What Is NEAR Protocol (NEAR) and How Does the Network Work?

What Is NEAR Protocol (NEAR)?

NEAR Protocol is a public Layer 1 blockchain. Developers can build decentralized apps and smart contracts on it. A Layer 1 is simply an independent blockchain network with its own rules, its own security, and its own token.

The network's native token is called NEAR. You use NEAR, among other things, to pay transaction fees and storage on the blockchain. Validators and delegators can also lock up NEAR, or stake it, to help secure the network. Validators are participants who help process transactions and new blocks. Delegators stake their NEAR through a validator.

A smart contract is code that runs on the blockchain. On NEAR, such a contract can be linked to an account. That lets the contract manage its own data and carry out actions according to the rules written in the code.

NEAR Protocol is also working on chain abstraction. This is extra infrastructure meant to make interactions with multiple blockchains easier for users and developers. So it is something different from the NEAR Layer 1 itself.

Key Takeaways

• NEAR Protocol is a Layer 1 blockchain for apps and smart contracts.
• NEAR is the token for fees, storage, and staking.
• The network combines Proof of Stake with Nightshade sharding and Doomslug.
• Sharding splits work and data across multiple shards.
• NEAR does not have a fixed maximum token supply and keeps evolving through upgrades.

How Does NEAR Protocol Work?

NEAR Protocol uses Proof of Stake. In this system, validators lock up NEAR to take part in securing the network and producing blocks and chunks. A block is a bundle of information that gets added to the blockchain.

The technology behind the network has two important parts: Nightshade and Doomslug. Nightshade is NEAR's sharding design. Sharding splits processing across multiple parts of the network, which are called shards. Doomslug helps with block production and finality. Finality means that a transaction or block is considered final and cannot just be rolled back anymore.

A block contains chunk headers. A chunk is the part that holds transactions and data changes for a specific shard. You can think of it as multiple groups of work being coordinated together in one block.

A transaction on NEAR can consist of multiple actions. Think of sending NEAR, creating an account, adding an access key, staking NEAR, or calling a smart contract.

Running such a transaction can produce receipts. A receipt is an instruction that gets processed later. Especially with smart contracts and actions between different shards, one action can therefore involve multiple steps.

NEAR Protocol (NEAR) Overview

How Does Sharding Work at NEAR Protocol?

With sharding, processing and data storage are split across multiple shards. That means not every validator has to process every transaction and all the data from the entire network on its own.

Within Nightshade, a chunk producer creates a chunk for a shard. The block producer then includes the chunk headers in the main chain. So the shards are not separate, independent blockchains. They belong to the same NEAR Protocol and are coordinated together.

The idea behind this is horizontal scaling. If there are extra shards, that can in principle create extra processing capacity. The network then spreads the work across more parts instead of making everyone do exactly the same work.

NEAR also uses stateless validation. With this, validators do not need to store all the data from every shard locally. They can verify chunks using the needed cryptographic proofs. That can reduce the amount of shard data a validator has to keep on its own.

An action between accounts or smart contracts on different shards goes through cross-shard receipts. It does not happen as one direct local execution within the same shard. Because of that, it can involve several separate steps.

How Do Accounts and Transactions Work at NEAR Protocol?

NEAR uses an account model. An account can contain a balance, access keys, stored data, and possibly smart contract code. So an account is more than just an address that holds NEAR.

NEAR supports readable and hierarchical account names. There are also implicit accounts, which are derived from a public key or an Ethereum address. A smart contract is deployed to a NEAR account. That contract account can therefore run code, store data, and manage assets.

An account can have multiple access keys. There are full-access keys, which give broad rights over the account, and function-call keys. Function-call keys give access to one specific contract. You can also limit them to specific functions and a maximum budget in NEAR for gas fees.

Gas measures how many network resources a transaction or smart contract uses. A gas limit caps how much of that an execution can use at most. This prevents an action from demanding unlimited work from the network. The exact rights of a function-call key depend on how that key is set up. So a limited key is not automatically safe for every use case.

A signed transaction contains one or more actions. During execution, receipts can be created from those actions and processed separately. In addition, accounts pay for the storage space their data uses on the blockchain. So storage has an economic cost on top of transaction gas.

What Is the Difference Between NEAR Protocol and Bitcoin?

