The Trust Machine — Part5: DLTs existential crisis, tokenomics and mana

Designing humanities trust layer for the digital world

Status Quo

If we look at the DLT space today, then we see that almost all projects use fees to determine the priority of transactions in a congested situation.

  • is easy to understand and implement (simple priority queue)
  • is in line with fundamental economic laws (dynamic supply / demand = dynamic price)
  • provides incentives (users pay validators)
  • enables smart contracts.
while(true) {

Fee-less transactions in other projects

There have been several attempts to implement fee-less transactions in other projects but they are either:

  • unsustainable (like Hathor that just replaces fees with an unbounded inflation and the corresponding ponzinomics)
  • only able to provide fee-less transactions because the network is uncongested and offers limited utility (like the current IOTA and Nano)
  • or have completely broken tokenomics and usability (like EOS).

Understanding the problems of fee-based systems

Considering all of the benefits of fee-based systems, we should ask ourselves if it really makes sense to replace such a simple and efficient system with something completely different or if we should not maybe focus on fixing the problems we see with fee-based systems, instead.

Different visions

In fact, I think that a large part of the disagreement inside the IF in regards to this topic is the result of people having different visions.

Fees create unnecessary dust

As soon as the fee to move funds gets larger than the balance of users, their funds turn into dust and can in the worst case (if the fees stay high) never be moved again.

Fees disincentivizes usage

Since every use of the network costs a part of the holdings, a lot of users prefer to hodl their coins instead of interacting with the network.

Bootstrapping problem

Since the only way to create sustainable tokenomics comes from demand for block space, fee based systems have a bootstrapping problem while the network is not fully utilized.

Unpredictable token supply

But even mature ecosystems like ETH that have moved to a more sustainable mint / burn model where users burn fees and validators mint new tokens are showing some undesirable properties like an unpredictable token supply that depends on the usage of the network (which makes it likely that the rates of minting and burning would need to be adjusted in the future).

Missing incentives

Currently most DLTs incentivize the following two behaviors:

  • users assign the weight of their funds to a trusted validator (staking rewards)
  • validators secure the network through regular statements (block rewards).
  • directly participate / run their own nodes (with their own ID)
  • only hold tokens.

Dynamic prices

Another “problem” of fee-based systems that is often expressed in discussions is the fact that the price to execute a transactions changes over time.

Fee-less doesn’t mean free

Critics of the fee-less paradigm usually assume that being fee-less means to offer free transactions which would violate the last point but that is not my understanding of IOTA’s vision.

  • it wastes energy
  • it leads to mining races (advantage for ASICS and FPGAs)
  • it decreases the user experience (makes issuing transactions slower)
  • it can not directly be used as a replacement for gas in L1 smart contracts
  • it can not provide incentives

Defining the vision

Instead of trying to provide free transactions (which seems impossible), we should try to build a system:

  • were funds no longer turn into dust
  • that allows users to repeatedly interact with the network without loosing their tokens
  • that doesn’t have the bootstrapping problem (sustainable tokenomics)
  • that has a capped token supply (a harder money / better trust anchor than even Bitcoin)
  • that provides additional incentives for direct participation and holding tokens

The biggest problem of DLTs

While we have so far only discussed the problems of fee-based systems, I also want talk about another, much more fundamental problem that the space is facing and that I would like to solve.

DLTs are useless

This statement might sound a bit weird coming from a DLT researcher but if we look at the history of accounting:

  • single entry accounting (10000 BC): the rise of the first civilizations
  • double entry accounting (1494): the renaissance, the industrialization and the information age
  • tripple entry accounting (2008): a decentralized savings account

The DLT space is having an existential crisis when it comes to its perceived legitimacy.

The killer application for DLTs

Considering the importance of this problem, I want to start the remaining parts of this blog post with formulating what I believe to be the killer application for DLTs that will single handedly turn them into one of the most valuable and important pieces of software on this planet.

  • DDOS attacks are only possible because overloaded servers have no way of differentiating between real users and attackers.
  • E-mail spam is only possible because spammers can create an almost infinite amount of addresses at 0 cost.
  • CAPTCHAs are only necessary because web servers could otherwise not distinguish between real users and malicious bots.

Self-governed, long-living and sybil protected DIDs for web2 and the world to secure and harden our existing IT infrastructure and to simplify the interaction with the digital world.

Interestingly, I am not the only person who has recently claimed DIDs to be the killer application. In fact, Jack Dorsey just announced his vision for web5 (a combination of web3 and web2) where web3 provides self-governed identities for web2

Source: Web5 Deck

Identity based ledger

To enable the named use case of providing a perception of sybil protected identities we first need to be able to track these identities together with their corresponding metadata and reputation.

