Special credit to ChainNews for edition work
Since the advent of Staking Economy, the market has gradually turned the spotlight onto it. Too much time and energy, I think, has been put on calculating how lucrative it looks on book, but most has overlooked the essence of staking the action — active engagement.
From day one, the concept of blockchain has been encouraging the engagement of the community. The blockchain network, through issuing cryptocurrencies and introducing incentive mechanisms, has successfully integrated varied identities or interested parties, such as users, investors, developers and miners, into one, and made them contributors to the development of it.
Staking itself is such a design that encourages token holders to actively engage into the blockchain network.
Recently, CoinFund, a renowned overseas blockchain investing institution, has published an article Active Network Participation as an Investment Strategy, suggesting that active engagement should be regarded as one of the investing strategies.
It is quite clear that in the decentralized blockchain world, the centralized institutions has no longer existed and hosted the assets of each and every one of us. We start to take the ownership of our assets, and are highly possible to enjoy the right of privacy in the future. Interests that we entrusted to the third parties before can be reclaimed by us, no matter it is assets, data or identities — we can write them to the blockchain, protect them through key pairs, and call them anytime, anywhere. In a nutshell, it is a future society where human rights are put under the magnifier.
Followed by the return of individual rights, most blockchain projects have conformed with this trend in their architecture and design. Each and every one is the owner of rights, which emphasizes the individual involvement in the overall network. The old behavior patterns of us, however, are not guaranteed to be adjusted to the decentralized world. Some of you may notice that, it is not that convenient in the decentralized than in the old centralized one. And some with keener eyes may find that investment has become more complicated, especially with part of rights in need of active exercise. Moreover, blockchains are decentralized organizations, which diminishes the role of third parties that we delegate our business to. The same changes has happened to capital entities.
It is mentioned by Coinfund that what the capitals do, in the future, is more than just investing. To be profitable in many ways, such as operating hubs in assistance with transaction processing on Connext, operating nodes in PoW and PoS mining, putting idle assets into Uniswap to gain liquidity or lend out, or running Filecoin nodes that provide storage service, the institutions cannot leave these things to a bank or a third party and then turn a blind eye to them anymore.
Except for being deep-pocketed or delegate to third parties, the investing institutions should really devote themselves into the development of blockchain network, and the easiest way, for instance, is operating nodes.
It is significant for blockchains to have various parties involved in it, and the involvement, if contributive, will bring about earnings. One of the earliest example is the economy model of bitcoin mining — the more people get engaged, the bigger the network effect, and the more resources that are put into the maintenance of nodes. The whole network is benefited from this upward spiral that also boosts the price of Bitcoin.
The mining mechanism of Bitcoin world is the most vivid example of active engagement of PoW consensus. While in PoS scenario, the token holders perform staking as an important way of participation in the development of network. Staking Economy is on the rise, but the essence of it is encouraging, by incentives, the active engagement of token holders.
Staking is in need of the active engagement of token holders
Here I would like to briefly introduce staking, which is difficult to be translated into Chinese.
Stake as a noun can be translated into 「股权」, but Staking as an action seems impossible to be translated, the nearest Chinese word is「质押」. Staking is a unique action in PoS systems. By staking tokens out, token holders can receive earnings or rights from it.
If a token holder does not staking his/her possessions, to him/her, tokens are just tokens, the rights to which are not claimed.
Here are some simple example. Let’s say Alice has the native token Atom of Cosmos chain, she could staking her tokens and delegate them to the validators, and get Atom rewards regularly. The current annualized rate of return is 12%. But if Alice just hold Atom and does not perform staking, her Atom has merely investment value without the extra benefits of staking.
In order to claim or protect her rights, Alice must actively engage into the development of network through staking. It will become a common sense in Staking Ecomony.
Let us compare the era of PoS with that of PoW from an investor’s eye. In the era of PoW, professional investors will study the knowledge of miners and participate in mining, but for normal investors, s/he only needs to know what cryptocurrencies s/he bought, and how’s the rate of return. So it lacks the sense of participation for most investors.
