Over the last three months, there has been significant focus on Loki’s layer two, with numerous papers and articles revealing the true scope of Loki’s Service Node functionality with Loki now becoming a fully fledged mixnet. There has also been much talk about how Loki as a currency, or layer one transactional medium, will function in this framework. Initially we envisioned Loki would act as an access token to prevent Sybil attacks, however there are some downfalls of that system which we addressed in an article here. Given we have focused so much on Loki’s second layer, it’s time to give Loki’s first layer some explanation, and demonstrate why Loki is not only an advancement in layer two design, but also what makes it a worthwhile cryptocurrency.

A Move Towards Scaling

Monero and most other Cryptonote coins have dynamically scaling block sizes, meaning there is no hard limit to how many transactions can theoretically take place on the blockchain. However in practice, nodes must transmit data between each other, and as each block is accepted into the network and the block size grows, low performance nodes can struggle to keep up with the higher bandwidth requirements and suffer computational stress trying to verify all transactions. This can centralise the operation of full nodes to miners, who make up one of the only parties that have an incentive to operate full nodes.

If we can create a way to incentivise the operation of full nodes, we can avoid the aforementioned issues. This is one of the goals of Loki Service Nodes; to create a network of full nodes that are incentivised to hold and serve a full copy of the blockchain. These nodes must meet standards of service that are tested by a distributed method of flagging called Swarm Flagging. Because nodes are competing for a limited block reward and can be removed from the staking reward pool, they are always incentivised to serve copies of the blockchain to users and relay transactions.

Theoretically, this means that Loki can scale to handle much larger blocks and thus, handle a higher transaction throughput. This is predicated on the fact that the full nodes operating on the Loki network offer higher bandwidth/storage and compute performance than nodes on the Bitcoin or Monero network.

Instant Transactions with Blink

In a typical blockchain system, the confirmation time for any given transaction is the time it takes for a transaction to be included in a block. However, because of competing miners, withheld blocks, and Finney attacks, recipients usually require a number of additional blocks to be created on top of the block which holds a transaction before it is considered to be complete.[1] Depending on a multitude of factors specific to each blockchain, this process can take 10–60 minutes, which is inconvenient for merchants and customers who must wait for confirmations before they release goods or commence services.

Because of Loki’s Service Node architecture, near instant transactions are possible. Blink enables the same transactions that would occur on the Loki mainchain to be confirmed in seconds rather than minutes, assuring both the sender and the receiver of the validity of the transaction, and protecting the receiver against a double spend.

Blink works in a similar fashion to DASH’s InstantSend.[2] However unlike DASH’s InstantSend, Loki maintains all of its privacy properties throughout the process. Any third party looking at a Blink transaction will have no idea of the amount, nor the address of the sender and receiver. This opens up a range of new use cases for Loki, where face-to-face payments become increasingly practical and online payments become quicker and easier for users.

Stable and Formally Defined Funding Model

Funding models for cryptocurrencies are generally tricky, weak and informal, and donation only models can lead to the creation of special interest groups like blockstream, Bitcoin Unlimited and Bitcoin ABC. These groups typically act as for profit companies who drive an agenda that might not align with the community as a whole. The downside to most formally defined models is they act as a sort of tax, either through emissions or some kind of fee. This can be seen to take choice away from users as they are unable to allocate their funds to the projects they see as important.

Attempting to solve some of the aforementioned issues, Monero maintains a forum funding system, which is fully funded by a donations model. Projects vetted by the the Monero core team are featured on the Seeking Funding page, and users are free to donate Monero to projects they feel are worthy. The Monero core team also has an official donations wallet which often contributes large amounts of Monero to projects seeking funding. The advantage of the donations model is that users have full autonomy over how they spend their funds and what specific projects they support. However, there are also disadvantages to this model: funding is never guaranteed for high quality projects, and a large number of the projects receive about 1/5th of their donations from their ‘General Donations’ fund for Monero itself. The ability for a community like Monero to continue to self-fund and provide core contributions may decrease over time, and that’s something we want to avoid with Loki.

