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Meet Merit: The invite only cryptocurrency with deliberate friction

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Can deliberately introducing a few elements of friction actually help build a userbase?

There are two things almost any cryptocurrency wants to achieve. The first is to accrue as many users as possible. The second is to eliminate as many frictions as possible to create a system that can be transacted with as easily and seamlessly as possible.

Merit might be the only cryptocurrency to date which does the exact opposite. As an invite-only cryptocurrency it limits its user intake, with the intention of using the extra friction as a security measure to create a safer community for all its users.

Is it a good idea? Maybe, or maybe not.

Is it a radically different tack to that taken by most other cryptocurrency projects? It sure is, which makes it interesting to explore one way or another.

The fundamentals

It's an invite-only cryptocurrency network where each user has to be invited to the project before they can create an account.

Invitations are dynamically distributed to all wallets across the network by the mining algorithm according to demand. The more invites that are spent, the more are generated. Invites can be requested with just a click of a current user's personalised link.

The idea is for each new user to spend their invitations carefully, and only invite people that they believe will actually use and transact with the Merit MRT cryptocurrency.

This type of attitude is encouraged by sharing the mining reward weighting of invitee stakes with the inviter. The goal is for every user to become a brand ambassador to innately incentivise network growth, specifically pulling in people who are more likely to actually use MRT.

MRT itself is intended to be used as a cryptocurrency that could be accepted anywhere. Initially it's been built into the system's exchange integrated marketplace, which was built as an alternative to investing resources in listings on other exchanges, and to create a way of distributing and trading MRT in the absence of an ICO.

Consensus-wise, Merit uses a "cuckoo cycle" system which separates block generation rewards from consensus and includes several different elements.

Network security is entirely based on a memory-bound proof of work system, but only 50% of the block generation award is distributed to the winning security miner. The other half is distributed to top "ambassadors" of Merit, and all wallets, not just miners are considered for this award.

The distribution of awards to ambassadors is dictated by the Pachira Tree algorithm. This is a tried and tested formula for semi-randomly distributing rewards, where the likelihood of receiving an award is based on one's contribution to a network. In this case, contribution is measured by factors including the combined stake of one's own wallet and the stake held in invitee wallets.

It's still subject to change too. After going live, one of the main complaints was that it was funnelling too many rewards to the wealthiest users at the top of the "leaderboard" as it calls it. But after a bit more tweaking, a more equitable distribution was created and the number of accounts made and users invited started increasing exponentially.

Merit's self-described goal is "to be the world’s most used cryptocurrency by creating a truly safe, secure, and easy-to-use means by which businesses, families, and individuals can store, transfer, and grow their wealth".

An extra-friction invite-only system doesn't necessarily seem like a great way of literally becoming the world's most used cryptocurrency, but in the sense of creating a truly safe and a secure network, it might make more sense.


finder asked Merit founder Adil Wali, who some might recognise as the creator of ModCloth, an on-trend womenswear store, a bit more about how it works, why it works and whether it works, including some of the potential weaknesses around users sending invites to themselves on alternate accounts, what actually makes Merit safer and more secure than alternatives, and that strange dichotomy around building an invitation-only all-welcome community.

Update 8/9/2018: This section has been updated with additional commentary from Adil Wali, in italics.

How does Merit prevent users from sending invites to themselves?

"Merit uses a sophisticated algorithm to determine how growth rewards are distributed. So while we don’t physically prevent users from sending themselves invites, the rewards they receive will be greater if their network is 'real' and not faked," Wali says.

"The algorithm is called the Pachira Tree and balances the importance of the stake of the parent (inviter) wallet with that of the stake of the child (invitee) wallets. By taking into account the stake of both the parent node and the child nodes, creating fake nodes will necessarily reduce the impact of the parent node. So you can invite yourself; but as the network grows you will see diminishing results from spreading your coins among different wallets in order to create a fake network."

Having said that, depending on what the exact weighting is, it might still always make sense for participants to invite themselves as needed to ensure they can still build as big a network as possible. It's certainly possible to make this economically irrational, but intuitively it seems like the only way to do this would be to heavily weight rewards in favour of wealthier individual accounts. It might also take some serious number crunching to devise a system that does all that while simultaneously preventing too strong a trickle-up effect, where the balance of wealth gradually shifts towards the wealthiest users with the richest network.

It's worth noting that most cryptocurrencies struggle to a certain extent with these kinds of incentive and egalitarianism questions.

Can a community simultaneously be invite-only and democratised for all?

"When we talk about invite-only, we don't mean exclusive. That is, there is nothing special that you have to do or be in order to get an invite. The invite system is only a limit insomuch as it introduces a bit of friction into being able to transact on the Merit network, which we think is actually an important safety feature of Merit. The invite dynamics don't prevent anyone from joining, they simply make it in the best interest of current users to invite others to the network in order to qualify for Growth Rewards."

More literally, though, the invite system does prevent people from joining the community. That's its point. On the one hand it serves as a line of defence against trolls and scammers, but it might also unintentionally rule out anyone who's illiterate, people who don't want to be forced into a social marketplace, anyone who doesn't know the right people, anyone who doesn't speak the same language as anyone else in the community, and anyone else who might struggle to get an invitation.

