How can we solve the problem of lost coins?

Millions of dollars worth of crypto are lost or abandoned every day. They are still there on the blockchain, yet not participating in transactions. For cryptocurrencies with a capped supply, such as Bitcoin or DMDv4, lost coins can be a serious issue — the difference being that Bitcoin doesn’t have a solution for it, while we do.

$200bn in lost Bitcoins

It is estimated that 20% of all Bitcoins out there in the world today are irrevocably lost. They still exist, of course — to the degree that Bitcoin can be said to “exist”, anyway — but nobody can use them. In fact, it’s very easy for cryptocurrency to get lost forever: it’s enough that the owner loses the keys to the blockchain wallet.

Crypto analyst Timothy Peterson even believes that 1,500 BTC are lost every single day, while according to Cane Island Alternative Advisors, 4% of the total supply is lost each year. This would put the actual available supply to around 14 million bitcoins — only 75% out of the 18.3 million that have been mined so far.

Why don’t we worry about lost ether?

Of course, other coins and tokens are constantly bleeding out of the ecosystem in huge numbers, too. However — and this is a very important point — lost coins are a real problem only when the maximum supply is capped. If new coins can be mined or minted indefinitely — as is the case with ETH etc. — then the loss of private keys to wallets, while very disappointing for the owners, isn’t an issue for the ecosystem.

Coins with a finite supply are a different story. When the economy built around a coin keeps growing but the supply keeps shrinking, you get strong deflation: the coin’s value suddenly surges (or, rather, other currencies depreciate against the coin).

If you are wondering what’s so bad about diminishing supply and rising price, consider this:

1) An economy built around such a cryptocurrency can’t function. Everyone will start hoarding the coins as investment assets instead of transacting with them. Crypto will really turn into ‘digital gold’, but this goes against Satoshi Nakamoto’s original idea of crypto as ‘electronic cash’.

2) Even if users want to transact with the coin, they won’t have enough of it to power all the transactions. Not having enough money in the economy is a bad thing: it stifles business activity.

Irretrievably lost vs. dormant

So far we’ve talked about those coins that are lost forever. Even with quantum computers, they may never be recovered. But there’s another type of coins that aren’t participating in the ecosystem: the dormant coins.

Coins or tokens can become dormant if their owner does one of several things:

• forgets that they are there (you’ll agree that it’s not the same thing as frantically trying to retrieve a lost password);
• remembers that they are there — but doesn’t care anymore;
• forgets to claim or swap them after a network upgrade;
• just doesn’t want to use them for some reason;
• deposits them in some sort of pool, exchange, or another scheme, which then stops working;
• stakes them on a validator (in PoS networks) who becomes inactive.

While dormant coins can often be retrieved, the ultimate effect is the same as with irretrievably lost crypto: the ecosystem suffers.

How can we retrieve lost coins and reintroduce them into circulation?

Since blockchain transactions are designed to be irreversible, you can’t simply extract lost coins and send them somewhere else, as a bank would do with a transaction gone wrong. However, there are a couple of options.

1) Redefine and redistribute

The first approach could work for networks that are already suffering from the issue, such as Bitcoin, though it’s hardly elegant. The idea is first to try and make the owners of dormant coins use them. For example, you could tweak the protocol in such a way that a unit is considered ‘lost’ after one year of dormancy and cannot be used anymore. It’s a bit like a sim card: if you don’t use it once a year to send a message or make a call, the number will be reassigned to someone else.

Once we’ve separated the dormant coins from those that are truly lost, we reassign the lost coins to miners. This would require a hard fork, but it can be done. There are many problems, though: who gets how much, how the distribution will work, etc. According to the well-known blockchain architect Stefan Crnojević, this idea isn’t likely to succeed.

2) Recover and reinsert — the DMDv4 solution

The second approach is the one used by DMDv4. Instead of trying to recirculate lost coins, we’ve designed a way to prevent them from getting lost in the first place.

As you will know if you’ve read our Light Paper or White Paper (you should!), once DMD Diamond v4 is launched, existing DMDv3 holders will be able to claim DMDv4 at a 1¹ ratio. using a special claiming dApp. If they don’t, the DMDv4 destined for them will just lie there unused, and that’s something we want to avoid because the total supply is just 1 million.

We’ve come up with a scheme to make sure that the majority of holders will actually submit a claim and allow the ecosystem to move forward. When claiming within 3 months of launch, you get an equivalent of 100% of your coins; but if you wait between 3 and 6 months, you’ll get just 75%. The remaining 25% are ‘recovered’ — reintroduced into the ecosystem — and split between two pools, or pots:

1. Reinsert pool: these coins will be used for epoch rewards (paid for securing the network) in the future;
2. DAO pool: the DAO members will vote on how to use the funds.

If a user doesn’t claim DMDv4 for more than 6 months, after launch, another 25% are recovered; and after 5 years of inactivity, the user will lose their claim to DMDv4 (of course, they will still have DMDv3).

Another source of lost coins is inactive validator nodes — those that haven’t been part of the active validator set for ten years. It can happen that users will stake DMDv4 on a node to earn a share of the block rewards and just leave them there — even after the node stops participating in validation. We have decided to recover all the coins staked on nodes that have been inactive for 10 years and to close such validator nodes. Of course, this system will only kick in 10 years after the DMD Diamond v4 project goes live, but we have long-reaching plans!

The recover’n’reinsert scheme is both simple and elegant, and it will help us prevent the value from bleeding out of the system. We only wish that other blockchains with a capped supply cared about their networks’ future as much as we do!

The mechanic described above doesn’t cover the coins that will be lost as a result of simply losing access to one’s wallet (which will happen sometimes). But it does cover those cases when a DMDv4 holder stakes coins on a validator and then loses the private keys. And since it only takes 100 DMD to participate in dPOS staking and thus a lot of coins will be staked, the amount of reinserted coins will also become quite large with time.

Curious to learn more about DMDv4 and its unique cooperative consensus architecture? Then join our official Telegram chat — it’s always our pleasure to answer your questions, no matter how technical they may be!