Introducing DropBurn: A new model to bootstrap staking network

Staking

With beta being actively developed and continuously released, we’re exploring ways to bootstrap DOS Network. We’d like to share our most recent thoughts on this topic, and in this post we’re proposing a new model named ‘DropBurn’ that we’d like to share and collect feedback from the community, interested developers, potential beta testers and node runners.

First of all, any staking system, not only DOS Network, require enough stakes to be locked, for both protocol security and network valuation. There’re differences between various staking systems though, we could basically categorize them into 3 types:

• PoS/DPoS blockchains: Standalone blockchains with their consensus mechanisms to be Proof-of-Stake or Delegated Proof-of-Stake. Represented by Cosmos, Tezos, Polkadot, Cardano, Dfinity, EOS, Tron, Loom, IOST, etc.
• Masternode: Proof-of-Work based blockchains, with privileged full node providing extra features like privacy, coin mixer, etc. and getting back a percentage of block reward as return. Represented by Dash, Horizen (ZenCash), Zcoin, etc.
• Staking protocols: Systems adopting work token model, usually without their own blockchains, but rather protocols servicing and enhancing the underlying anchored blockchains. Represented by Nucypher, Enigma, Livepeer, Celer, DOS Network, etc.

PoS/DPoS blockchains usually only have a limited set of validators, this is especially true for DPoS chains. Even for PoS chains like Cosmos, the maximum number of validators is 100, and Tezos only has less than 100 bakers (validators) now. Given so few node runners, it is unsafe and wouldn’t meet the SLA requirements for staking protocols. Furthermore, most PoS/DPoS blockchains apply inflationary economic model, which is also unsuitable for work tokens.

To incentivize as many node runners (hundreds, if not thousands) as possible to bootstrap and secure DOS Network, providing reasonable staking incentive is one solution. But simply making a high staking interest is not enough, it can easily lead speculators to manipulate the price by pumping and dumping too much in a short period of time, making it unfair / too expensive entry barrier for legit node runners, and in turn undermining the network valuation and security in the long term.

Above is an example when SmartCash launched its masternode program in Jan 2018. Inappropriate bootstrap mechanism and unreasonably high interest attracted speculators to manipulate the price and hurt node runners’ and investors’ benefit.

To sum it up, there’re some principles to keep in mind to bootstrap a staking network:

• Bring in as many network maintainers (node runners) as possible, ensure a wide and fair participation;
• Reduce the volatility as network maintainers joining and leaving the network;
• Disincentivize short term price speculation, pump and dump;
• Align network maintainers’ long term benefit with investors’ interests;
• The network valuation should increase healthily as more adoption and usage of the network happens.

Introducing DropBurn

Let’s give a simple example to explain what is DropBurn. Say if the total supply of network token is 1,000,000,000 (1 Billion), and the minimum number of tokens required to stake to be a node runner is 100,000.

If the desired goal is to grow the network into at least 1,000 nodes, that means at least 10% of total supply is going to be staked and locked. If this amount is purely obtained from secondary market it would drastically affect the market and lead to speculation.

Instead, we develop and deploy a DropBurn smart contract on chain. 5% of total supply will be burned forever, at the same time 5,000 DropBurn tokens (let’s use DB for short) will be minted, with each DB token representing a stake quota of 10,000 network tokens. Note that DB token doesn’t entitle anyone to exchange back 10,000 network tokens, since the 5% of total supply is burned forever, it’s only meaningful to node runners as each DB token stands for a stake quota: A node runner owning 2 DB tokens only needs to obtain the rest 80,000 network tokens in order to stake and participate into the protocol.

The DB tokens will be distributed to registered beta testers, developers, interested node runners, etc. for free, or based on some proof of “work” beneficial to the whole network. There’s no point for node runners to cheat to get more than 3 DB tokens in this example, as the maximum percentage of stake that can be substituted by DB is 30%. Thus 5,000 DBs can be distributed to ~2,500 node runners in average. Also, DB token has no value to speculators and airdrop hunters who are not interested to run a node.

Moreover, since DB token conforms to ERC-20 standard, it’s tradable on non-custodian decentralized exchanges. If in future, a node runner decides to leave the network it can exchange its DB tokens to other interested node runners, which is a win-win situation.

Benefits of DropBurn

1. DropBurn is beneficial to network maintainers:

• Stake quota (DB) will be widely distributed to network maintainers, in the given example it’ll reach ~2,500 node runners in average.
• It means higher average ROI to network maintainers, incentivizing more node runners to stake & lock more tokens, securing network security and valuation.
• It reduces the market volatility when network maintainers joining and leaving the network. Node runners are able to exchange stake quota (DB) on DEX in future and reclaim some return; while acquiring stake quota (DB) is cheaper than obtaining equivalent amount of network tokens. A win-win.

2. DropBurn is beneficial to secondary market & investors:

• In the given example, 5% of total network tokens is burned from circulating supply forever, giving value appreciation.
• Node runners still need to obtain majority (at least 70% in given example) network tokens from secondary market in order to stake; not to mention that higher ROI would incentivize more nodes.
• It stabilizes market as stake quota (DB) can be traded on DEX without affecting token prices on secondary market.

3. DropBurn washes out speculators and airdrop hunters early:

• Stake quota (DB) will be distributed free, but it may be based on some kind of proof of contribution to the network (e.g. participating in beta testnet, developers, etc.).
• Even if speculators may obtain stake quota in some way, they’re incentivized to exit with an early profit by exchanging with real demanders on DEXes, as otherwise DB token is purely useless to non node runners. It is beneficial for both short-term speculators & long-term network maintainers.

As DropBurn is still an experimental idea to bootstrap staking protocols like DOS Network, we’re keen to know community’s thoughts on this, any comment and discussion are welcome!