Loom Staking Primer and Reward Calculator
The following post will cover the mechanics of staking LOOM. It will explain the current implementation and cover the risks and expected returns including a basic reward calculator. The results provided by the calculator serve as a projection only, Chorus One doesn’t guarantee their accuracy.
Delegating on Loom’s PlasmaChain only went live last week and almost 10% of the circulating LOOM supply is already participating in staking. To many, this is the first time they actually use their tokens in some other way then simply holding them in a wallet. The concept of staking can be hard to grasp and Loom has a unique implementation that requires some digging into to understand the rewards and risks associated.
What is Staking?
Staking means you are depositing your tokens and participate in securing and maintaining Loom’s PlasmaChain, for which you are rewarded in the network’s native tokens ($LOOM). You can delegate your tokens to a validator that will run the required node infrastructure for you in exchange for a cut of the rewards. This post specifically focuses on delegating, if you want to learn about the difference between validating and delegating check out our explanation of these concepts here.
Loom’s Staking Implementation
Staking on Loom is unique because rewards increase with the duration you commit to lock your tokens up for. In exchange for being unable to withdraw your staked tokens during this timelock period, you will receive a larger share of the rewards paid out by the system.
At the same time, there is only a limited amount of LOOM tokens available to be paid out as rewards. Loom’s implementation limits staking rewards to a yearly maximum of 20% of the token balance set aside for staking rewards. In total there are 300mn LOOM tokens in the pool set aside for block rewards, meaning that no more than 60mn LOOM (20%*300mn) will be paid out to those staking in the first year.
The more LOOM holders participate in staking with long lock-up periods, the faster this cap will be reached, resulting in lower rewards for everyone. Additionally, there is an expectation of revenues from transaction fees and other sources, but these are currently unpredictable. We will monitor network conditions to accurately predict staking returns for delegators. Our investment thesis on the Loom Network features an analysis of how returns might evolve over the first four years based on reasonable staking participation assumptions. This post and the reward calculator will focus on the first year and assume a setting where the cap is not reached and where there are no rewards from transactions fees or other sources.
Election Cycles, Re-Staking and Compounding
Loom’s current implementation distributes rewards once per election cycle (these are planned to last 2 weeks, but currently a new cycle begins every 10 minutes). Rewards from staking accrue in a separate reward pool (“Unclaimed Rewards” in the UI) and need to be claimed by the user, who can then decide to either stake those rewards or to withdraw them. There is at the time of writing no option to let rewards automatically compound and re-staking rewards resets the timelock (meaning you won’t be able to withdraw your total delegated stake with that validator for another timelock period when you re-stake). The only way to circumvent this limitation currently is to either re-stake with a different validator or to create multiple accounts.
The Loom team is working on both having an automatic compounding option and having different timelocks for portions of the staking balance. This article will be updated accordingly once these options are available. It is also important to note that once a timelock runs out, your staking balance converts into continuing with the shortest timelock possible (one election cycle, i.e. 2 week periods). This means that if you want to continue receiving bonus rewards from longer lock-ups, you will need to re-stake with your desired period once the timelock runs out.
Risks and Returns
Aside from the risk that the reward cap is reached lowering interest from block reward, there is currently no other risk involved when delegating LOOM tokens. The process is non-custodial, a validator can never access delegator tokens, they can only adjust the commission rate they set. Additionally, there is currently no slashing in Loom. At a later point in time, delegators will be penalized for their validator not following the protocol. We will cover this aspect in the future, as it is currently not implemented and thus irrelevant for the time being.
Reward Calculator
Staking returns in the first year will likely only depend on the chosen lock-up period, the commission rates set by validators, and whether delegators decide to re-stake the reward they receive. Type in the inputs in the fields provided at the top and choose whether you want to re-stake to compound your rewards. Keep in mind that re-staking currently requires you to claim and delegate your rewards after every election cycle (the calculator assumes an election cycle duration of 2 weeks) and also that this will reset your timelock.
The reward calculator will show your expected returns after a year of staking using the assumptions mentioned above. You can also experiment with different LOOM prices to see what that could mean in fiat terms.
If you feel ready and plan to delegate after reading this primer, check out our delegation tutorial that walks you through the official Loom Delegation Dashboard UI.
We will update this article to account for changes and provide other resources to our community of delegators to help them evaluate their staking investment. Please feel free to share this post and to ask questions on our Telegram or on any other channel.
Originally published at blog.chorus.one on February 22, 2019.
