EP 48: Building the Infrastructure of Web3.0. Explaining Handshake and $HNS Economics

Handshake.

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TLDR below. This is not financial advice.

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In the previous newsletter we introduced Web 3.0 and why it is so important. Web 3.0 is the next era of the Internet. It makes cyberspace more democratic, and the data is not used against the users themselves. More specifically, the user determines nearly every activity through administration.

There are many projects now trying to change the mechanism of Web 2.0 companies to become Web 3.0 Protocols, which is good news. Examples are:

• Filecoin, Sia, and Arweave (Data Storage and Web Hosting);

• Ocean, Erasure, and Streamr (Data Processing and Information Markets);

• Handshake, ENS, Unstoppable Domains (Domain Name System - DNS);

• Audius, Mirror, Braintrust (Applications).

Today, we will go deeper about an application that relates to Web 3.0 - Handshake. But first, we need to understand what is this DNS that Handshake is talking about?

What Is DNS?

If you go to Instagram or Twitter you can find people's usernames by typing the name into the search box. In the same way, we give names to computers and systems so we can find them. But how do we do that? How does that work?

You see, machines read 0 and 1. But humans read letters and words. So we need a way to turn letters that humans read, into 0 and 1 that machines read. This is done via DNS.

In the computer world, every individual is a server, computer or one of these machines. The computer name is in 1 and 0. DNS gives this 1 and 0 a name. That name is the website link or URL.

This can be .com, .org, .edu.

Why Do We Need To Decentralise DNS?

DNS is already fairly decentralised but there are different types of decentralisation. Handshake is coming at the political decentralisation of the DNS system. DNS is geographically distributed and there are many different ways to access domain names. The entire domain name system is controlled by one entity called ICANN or IANA. Handshake is trying to turn that kind of entity into a protocol.

Introduction To $HNS

Handshake ($HNS) is a decentralised, permissionless naming protocol in which peers authenticate and are responsible for managing the root DNS naming zone to create an alternative to existing naming systems and certification bodies.

Handshake uses the Bitcoin architecture. Instead of running decentralised money as an application, Handshake runs the decentralisation of DNS.

It is an application that decentralises the domain name service. Instead of .com, you can have .lisa or .economicsdesign, for example. This ownership will be distributed because everyone can own it.

Why Is Handshake Valuable?

Handshake is a domain name system that supports Web 3.0. Web 3.0 is about rearranging existing Internet products and services so that they benefit people rather than entities.

The data will still be used to drive decision-making but will not be used against consumers. Data rights will be protected instead of being trampled for profit. Incentive and marketable mechanisms will help ensure that information is reliable and verifiable.

If Web 3.0 is successful, it will positively affect projects solving related issues, including Handshake.

Objectives

Objective 1: A decentralised domain naming protocol for everyone to access.

Objective 2: Replace the root zone fork and the root servers.

Why Should People Care If The Handshake Protocol Is Decentralised?

One reason why you would want to use Handshake is that you control the domain. It is like your keys and only you can update the records. No one can take it from you or no one can accidentally give your domain to someone else, so there is a ton of security benefits from Handshake.

There are some identity aspects as well, like owning your domain or your name across multiple platforms. You can log in with your Handshake domain into Facebook or Instagram so you have a unified identity across all the different applications you use.

Market Design

There are a total of 2 billion and 40 million Handshake tokens out there. 43.3% are distributed to open source software contributors. Tokens are airdropped to developers on Github who meet certain criteria showing that they are working as part of this Web 3.0 infrastructure. We reward these developers by airdropping tokens to them.

One-third of the tokens go to mining rewards. The basic underlying infrastructure of Handshake is like Bitcoin. This means that for every transaction you need people to be validating and to incentivise these validators we give them mining rewards. These rewards halve every four years just like Bitcoin. It is really the whole Bitcoin infrastructure just built for a different kind of use case. 5% goes to some core developers that are contributing.