When it comes to the era of PoS, the game has changed. Even the normal investors need to know what cryptos they bought and the rate of return. Moreover, they are expected to know the staking rules, which are always different to different chains, then find reliable validators to gain earnings, and finally examine their rights from staking regularly. That is because the unique action staking brings about more benefits. If you ignore staking, you suffer serious losses.
We can observe “proactivity” in this process where token holders must engage in initiatively. In token economies that based on proactivity, only when token holders involve actively can they claim their rights. If not, many interests will slip away.
How projects encourage user’s active engagement through staking design?
The most common practice is to offer staking reward. As the hot issue of 2019, the catalyst for Staking Economy is on the way. For popular blockchain projects using PoS as the consensus like Cosmos Network, Alogorand, Polkadot, etc., their token holders all need to actively choose validators to participate in staking in order to gain profits.
2019 is estimated to see PoS projects with a market value of $10 billion, which, simply multiplied by the rate of return (typically between 5% and 25%), will generate billions of dollars in staking revenue throughout the year. In addition, the largest catalyst, Ethereum, is on the way to adopt PoS consensus, and it is likely to be completed around 2020. In the future, there will be more special forms of rights that require active participation to obtain.
In addition, some PoS projects have also solved the problem of insufficient user participation through ingenious design. For example, previous projects faced the problem of inaccurate and inefficient token airdrops, or insufficient engagement rate of addresses that hold tokens after the project was launched. Among them, the problems of airdrop are extremely grave. In ordinary investors’ or petty profit collectors’ eyes, airdrops are free lunch, so it’s better to sell out right after receiving them. That contradicts with the original intention of project runners in hope of generalizing the project and expanding the token holder group. But many project incentive systems are designed to require users to actively engage in. Here are some inspiring examples below.
- Livepeer — the project with a cohesive overseas community
Livepeer is a decentralized video transcoding project that allows people to participate in video decoding with idle computing resources to earn ETH, while those with transcoding needs can sort for the Livepeer decentralized network with limited cost.
The project itself is down-to-earth, but the reason why Livepeer is so popular in overseas communities is its token economy design. Its “Merkle Mining Distribution” once has clogged the Ethereum network. The project’s inflation rate is very high, reaching 150%, which makes Livepeer still the highest-yielding project in the PoS world.
The design that Livepeer adopts to motivate users to actively participate in is divided into two parts:
- Primitive Distribution
The aforementioned “Merkle Mining” is a special way for the Livepeer team to assign LPT tokens. The Livepeer team took a snapshot of an Ethereum height before distribution, and 2.4LPT was available for any of the 2.59 million Ethereum addresses with a balance greater than 0.1 ETH.
In the slow start phase, if you want to get 2.4LPT for free, you need to submit a Merkle certificate, which is very simple. The team has tools for that. You will earn free of tokens as long as you actively participate.
In the accelerated acquisition phase, there are still many tokens in each Ethereum snapshot address to be claimed, because the user did not take the initiative to submit the Merkle certificate. Therefore, in this stage miners are encouraged to help distribute the tokens. They receive the reward by helping the remaining snapshot address submit the Merkle Certificate (requires a fee). The reward, by defined ratio, will be given to the miners and the above mentioned Ethereum address users who have been successfully snapshot. As the miners competed to provide certificate to the users, the Ethereum Gas costs are greatly increased and the whole network is clogged. In that process, the miners spent a total of 2048 ETHs (equivalent to $47,000) to obtain LPT rewards.
The inflation rate of Livepeer token is stunning. The annualized income of participating in staking is as high as 150%. In the design of Livepeer’s economic model, it hopes that the holders will actively participate in the network, and the initial inflation rate is 0.05%, which will increase by 0.0003% each round. The interval between each round is 24 hours. When the participation rate of staking does not reach 50%, the inflation rate will continue to rise and has reached 53% currently.
Currently, the Livepeer blockchain has a staking ratio of 39%. If we divide the inflation rate with staking ratio. The current rate in the Livepeer blockchain is nearly 140%. In other words, if you are a Livepeer token holder and you are not involved in staking, your token will be heavily diluted and the inflation rate will continue to rise until the participation rate reaches 50%.
