VeChainThor (referred as VeChain hereafter) , launched on June 30th, 2018, is a blockchain platform that pioneers in enhancing supply chain management. It provides a solid governance structure, and advances IoTintegration. The new blockchain can be utilized in cold-chain logistics, luxury goods, medical products, automobiles, and many other industries that can benefit from trustworthy supply chain record keeping. Thanks to the distributed ledger technology, businesses and their customers can rest assured that the information is accurate and tamper-free. From raw materials to final delivery, VeChain makes every piece of information about the supply chain secure for all parties involved.
VeChain aims to promote effective collaboration between enterprises on its platform to facilitate transparency, and high-speed value transfers. For example, the platform can be utilized to track a vehicle’s maintenance records, insurance, parts replaced, and accidents history. Any attempts to hide or alter information will be impossible to achieve as it is securely stored on the blockchain. The total transparency of information would save tremendous amount of energy from reduced effort on researching and fact checking for buyers, thus speedup the buying process.
Through the use of Proof of Authority (POA) consensus algorithm, VeChain secures its network by a group of 101 Authority Masternodes (AM). Different from other blockchains, AMs cannot maintain anonymity on VeChain. They are subject to a thorough vetting process, and only those who have made it on the VeChain Foundation’s whitelist can become a masternode. In addition to the hardware and software requirements, they are also required to stake at least 25 million VeChain tokens (VET). As an incentive for them to participate in servercing the blockchain and stay active, Thor Energy tokens (VTHO) are paid to AMs as rewards. We will discuss the economic model and consensus algorithm of VeChain in details.
VeChain has aimed to compete in the logistics and automotive industries on a global scale. According to market data, the global cold chain market size was valued at $147.55 billion in 2017 and is expected to grow at 15% CAGR from 2018 to 2025. At this rate, the market size would reach $451 billion by 2025. Most importantly, due to technological advancements and the growing concern of shipment safety, the use of monitoring devices in the cold chain is on the rise. This trend could help VeChain to market its proprietary IoT devices which are designed to track key metrics throughout the logistic process. The embedded data management and information sharing on VeChain can make cold-chain logistics transparent and reliable.
Another target market of VeChain that is experiencing significant growth is the Automotive Industry. By 2020, there will be 1.32 billion cars on the road with 22% of them come equipped with some network solutions. Those cars are perfect for collecting information live. With proper equipments, information on traditional cars can also be collected and then uploaded to the blockchain when they go in for services and annual checks. All of the data can be stored onto VeChain’s vehicle digital passport and put it in the hands of the owners, making managing a comprehensive record effortless.
Although VeChain is relatively young in the market, its platform has been developing for 3 years. It has attracted numerous business partnerships in logistics and auto industries. In May 2017, PwC accepted VeChian into its incubation programme. Through this program, VeChain will have access to PwC’s expertise as well as the clientele. Other partners of VeChian include: BMW, China Unicom, DNV.GL (global provider of assurance services), Renault, and many other successful businesses in luxury goods, logistics, and technology industry.
Economic Model of VeChain
Vechian uses a dual-token economic model. Its main token, VET, serves as a value transfer medium for payments and value circulation within VeChain’s ecosystem. Its utility token, VTHO, is used to pay for the cost of using the blockchain. 70% of used VTHO is burned, and the remaining 30% is paid to AMs as compensation. Utility token is automatically generated by holding VET, thus preventing the transaction costs from market price volatility of VET. Therefore, if developers/businesses hold enough VET, VeChain is free to use as long as they don’t spend more VTHO than their VET tokens generated.
In anticipation of wide adoption of the platform, it uses the POA consensus algorithm. As introduced in our consensus article , POA is optimized for permission networks and is capable of handling ~10,000 transactions per second. However, the VeChain Foundation (the Foundation) understand that the number of transactions is low at launch. In order to maintain a robust economy, supply and demand of VTHO should be balanced. Therefore, one million VET tokens is set to generate 432 VTHO tokens per day(referenced as “current generation rate” hereafter) at launch. This rate currently limits the TPS to roughly 20.
