Midnight, a Cardano partner chain dedicated to data protection, will introduce two tokens: DUST and NIGHT. While having two tokens is uncommon for a blockchain project, it’s not unprecedented. For instance, the Neo project also utilized NEO and GAS tokens. Although the specifics of the relationship between DUST and NIGHT are still under wraps, the whitepaper provides insights into the system’s expected functionality. Creating a functional and effective token pair can be a significant challenge for the team. Building a functional and efficient system with a pair of tokens can be a significant challenge for the team.
DUST and NIGHT
Common blockchains like Cardano, Bitcoin, and Ethereum use native coins both as rewards for node operators and as payment for network usage fees. The coin circulation within the ecosystem is straightforward: users pay with the same tokens that node operators receive. Some users simply hold coins without actively using the network.
While this system is simple, it has a drawback: the high volatility of tokens affects fees. Cardano, for instance, has fixed fees. A typical Cardano transaction incurs a fee of 0.17 ADA, which can fluctuate in dollar terms based on ADA’s market value. Projects with a fee market, such as Bitcoin, see fees increase with the demand of users to send transactions. Thus, fees are influenced by both volatility and usage demand.
The unpredictability of future network costs can be a concern for users, especially businesses.
Midnight addresses this issue elegantly by introducing two tokens: DUST and NIGHT. This approach separates governance and node operator incentives from user fees.
NIGHT is an unshielded token used for governance, consensus participation, and block production rewards. It functions similarly to ADA, but unlike ADA, NIGHT cannot be used to pay for network usage. NIGHT can be transferred between addresses and bought or sold on exchanges. NIGHT will initially exist as a Cardano native asset.
DUST, on the other hand, is described as the capacity access token necessary for network usage. DUST is a shielded token that cannot be transferred between addresses.
Historically, privacy coins like Monero have been delisted from exchanges due to regulatory pressures. This delisting negatively impacted their market capitalization and security budget, as blockchain security generally increases with higher attack costs.
If the DUST token were transferable between users, it might be seen as a privacy coin, potentially leading to the delisting of the Midnight project from exchanges. Midnight will enable users to send private transactions while also supporting identity management and selective disclosure. This sets it apart from fully private coins.
DUST is somewhat similar to a GAS token but with a few key differences. When using DUST, it won’t be possible to link the fee payment to the transaction and its metadata. For a transaction to remain private, this must also apply to the fees. I anticipate that fees will be fixed in terms of DUST value. For instance, a standard transaction might cost around 1 DUST.
The whitepaper describes DUST as energy that can hold value but cannot maintain it long-term. DUST tokens will be proportionally generated from NIGHT tokens. Users holding a certain amount of NIGHT will earn DUST, enabling them to use the network. This is advantageous for users, as they can essentially use the network for free by holding NIGHT tokens. However, the downside is that they may have to wait an unspecified amount of time for their DUST tokens to be generated from NIGHT tokens.
If a user knows they need to send an average of 5 transactions per day, they can easily calculate the number of NIGHT tokens required. These NIGHT tokens will generate the necessary DUST tokens to cover the transaction fees.
I’ve seen similar concepts fail in the past because users only pay once for NIGHT tokens and can theoretically use the network for free indefinitely. This could lead to economic collapse, as each transaction incurs a cost in terms of computer resource consumption. It’s not sustainable to pay for 5 transactions and then send 5000.
Another potential issue is that a large entity could generate a significant amount of DUST tokens, monopolizing a substantial portion of the network’s capacity. If the network’s capacity can’t accommodate the maximum amount of DUST tokens in circulation, smaller users might find the Midnight network inaccessible. An attacker could exploit this by sending unnecessary transactions to exhaust the network’s capacity, effectively launching a low-cost attack with just the initial purchase of NIGHT tokens.
NIGHT is described as a deflationary token. However, it’s unclear what will incentivize network operators once all NIGHT tokens are in circulation. If I understand correctly, DUST will be consumed during network usage. New NIGHT tokens cannot be generated from consumed DUST tokens, as this would lead to a constant increase in the number of NIGHT tokens, making them inflationary rather than deflationary as claimed.
If only users hold NIGHT tokens to generate DUST, the protocol would lack NIGHT tokens for rewards, while the network would still need to provide computing resources to process transactions.
The Midnight team will need to address these issues, and I believe they have a solution. The system is very advantageous for consumers of Midnight services.
Midnight is a partner chain of Cardano. If a team were to develop a Cardano application requiring privacy services for, say, 1000 users per day, they could calculate the cost of these services in DUST value and purchase the necessary amount of NIGHT tokens accordingly. This setup incentivizes teams to hold NIGHT tokens for DUST generation, allowing them to use Midnight services essentially for free. This mechanism is particularly advantageous for third-party teams.
The Neo project had a similar model, where NEO tokens generated GAS tokens used to pay fees. However, GAS tokens could be bought and sold, leading to speculation about whether NEO or GAS would hold more value over time.
Midnight avoids this problem by making DUST non-transferable. The market value tied to the network’s economic importance will be associated with NIGHT tokens.
Another potential drawback is that investors might hold a large amount of NIGHT without actively using the network. If the cost of acquiring NIGHT tokens is high, the network could become less inclusive. For example, if a user needs to own 100 NIGHT tokens to generate enough DUST for one transaction per week, and each NIGHT token costs $1, the network could become economically inaccessible for people in developing countries.
As previously mentioned, not all details about the relationship between NIGHT and DUST are known, so our speculations might be premature. The team is expected to publish a paper soon that will provide a more detailed description of the mechanism.
We recognize many challenges that the team will need to overcome. However, if they succeed, NIGHT could become a highly attractive token to hold, as it would enable free access to privacy services.