2. The staking of resources on EOS blockchain
CPU and NET are necessary for developers. In EOS world, you can stake EOS tokens for CPU and NET resources. If a developer does not have enough EOS, they can rent through third-party software such as Chintai Team and CPU Baobaobao MEET. ONE, but the rental market is not so active.
Dan Larimer, the founder of eosio, proposed the concept of REX in August 2018, which seeks to measure the interest rate of resource leasing through a free market, thereby promoting developer’s usage rate of resources. Before REX was introduced, the user obtains the rights of Net, CPU and voting in the EOS network by taking the initiative to staking. After the REX comes out, the user can convert the EOS into REX, and the REX free market can help you rent the resources so the users can finally enjoy the rental income.
The user’s interest in EOS will be amplified in the upcoming REX market, and EOS placed in the REX market (in other words, EOS Staking) in the future will enjoy dividends from renting Net and CPU, provided that the holder must actively participate.
NuCypher is a widely-known privacy protocol layer project that provides dApp and developers with a secure way to store, share and manage private data on public blockchains. The technical details are not to be mentioned here, but the interesting part of this project is its economic model design.
The Tokenomics Whitepaper of NuCypher was published at the end of July 2018, which mentioned that the daily inflation rate will have a time-coefficient decay and the nodes will have different rewards depending on the lock-up time point of staking. In the Whitepaper are many mathematical deductions of the final economic model, but no parameters have been officially announced yet.
On March 29, 2019, NuCypher launched the Worklock economic model for the initial distribution of its token NU. Meanwhile, this model is expected to solve the centralization problem in the initial distribution of PoS, which is widely criticized.
In the Worklock economic model, users claim NuCypher’s token NU by locking ETH into a smart contract.If the NU they obtained are put into staking, they can gradually re-claim the previously locked ETH and even the extra NU (as staking reward). If the NU does not involve in staking, the holder will lose the ETH locked in the smart contract.
Edgeware is a project focused on governance on Substrae. The team see more and more projects mentioning blockchain governance, but only a few of them are virtually implementing it. Therefore, they founded Edgeware in hope to make it easy for project parties to build DAO Governance Protocols in the future thus facilitating the governance of the blockchain itself.
Governance is a process that involve active engagement. Edgeware wants their token holders to be genuinely concerned about governance and can actively participate, so they adopted lockdrop model in initial distribution of EDG. Users with ETH can use the tool provided by the project side send ETH to the smart contract to lock it up for 3 months at least and one year tops. The longer the lock time, the more EDG dividends. After the lock period expires, the original ETH and the reward token EDG can be obtained. The potential loss is the opportunity cost and price fluctuation risk of ETH during this period.
What the 4 example above shares in common is that, the system design of the 4 are all encouraging active engagement, no matter the “Merkle Mining” of Liveper, or the resource leasing of EOS, or the Worklock of NuCypher, or the lockdrop of Edgeware. They all require the active actions of token holders, and on the other hand, passive member will also be punished.
The perception of “active engagement” in the blockchain project will become increasingly important and will affect all token holders and investment institutions.
Why are most people neglecting active engagement?
Although each project hopes that the designed incentive system encourages the holders to actively engage in, in fact, the situation is not so optimistic.
From the experience of Wetez operating PoS nodes, wallets and related communities, a large number of holders do not really understand the benefits of staking, as reflected by the following phenomenon:
- Most token holders are overlooking their staking rights and interests
As Wetez operates the community and wallet, there are many users who have held Tezos tokens but have not participated in staking for more than half a year. For these users, the 4％ annualized rate of return was put in vain in the past six months, which is equivalent to that of Yu’ebao, an investing product under Alipay. In addition, some users store PoS tokens in the exchange, without knowing that the exchanges have taking advantages of their staking gains.