  1. They should have a commitment to a DID document hash that contains eventually existing verified credentials associated with this DID (enshrined DID).
  2. They should be able to point to an optional parent identity, allowing us to build hierarchical structures with sub-identities and fine grained access control (think active directory trees and forests).
  3. They should have a private identity based ledger of tokens that can only be burned but never be transferred or traded to a different identity.

Identity based tokens (soul bound tokens)

For people who are actively following the space, this last point might sound familiar as Vitalik Buterin recently published a paper about a very similar idea of soul bound tokens (SBT).

Problems with Vitaliks paper

The biggest problem that I see with Vitaliks paper and the corresponding ideas is that they are still pretty vague. In particular the absence of some form of social consensus around what these reputation tokens would mean, seems to be problematic.


This is where mana comes into play which will be the central identity bound token that is used by everybody as a resource for the tokenomics in the IOTA ecosystem.

Mana generation

The resource that generates mana is the IOTA token itself with each token generating 1 mana per time unit.

generatedMana = amountOfTokens * timeHeld

Mana as a reputation

Since mana is an identity based token, it can no longer be moved once it was pledged to an identity.

  • 10 Tokens that are held for 2 time units generate 20 mana.
  • 4 tokens held for 5 time units generate 20 mana.
  • 20 tokens held for 1 time unit generate 20 mana.

Mana burn

The application of mana to our congestion control is relatively straight forward: Instead of burning a real resource like energy in PoW and favoring the actors the burned the most, we simply switch to burning a virtual resource (mana).

Mana as a replacement for gas

Since mana is now a virtual resource with a concrete balance, we can use it as a replacement for gas in layer1 smart contracts.

Mana for on-chain governance

One important difference between mana and stake is that it is directly held by the users of the system and doesn’t get delegated.


In the DeFi ecosystem, it is very common to bootstrap new projects by airdropping governance tokens to the users.

  • distribute tokens to the top n holders
  • distribute tokens proportional to mana holdings
  • distribute tokens based on a weighted lottery

Mana as a currency for other applications (mana economy)

But mana doesn’t need to be limited to the base layer. It can also be used as a sybil protection for other applications.

Mana as a sybil protection for the real world

If IOTA were to be widely adopted, it would for example be possible to only accept emails from actors with a minimum mana balance. Spammers would have a really hard time to fight against this protection as it takes a long time to build up their reputation but a single entry in a firewall to block them.

  • grant access to luxury areas in i.e. airports (identify wealthy individuals)
  • protect online votings from armies of bots
  • limit amount of people that can sign up for online events
  • DDOS protection through prioritization of requests by actors sorted by their mana balance

Mana market / tokenomics

Actors that require more mana than they generate need to buy mana (or throughput) on a secondary market (using IOTA as a currency).

Overcoming the bootstrapping problem

Since the rewards are payed in throughput quota instead of burned IOTA tokens, we are not using ponzinomics to incentivize people early on.

Funds no longer turn into dust

Another very interesting feature of this mana model is the fact, that funds no longer turn into dust.

                    Old Mana      Income       Spent    New Mana 
Day1 (Alice / Bob): 0 / 0 1 / 3 (1) / 2 1 / 1
Day2 (Alice / Bob): 1 / 1 1 / 3 (2) / 3 2 / 1
Day3 (Alice / Bob): 2 / 1 1 / 3 (3) / 4 3 / 0
Day4 (Alice / Bob): 3 / 0 1 / 3 4 / (3) 0 / 3

Users can repeatedly interact with the network

Since mana is a regrowing resource, users can repeatedly interact with the network without having to pay IOTA tokens for each transaction (unless they want to use the network more often than what their throughput share permits).

Identities as the ultimate NFTs

NFTs have been a big topic in the DLT space but their value is subjective — identities are also unique but in IOTA they have an objective value.

Mana boosts

So far we have only incentivized the act of holding tokens and direct participation but as mentioned earlier, we need to also incentivize the following two behaviors to have a secure DLT:

  • users assign the weight of their funds to a trusted validator (staking rewards)
  • validators secure the network through regular statements (block rewards).


We have designed a system that in my opinion objectively improves the most successful model for tokenomics in the space and even if we assume that it could still be improved — it would already be extremely valuable.

Instead of tracking assets, the main role of DLTs will be to track self-governed identities, which interestingly resonates very well with the idea to use real world identities to secure the DLT (but more on that in a later blog post).


So let’s summarize the ideas in this blog post in a few sentences:

  • Holding IOTA is like owning a virtual piece of land that grows mana according to its size.
  • Mana is used as a currency for interacting with the ecosystem.
  • Staking your funds to secure the network will increase the mana output of your piece of land (exact % TBD).
  • The mana balance of actors can be used for airdrops, on-chain governance and as a form of sybil protection for the real-world / web2.
  • The demand for block space will allow people to sell excess mana for a passive form of income once the network is fully utilized.



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Hans Moog

I am a hacker, feminist, futurist and tech enthusiast working for IOTA and trying to make the world a better place (whatever that means) :P