According to Merit there are safeguards in place to prevent the exclusivity from getting out of hand, and it seems like anyone could get an invitation as needed. But a system that's exclusive by definition, while aiming to be inclusive by nature, might be unpredictable.

This is just a picture. The actual invitation application form can be found here.

"There aren’t any aspects of Merit’s fundamentals that would suggest it favors one group, identity or community over any other. In fact, it’s the blockchain’s inherent decentralization that ensures no one person gets to decide who is invited and who is not. Merit doesn’t rule out anyone who is illiterate any more than any software application that has words in its interface does. Invites are request and confirmed with links that don’t require literacy beyond that required by any internet application.

As evidenced by the invite application on our site, you don’t actually have to “know the right people” to join Merit, you literally just have to indicate that you’d like to join. With a highly diverse population of users who speak over 20 languages already, so if you can use any cryptocurrency, Merit doesn’t provide any additional barrier to entry. Furthermore, because invites are dynamically generated, the more invites that are issued, the more come into circulation - this solves for the “too poor to be invited” case as there is literally no limit to how many invites you can get and use.

Invites do not prevent people from joining the community, it prevents people from exploiting it. Invites are not so scarce that people aren’t able to join, it just adds a type of cost to participating in bad behavior. For example, it’s easy to get a couple of invites. It’s not easy to get thousands of them. As such, an individual can easily join while a bad actor looking to create thousands of difficult-to-trace wallets would have a hard time doing so."

How do Merit's different security and safety features work?

"One of the most exciting features in Merit is the alias system. Because Merit requires users to register their address or alias (just like a username) with the invite system, we are able to identify users by human-readable usernames instead of 34 character hexadecimal addresses. This automatically makes it safer, as it's much easier to identify incorrect addresses."

"It's also much less likely that you send Merit to an unattended address. Because all addresses have to be validated, you can't send Merit to an algorithmically correct, but unattended address."

"We also created a special kind of address called a vault. Merit vaults add multiple layers of protection without sacrificing decentralization or forcing a user to understand and use cold storage. Vaults utilize purpose-specific keys, whitelists and rate-limiting to help keep your MRT safe. These features are enforced at the protocol-level, not by a central party. Soon, Vaults will even include decentralized key recovery through Merit's upcoming Guardian feature."

It might not be the anonymous cypherpunk vision of crypto, but these kinds of features are undeniably useful for anyone who actually wants to use and spend crypto.

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How does the invite system incentivise the creation of a safe and trustworthy community?

"It's important to remember that invites are a relatively scarce resource; rewards are determined by not just the number of users you invite, but how much MRT they hold in their wallet and because each wallet will only get a certain number of invites at any given moment, you are incentivized to grow your network with users that will buy and mine MRT and that will invite others who will do the same."

"In other words, handing out invites to someone who never acquires any MRT will not benefit you. Therefore, it is in the best interest of the user to be discerning when spending their invites in order to maximize the impact of each spent invite."

This is not to say economically rational Merit users are gold diggers, but perhaps they aren't financially incentivised to mess with no broke miners.

On the other hand, using wealth as a proxy for trustworthiness is a longstanding staple of cryptocurrency, mostly for lack of a better option to date.

"Merit doesn’t use wealth as a proxy for trustworthiness. Newly invited merit users also have the opportunity to invite new users, an activity that can automatically earn them merit. Merit users, therefore, are incentivized only to invite new users that will be “active.” Often this means simply inviting those who can be trusted to then leverage their invites to also invite new users. Furthermore, there is also a growing secondary invite market new users can leverage to sell their invites in return for Merit, fiat or any other currency. This secondary invite market can actually help new “poor” users to build wealth. One of the major innovations of Merit is that you DO NOT have to mine to earn the currency. You just have to participate by growing the network."

How did it all begin...

"When we started talking about cryptocurrency, we couldn’t get over how difficult it was to use and how confusing it was for a non-technical user to get started. Once we started digging into the various avenues of confusion, we realized there was a large opportunity to make crypto much more approachable and accessible. Just try and figure out which bitcoin wallet you should use - it’s overwhelming!"

...and how were the first invitations distributed?

"There are a minimum number of invites distributed with every block, so on day one, the first wallet on the blockchain (which belongs to the Merit Foundation) mined the genesis block and received the initial distribution of invites."

"However, we built this wallet with a unique characteristic: it does not receive growth rewards. Therefore, the Merit Foundation has the entire network in its tree of child wallets, but doesn't get an unfair advantage from being first."

Merit might not be for everyone, but it's almost certainly going to be interesting to watch from a kind of anthropological perspective. Plus, the concept of these sorts of tangible barriers for economic participation, and a programmed system that rewards social-climbing towards wealth, is good food for thought.

"Merit does not itself serve as a barrier to economic participation. The digital currency market is enormous, and growing larger every day with plenty of opportunities for those interested to participate. No one has to show proof of wealth to join, and since we reward users not just for their stake of Merit, but for their network size, we help distribute Merit to an entirely different segment of the population rather than restricting block generation rewards to wealthy and technologically sophisticated miners with hundreds of thousands of dollars spent on specialized equipment."

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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