2. Token holders do not know how to Staking
The most frequently-asked question by ordinary token holders is: does staking means I have to deposit my tokens in the third-party team? What if they slink away? Will my ownership be at risk? In fact, in most PoS projects, token’s ownership and delegation rights are separate; in addition, staking’s operation rules for each blockchain are different. For example, Tezos and Cosmos have a lock-up period of about 20 days while you can freely choose lock period in Loom that represents varied returns. In addition, the tools for staking are different, including official wallets, Metamask, third-party wallets, and Ledger, etc.
3. Token holders do not know how to select validators
To choose a suitable validator from many choices is a bit like choosing a suitable public opinion representative to serve the people and the country in real life. The establishment of the selection criteria is a process that requires education. If there is lack of education and information asymmetry, holder users are likely to pick an unreliable node. On top of that, they don’t know how to verify their earnings. According to Wetez’s experience, staking yields range from 5% to 25% in general.
How to better participate in staking?
Although the original purpose of designing staking benefits is to increase the user’s active engagement, but in fact, such initiative rights can also become an exclusive service. The holder can entrust the professional service team for staking operations in order to obtain the benefits that belong to him/herself.
Because each project has its own staking mechanism, it can produce differentiated third-party services, just like there are financial experts and brokers to help investors access a wide range of investment products. In the world of blockchains where individual interests are often emphasized, teams that offer exclusive staking services have already emerged, and exchanges or wallets are the most suitable service providers to undertake such duties.
We mentioned in the previous article “PoS Consensus Awakens, Staking Economy has Come”, that the awakening PoS consensus is bringing new investment opportunities to the cryptocurrency market. Not a few teams are well prepared for PoS era. They provide operational services to institutional nodes or provide agency services for individual investors, including HashQuark under Wanxiang Holdings, Wetez, the largest Tezos node in China, NGC StakeX in the NGC system, Huobi pool, Cobo wallet, Bixin wallet, Matpool under 8btc forum, etc. (Most of cases are from China)
As more and more service providers enter this field, giving professional services to users and assisting PoS holders to involve actively, competition in this field will become increasingly fierce. In the hope of gaining edges in this field, there are several things that should be take into consideration:
- Better educating the team
The design of each blockchain, such as staking rules, inflation rate changes, and special token acquisition methods, are different. Operators do not need to know much about what problems exactly the project tries to address, but they must be experts of tokenomics designs since the rights to tokens are very important for users.
- Supply third-party tools
Good tools are constantly narrowing the gap between blockchains and users. It’s true that the design of dApps is getting increasing user-friendly. For example, the CPU Baobaobao on Meetone allows you to quickly lease CPU, and the delegation function on the wallet can quickly perform staking. Such convenient tools will be extended to more initiative rights. Eventually, it will be easier for holders to obtain their own rights.
- Help user’s operations through signing contracts
More complex initiative rights such as Livepeer and NuCypher require users to understand the entire economic system and use ETH as a medium to gain benefits. This may be a threshold for many users. Therefore by signing contracts of ETH agency rights, exchange or wallet can claim tokens or benefits wanted by their users in a unified manner. However, this comprehensive service package will be a challenge for the team’s product service design and operational plan.
- Integrate exchanges and wallets
Under the consensus that PoS returns most of the proceeds to users, whether exchange or a wallet are not particularly concerned about the profit of staking based on our knowledge, and they prefer to value the trading volume and online traffic that are directly related to profits. However, the process that users staking to get rewards, in exchange or wallet entities’ eyes, are daily access rate, daily activity, adhesion level, etc, which are also the emphasis of Coinbase and Trust Wallet.
I wrote many about the concept of initiativity and how should a team respond to that, but back to Staking Economy, staking hugely embodies the importance of active engagement in a large scale.
Staking manifests a great charm of the blockchain world — the unification of stakeholders, users and involvement through token. The reward and punishment system is closely integrated with its basic design, and those who are familiar with tokenomics can earn more in the earlier stage. Meanwhile, the uniqueness of each and every blockchain will give birth to professional bespoke third-party services in the future. Behind this blooming possibilities is an exciting era of Staking Economy.
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