NEAR Protocol and Bitcoin are both public blockchains with their own native asset. But their purpose and technical design are clearly different.

• Purpose: NEAR is designed as a programmable platform for apps and smart contracts. Bitcoin is primarily a peer-to-peer electronic cash network.
• Security: NEAR uses Proof of Stake, where validators stake NEAR. Bitcoin uses Proof of Work, where miners do computational work to produce blocks.
• Transaction model: NEAR works with accounts that can contain balances, keys, storage, and smart contract code. Bitcoin uses a UTXO model. In that system, a transaction spends earlier, unspent outputs.
• Programming capabilities: On NEAR, general-purpose smart contracts can be deployed and run on accounts. Bitcoin has Script for conditions around spending bitcoin outputs, but this system is more limited than NEAR's general smart contract platform.
• Supply: According to the consensus rules, Bitcoin has a maximum supply of 21 million bitcoin. NEAR does not have a fixed maximum total supply. The maximum annual inflation is currently 2.5%.
• Scaling: NEAR uses sharding to spread processing and data across shards. Bitcoin keeps one shared UTXO set and does not use protocol sharding at the base layer.

How Did NEAR Protocol Start?

Illia Polosukhin and Alexander Skidanov founded NEAR Protocol in 2018. Their goal was to build a scalable and user-friendly blockchain.

At first, they explored AI-related use cases. Later, they focused on blockchain infrastructure because they saw problems around cross-border payments and scalability.

Before the mainnet launch, NEAR developed public testnet infrastructure. The genesis of the NEAR mainnet took place on April 22, 2020. That was the start of the network, but not yet the start of a fully open mainnet managed by the community.

The first phase temporarily used Proof of Authority. In September 2020, the NEAR Foundation stopped running its own mainnet nodes. From that point on, the network was managed by the community.

What Are the Benefits of NEAR Protocol?

One important feature of NEAR is Nightshade sharding. By splitting processing and data across shards, not every participant has to process every transaction. That gives the protocol room to scale horizontally.

Stateless validation can help with that. Validators then need to store less shard state locally, while still being able to verify chunks with cryptographic proofs.

The account model also offers practical options. NEAR supports readable account names, subaccounts, and multiple access keys. With function-call keys, apps can set permissions more precisely, for example by limiting access to one contract, certain functions, and a maximum budget in NEAR for gas fees.

Developers can also deploy smart contracts on NEAR accounts. Those contracts can manage their own logic and data on the blockchain.

NEAR Intents is extra infrastructure for interactions between supported blockchains. With it, a user can specify the financial outcome they want without having to carry out every separate step themselves. This does not apply to every regular NEAR transaction.

What Are the Downsides of NEAR Protocol?

Sharding makes the network more technically complex. Actions between shards, in particular, can go through receipts and consist of multiple asynchronous steps. Asynchronous here means that not every step is completed right away in a single execution.

When the network is busy, receipts can pile up. That can create more time between submitting a transaction and its final execution. NEAR therefore has congestion control mechanisms meant to deal with this kind of congestion.

NEAR does not have a fixed maximum total supply. The current maximum annual inflation of 2.5% can increase the supply. At the same time, fees are burned. Whether the total amount of NEAR rises or falls overall depends on the balance between new issuance and burned fees.

Validators can see transactions in the mempool before they are executed. The mempool is the waiting area for transactions. Smart contract developers therefore need to account for front-running: someone may try to get ahead of a visible transaction. That does not mean every NEAR transaction gets front-run.

Finally, the protocol and tokenomics keep changing through upgrades. So technical details and economic parameters should not be seen as permanent features.

Conclusion

NEAR Protocol is a Layer 1 blockchain where developers can build apps and smart contracts. The native token NEAR is used for things like transaction fees, storage, and staking.

Technically, the network combines Proof of Stake with Nightshade sharding and Doomslug. Sharding splits processing and data across shards, so not every validator has to process everything. That also adds extra complexity, especially when actions between shards move through receipts.

NEAR also offers an account model with multiple types of access keys and room for smart contracts. At the same time, NEAR does not have a fixed maximum supply, and the technology and tokenomics can keep changing through upgrades. Those are important points to keep in mind if you want to understand how NEAR Protocol works.