake network focusing on user accessibility. NEAR’s innovative sharding technology, unique transaction fee mechanism, and growing interoperability with other networks are helping the protocol grow at a rapid rate.
NEAR Protocol Unpacked
NEAR Protocol is a sharded Layer 1 blockchain using a Proof-of-Stake. Launched in April 2020, the network is the brainchild of former Google engineer Illia Polosukhin and Microsoft developer Alexander Skidanov.
Although NEAR is a blockchain network in its current iteration, it started life as a machine learning project exploring program synthesis—in layman’s terms, teaching machines to code. Polosukhin and Skidanov’s research eventually led them to programmable smart contracts and crypto payment technology in early 2018. By August, the pair had switched gears, leaving behind program synthesis to build NEAR Protocol full-time.
Like many other Layer 1 blockchains, NEAR’s technology aims to tackle the “Blockchain Trilemma”—the proposition that it is difficult to create a scalable, decentralized, and secure blockchain without compromising on any one facet.
NEAR Protocol’s approach to solving the Blockchain Trilemma is by implementing a horizontal scaling feature called sharding. It works by splitting a blockchain node network into smaller partitions known as “shards.” Each shard consists of its own data and can be used to process transactions in unison with other shards, increasing the overall throughput of the network. Thanks to its shard technology, it claims it can process up to 100,000 transactions per second, outpacing other rival smart contract platforms by some distance.
While sharding is not unique to NEAR Protocol (Ethereum also plans to implement sharding on the completion of Ethereum 2.0), it has built on the concept by developing dynamic re-sharding. On NEAR, instead of the number of shards being static, the network will regularly adjust the number supported based on user demand. By dynamically adjusting the number of shards used, NEAR can reduce the average cost of using the network while maintaining the potential for high transaction throughput.
Transaction fees on NEAR Protocol follow other Proof-of-Stake networks in that they are very low compared to blockchains like Bitcoin and Ethereum. NEAR’s protocol documentation asserts that the cost of sending funds is roughly 4.5⨉10⁻⁵ NEAR tokens, rivaling Solana in how cheap its transactions are. As a Proof-of-Stake network, NEAR does not consume large amounts of electricity to validate its network and has been rated carbon neutral by the global climate solutions provider South Pole.
Staking validators securing the network are paid in NEAR token rewards proportional to their overall stake, much the same as Solana and Avalanche’s Delegated Proof-of-Stake systems. The protocol generates new tokens at a rate of 5% of the total supply every year, with most of them being given as rewards to validators. Security is maintained through slashing—a penalty applied to a validator’s stake for inactivity, dishonest validations, or any other malicious behavior.
However, NEAR differs from other Proof-of-Stake networks in that it doesn’t punish users who delegate their funds to a validator. If a validator gets slashed, users only stand to lose potential rewards instead of a portion of their delegated stake.
Additionally, to offset the 5% inflation from validator rewards, NEAR’s tokenomics also contain a fee burn mechanism similar to Ethereum’s EIP-1559. On NEAR, 70% of all transaction fees are burned, meaning that the network becomes more disinflationary as usage increases. At an average of 1.5 billion transactions sent per day, the NEAR token would become deflationary, with its token supply decreasing by 0.475% per year.
NEAR’s Focus on Accessibility
A key focus of NEAR Protocol is making the network as accessible and user-friendly as possible. This focus on user-accessibility stems from when Polosukhin and Skidanov were working on program synthesis back in 2017. In a 2020 interview with The Defiant, Polosukhin said:
“We really wanted to have a machine learning model that a normal person who does not know how to do programming would be able to explain what they want, and the computer would write codes for them. It’s a very challenging task; a lot of people have been working on it.”
With NEAR, the pair are staying true to their initial vision of abstracting away the complicated aspects of technology. The NEAR whitepaper even states that “applications deployed to the platform should be seamless to use for end users and seamless to create for developers.”
To achieve this, NEAR has made the process of creating a wallet much more intuitive and user-friendly than other networks. From the start, users create NEAR accounts with human-readable domain names without having to rely on third-party providers such as Ethereum Name Service. Additionally, NEAR accounts handle every wallet’s private keys through two-factor authentication, maintaining self-custody but making the user experience less clunky and more similar to what users are familiar with in Web2 applications.
When interacting with applications on NEAR, several more usability features come into play. A simple subscription interface lets users manage the apps they have given permissions to, and the costs of using the network can be made more predictable by letting app developers pay for fees on behalf of their users.
Another of NEAR’s unique features is that smart contracts running on the network earn 30% of the fees paid to interact with them. The contract’s owner (or owners) can decide how these funds are allocated, helping decentralized autonomous organizations operate more fluidly. The percentage of fees allocated is a system-level parameter and can be adjusted by governance votes, as is typical in decentralized organizations across the crypto space.
As other Layer 1 blockchains have shown, interoperability is key to increasing user adoption. NEAR has boosted integration with existing networks through Aurora Network, a protocol that offers compatibility with the Ethereum Virtual Machine. Users can directly bridge funds from NEAR Protocol, Ethereum, and several other Layer 1 chains to Aurora using Allbridge or Rainbow Bridge.
Although DeFi activity on Aurora is still in its infancy, several projects are building out the infrastructure needed to bring more liquidity to the network. Trisolaris, Aurora’s main decentralized exchange, has already accumulated $412 million in total value locked and supports trading for many native Ethereum DeFi tokens, such as Aave, Balancer, Compound, and Sushi.
Additionally, a recent partnership between NEAR and Terra means users can now bridge Terra tokens like LUNA and UST over to Aurora, creating more trading and yield farming opportunities on the network. Blockchain infrastructure projects like The Graph and MATH Wallet have also started making their way onto Aurora, allowing for more complex protocols to be built in the future.
Another project working to increase NEAR’s interoperability with other blockchains is Octopus Network. It’s aiming to create an interoperable network of application-specific blockchains called appchains, which will be validated by the Octopus Network smart contracts hosted on NEAR.
In some ways, Octopus Network works similarly to Polkadot and its ecosystem of parachains. The Octopus smart contracts create a relay on NEAR Protocol, which validates all appchains built on the network. The network also consists of a validator node network that appchains pay to secure their applications. However, bootstrapping appchains on Octopus is much less expensive than buying into Polkadot’s parachain auctions. Where the winners of Polkadot’s first parachain auctions received over $1 billion worth of DOT via crowdloans to secure parachain slots, launching an appchain costs closer to $2 million in Octopus Network’s OCT token.
The Octopus Network is also designed to be compatible with other NEAR-based tokens and the Inter-Blockchain Communication protocol, opening up many more cross-chain possibilities with other blockchains working on IBC-compatibility, such as Cosmos.
As the NEAR network is currently home to only a few applications, some have labeled it a “ghost chain.” However, the recent growth of other alternative Layer 1 networks like Solana, Avalanche, and Terra has shown that the market believes in a multi-chain future. The question is whether NEAR will succeed in building its own thriving DeFi ecosystem like the rising stars of 2021 did.
Solana and Avalanche saw rapid growth in 2021 partly because they offered generous rewards to entice builders onto their networks, and NEAR has a similar strategy. In October, NEAR announced an $800 million fund to incentivize developers to build on NEAR and its auxiliary networks, Aurora and Octopus. Once newly funded projects start to launch, the real test, whether NEAR Protocol will be able to attract more liquidity and establish network effects, will begin.
Disclosure: At the time of writing this article, the author owned NEAR, ETH, SOL, LUNA, and several other cryptocurrencies.