Consensus Algorithm of VeChain
On VeChain, the duty of processing transactions and producing blocks falls on to the 101 Authority Masternodes. They maintain the network using the POA consensus algorithm. POA is a balance between total decentralization and total centralization in the sense that nodes are distributed around the world but not everyone can participate in consensus. Each AM has to pass a strict know your customer (KYC) procedure and satisfy the requirements set by the Foundation. Therefore, there is no anonymous block producer on VeChain.
Due to its unique design and the trustworthy nature of vested AMs, communication is not required between nodes to reach consensus on VeChain. The POA protocol chooses the next block producer randomly from the list of available AMs and each of them has an equal chance to be selected. Although communication is not required for consensus, each block can be witnessed by multiple AMs for added security. Based on the development team’s estimation of VeChain usage, the current block time is set at 10 seconds.
Authority Maternodes Incentive Model
The rewards issued to AMs is consisted of three parts. The first part is the VTHO generated from the required 25 million VET stake. At current generation rate, this totals 25 * 432 = 10,800 VTHO per day.
The Second part is the 30% of the VTHO consumption. If we assume that half of the freshly generated VTHO on VeChain are consumed each day, then each AM receives: 0.5 * (86.7 billion / 1 million) * 432 * 30% / 101 = 55,625 VTHO per day.
The third part of the AM rewards comes from the 6,480,000 VTHO generated each day by the 15 billion VET reward pool established by the Foundation. However, this reward is shared with Economy Masternodes (EM) on VeChain. EMs are the ones that offers stability to the blockchain but do not participate in consensus to produce blocks.The following shows three different EMs and their corresponding VET holding requirements:
- Mjolnir (MEM) — 15,000,000 VET
- Thunder (TEM) — 5,000,000 VET
- Strength (SEM) — 1,000,000 VET
The rate (base reward rate) at which EMs receives VTHO is calculated using the formula that can be found on the white paper (page 41). Notice that AMs and MEMs has a 100% bonus reward, and TEMs has a 50% bonus reward.
Using the numbers published by the Foundation, we assume that there will be 667 MEMs, 1600 TEMs, and 5000 SEMs. Solve the formula, we have a base reward rate of 154 VTHO generated by one million VET per day. Factor in the 100% bonus reward for AMs, 25 million staked VET will receive (154 * (1 + 100%)) * 25 = 7,700 VTHO per day. The size of the reward pool is set to decrease by 2.5 billion VET on January 1st, 2019 and another 2.5 billion VET on July 1st, 2019. The reward from reward pool (the variable F in the formula) will decrease accordingly.
In total, an AM receives 10,800 + 55,625 + 7,700 = 74,125 VTHO per daybefore the end of 2018. As you may have noticed, in our calculation about 75% of reward comes from consumption on VeChain. This is under the assumption that only half of freshly generated VTHO got spent. If all VTHO is consumed, the percentage will be even higher. If there are no transactions, which is highly unlikely, each AM will only receive 10,800 + 7,700 = 18,500 VTHO per day.
VeChain’s economic model is somewhat more centralized than other blockchains’ model due to the important role the Foundation plays in the governance structure. However, It is the intended design of this newly launched blockchain platform. Like what we mentioned when introducing the POA consensus algorithm, total decentralization was never a goal that the VeChain’s development team seeks.
We believe that blockchain technology will play an important role in supply chain management in the foreseeable future. With a growing list of partners and a working platform, VeChain has the potential for rapid expansion and the right tools to make it happen.
 Cold Chain Market Research Report, https://www.grandviewresearch.com/industry-analysis/cold-chain-market
 The road to 2020 and beyond, A McKinsey Report on Global Automotive Industry, https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Automotive%20and%20Assembly/PDFs/McK_The_road_to_2020_and_beyond.ashx
 The 101 VeChain Thrudheim (Authority) Masternodes Selection Process Begins, https://medium.com/@vechainofficial/https-medium-com-vechainofficial-authority-masternodes-4c1233c6f18e
 VeChain Apotheosis Part II: VETHOR Power Forged, https://medium.com/@vechainofficial/vechain-apotheosis-part-ii-thor-power-forged-974111a93278
 VeChain Development Plan, 4.6.1 Initial Token Distribution, https://cdn.vechain.com/vechain_ico_ideas_of_development_en.pdf
 2017 Top Markets Report Cold Chain Sector Snapshot, U.S. Department of Commerce, https://www.trade.gov/topmarkets/pdf/Cold%20Chain%20Snapshot.pdf
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