5% goes to certificate authorities. We have these big servers around the world or big websites like google.com or facebook.com and in this Handshake system, they get to keep their .google or .facebook and so 5% of these tokens are set aside for them. For instance, if Facebook comes on board and wants to have a .facebook, they get to unlock that for free and get to have some Handshake tokens.

3.3% goes to non-profits and other kinds of open source software, to reward and return this value that is being created in the Handshake protocol back to the community.

Why Is Such A Large Portion Given Out?

There are two main reasons:

1. The entire internet is built on open-source ideologies and this project is based on giving back to the people. On a fundamental level, the internet and what we use today wouldn't exist without free open-source software.

2. The other side of it is that the more value that you can give away to other people the more value you can generate and have people contribute back to your protocol. The reason why they gave away 70% of the supply is that if some other protocol comes along and gives more of their supply to developers or to other people, then that protocol is more likely to succeed because now more people have a vested interest in it.

How Does Handshake Work?

$HNS is just a copy-paste of Bitcoin's core code with some additions and it has its own mining consensus. In Bitcoin, many people are trying to solve the puzzle and confirm that transaction called mining whenever there is a transaction. In the same way, you have that kind of system in the Handshake network. They have their own miners and validators mining and validating the transaction and they are rewarded.

Supply And Demand Of $HNS

How Does The Protocol Increase Supply?

Supply is increased through block rewards. Every 10 minutes 2,000 Handshake tokens are released into the system to the different miners that have validated transactions, halving every four years. This is the main active way that it is increasing the supply.

The second way is that 5% of the tokens are kept for certificate authorities. These are big players who are incentivised to come on board to Web 3.0 because they get the Handshake tokens for free.

How Is Supply Reduced?

Handshake is kind of all about burning. Every time you buy a domain the money does not go to anyone and just gets burned. You are, in a way, paying back to the rest of the protocol participants that still hold Handshake. The main deflationary aspect is auctions, so currently about 1% of the total Handshake supply has already been burnt in order to buy these domains.

Handshake is working on other burn models for secondary applications built on top of Handshake. There is this one DEX called Shake DEX where you can buy and sell domains in a decentralised manner and they're looking at having you burn Handshake to list on their site.

It is mostly a deflationary token and there is a pretty limited inflation rate from the miners and we don't know when or if any of these airdropped tokens will ever be claimed and come into circulation.

How is DNS Priced? Vickrey Auction

What Is A Vickrey Auction?

The Vickrey auction is a closed auction type auction. Bidders submit their bids without knowing the bids of others in the auction. The highest bidder wins, but the payout is equivalent to the second-highest bid. This is really important to understand.

For example, if you bid 10 HNS for /Nakamoto and someone else bids 5 HNS, you will win the auction but pay only 5 HNS for /Nakamoto. This means you spent less HNS than your bid.

How Does The Auction Work?

This is a very robust auction mechanism where you can allocate the asset to the person who has the highest value of the good.

For example, let's say I bid a thousand bucks for a camera and if someone else bids two thousand bucks then the other person wins the auction but they pay the second-highest bid which is one thousand dollars.

This way the domain name is awarded to the person who values it the highest.

What Happens When You Win/Lose?

If you lose, your funds are returned in full (minus the Handshake Mining Fee) after the reveal period ends. If you win, you are now one of the first owners of a decentralised top-level domain on the internet.

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TLDR:

Currently, Handshake is the first project to have its own crypto on the Domain Name System. And the development potential is huge if the project is on the right track and has the support of users of Web 3.0.

The operating mechanism is similar to Bitcoin Blockchain, with several improvements in functions to optimise and match the protocol's goal.

The cryptocurrency is designed to use the protocol's services, which will then be burned to increase the value of $HNS, which is the buy demand. Regarding sell demand, miners maintaining the network will get $HNS as rewards, they can sell them in the marketplace to continue maintaining the network. According to the distribution of $HNS, the inflation rate is relatively low at 7.7% (excluding burn). If demand grows for the protocol, $HNS will be of enormous value.