Loki’s long-term funding model is quite different from the donations model used by the cryptocurrencies mentioned above, and we think it will provide a significant advantage to consistent development, which will be in the interest of our users. Proposed in the whitepaper V3 is a revised governance block reward, which allocates 5% of each block reward to fund governance operations. Of this, 5% block reward 3.75% is controlled by the Loki Foundation, a registered Australian non-profit which is legally bound to spend the block reward as per its constitution.

“facilitating the development of an open source, highly secure, decentralised data transmission network that allows individuals, business and government to freely transact and communicate without the threat of malicious third party interference”

The other 1.25% is controlled by the Service Nodes through the Loki funding system. The Loki funding system is an entirely non-custodial system of proposal funding, meaning the Loki Foundation cannot control how its funds are allocated. Because Service Nodes are not bound by Australian law or a constitution, this greatly expands the range of proposals that can be funded. To distribute funds to proposals, Service Nodes vote on proposals that occur on-chain, and funding is allocated every two months via special funding blocks which pay a portion of their block reward to proposal addresses. Because Service Nodes represent players with a high stake in the Loki system, they are incentivised to vote on proposals which will increase the value of their stake.

Remote Node Availability

Due to the design of all CryptoNote coins, the blockchain cannot be easily queried by connection to a full node. Instead of simple queries being made for the balances of public keys, full nodes must transmit full blocks to users, and the user has to scan every transaction in the block and identify whether they can calculate the private spend key for the destination stealth address. This results in significant stress being placed on every remote node operator with no reward, and Monero and other Cryptonote coins therefore rely on the altruism of community members to fund these operations, which can be problematic.

It is common for mobile users in Monero to cycle through 3 or 4 remote nodes before connecting to one that is reliable. Additionally, as any user can become a remote node that serves blocks to the community, there is the possibility that “popular” remote nodes will provide an altered history of the blockchain. Though this altered history cannot be used to directly steal a user’s funds, in combination with other malicious attacks, a remote node could potentially convince a user to send funds twice to someone who has already received the transaction.

By rewarding Service Nodes, Loki creates a large, decentralised network of nodes with a full copy of the blockchain. These nodes are incentivised to serve copies of the blockchain to users and relay transaction. If a user chooses to connect to these nodes at random, ‘popular’ nodes are no longer an issue. This also balances the load of remote syncing across the whole network instead of onto a select few nodes.

Lokinet, SNApps and Highly Integrated Payments

Work is ongoing on Lokinet, which when fully launched will be a private, decentralised and Sybil resistant overlay network for the internet. You can read a detailed article about it here.

Anyone can host services on Lokinet, which will be called SNApps (Service Node Applications). With SNApps, any web developer will be able to host websites that are completely anonymous; the website owner won’t know the IP address of their visitors, and the visitors won’t know the IP address of the website they connect to. All content hosted inside Lokinet will be accessible through the Loki browser.

The Loki browser will have an inbuilt wallet. Users will be able to fund this wallet with Loki, and the browser will automatically hook into SNApps that display Loki addresses for payments. This will make it very easy for a user to operate a store, or take or make payments for goods and services while maintaining anonymity between both networking and transactional layers. Lokinet will also have exit functionality, so any website operator who serves a website on the wider internet will be able to implement these hooks for users of the Loki browser to easily manage Loki payments.

In Summary

Loki’s value is derived not only from an inventive layer two, but also as a layer one transactional medium, or cryptocurrency. Although Loki is moving away from the use of $LOKI as simply an access token, there are still some significant advantages to $LOKI over other privacy based coins. Most of these advantages are a result of the widely distributed set of Sybil resistant nodes, called Service Nodes. Due to Loki’s high scalability, Loki can handle a higher transaction throughput and offer higher bandwidth/storage and compute performance than nodes on the Bitcoin or Monero network. Leveraging Service Nodes, Loki can be sent near instantly and privately using Blink bringing instant new use-cases. Loki’s unique funding model provides strong governance and avoids the pitfalls and potential risks that donation-only models pose. Due to Loki’s incentivised Service Nodes, remote syncing loads are balanced across the whole network and the issues caused by ‘popular’ nodes are avoided. Layer one, coupled with an impressive layer two provides a whole suite of services to assist Loki users transact and communicate with absolute freedom.