What Is Near Protocol and How Does It Work?

Near Protocol is a layer 1 blockchain network. It provides a platform on which developers can build decentralized applications (dapps). The most successful layer 1 blockchain is Ethereum, so protocols like Near are seen as challengers.

The key yardsticks for layer 1 networks are transaction costs, speed and the ability to maintain those features as transaction volumes grow. These factors are the focus for layer 1s like Near to improve upon Ethereum, which has encountered issues with costs and speed over the last few years.

Near Protocol is faster and cheaper than Ethereum. More importantly, it promises to be faster than some of the other largest challengers. When fully implemented, Near is expected to be able to process up to around 100,000 transactions per second (TPS). Ethereum’s largest rival, Solana, averages less than 3,000 transactions per second, according to its own blockchain explorer. Ethereum averages double-digit transactions per second. Bitcoin does less than 10.

Outside the crypto sphere, an important comparison is Visa’s (V) capacity. The global payments giant processes around 7,000-8,000 TPS, based on its claim of 232.5 billion transactions over a 12-month period. Near Protocol could eclipse that, though it has not yet realized its theoretical potential as of July 2022.

“Near has built technology to enable transactions that are fast (~1 second), quick to finality (~1-2 seconds), cheap (less than a penny), and secure,” crypto research firm Messari noted in March 2022.

How does Near Protocol achieve those numbers?

Near Protocol’s defining feature is a technique called "sharding," designed to improve transaction speed and capacity. It involves breaking up the blockchain into sub-chains with different validators working on them, which regularly get connected to one another. Effectively, the network dodges the problem of becoming too big by cutting itself up into smaller parts.

Near Protocol is starting to implement a new version of sharding, which will turn it into what it describes as a "fully sharded" network. The innovation is "state sharding," as opposed to simply "processing sharding." Instead of simply dividing up the responsibilities of the validators, it actually divides the blockchain itself up into smaller parts. Near calls its technology "Nightshade" and began introducing it in phases in late 2021, as the transaction volume on the network increased.

Near Protocol is by no means the first network to use sharding. It has been talked about as a possible fix for Ethereum since 2013 and Ethereum-competitor Zilliqa put one version of it into practice back in 2018. But a "fully sharded" chain would break new ground.

This is why Near Protocol claims to offer “infinite scalability,” which means that the volume of transactions happening on the network can grow indefinitely without hurting its performance.

Near uses a proof-of-stake (PoS) consensus mechanism, in contrast with Ethereum’s current proof-of-work model (though it is working on transitioning to PoS through the Merge).

In proof-of-stake, bad actors are deterred from corrupting the system by a requirement to "stake" a certain volume of tokens to validate blocks. Near currently sets the number of nodes at 100 and requires a minimum threshold of 67,000 NEAR tokens in order to participate in the validation of new blocks of legitimate transactions and get rewarded with more tokens. Currently, the node with the lowest amount has over 162,000 NEAR tokens staked.

Despite its promising ideas, Near Protocol is still a long way from the biggest challenger to Ethereum. Others have been around and gathering momentum for longer: Solana, whose native token is SOL, and Polkadot, whose token is DOT, are two of the best known. The native tokens had market capitalizations of around $17.5 billion and $7.5 billion, respectively, in July 2022. Near Protocol’s native token NEAR had a little under $2.4 billion, to put it in perspective.

The NEAR token is used for the staking that underpins the validation of blocks on the network. Stakers get rewarded in the form of that token, too. The token’s all-time highest price was $20.44 in January 2022.

In addition to its speed and scalability, Near Protocol taps into the conversation around the environmental impact of the crypto sector by touting its "carbon neutrality." It partners with carbon-offsetting companies to cancel out its energy use. Additionally, proof-of-stake mechanisms tend to be less emission-heavy than their proof-of-work counterparts.

How is the NEAR token doing in 2022?

The first few months of 2022 looked very encouraging for Near Protocol. Analysts noted rapid growth in the volume of applications developed on the network and intensifying interest from major investors. The NEAR token roughly doubled in value to more than $17 between March and April. The protocol raised $400 million in funding in just the first four months of the year.

By May 2022, the outlook had started to sour for the wider crypto space. Near made a play to capitalize on the collapse of the terraUSD (UST) stablecoin by publishing an open invitation to the Terra community. It noted synergies including the fact that both networks used the same language, Rust, to write smart contracts.

But that could not protect Near from the harrowing summer that was about to hit the sector. By July, the NEAR token's value had dropped to less than $4.