A Staker’s Look at the Edgeware Lockdrop
Word is getting around the staking community about Edgeware’s “lockdrop,” a unique new token distribution mechanism. But before we talk about the lockdrop, here’s a quick primer on Edgeware.
What is Edgeware?
Edgeware is reported to be a high-performance, self-upgrading, Wasm smart-contract platform (the first one!) being built on Substrate, the Polkadot ecosystem. Edgeware is being designed specifically to facilitate advances in on-chain governance for blockchain protocols. Participants vote, delegate, and fund each other to upgrade the network, and are entitled to governing rights via its native token, EDG.
Validator participation also requires EDG, and validators may only participate at the genesis block by temporarily locking up Ethereum coins (ETH) in exchange for EDG.
5B EDG will be distributed, with 90% to allocated to lockdrop participants and 10% to the Edgeware team. To obtain EDG, participants must participate in what’s being called a ‘lockdrop.’
Locked ETH will be held in an individual ‘lockdrop user contract,’ or LUC, for the chosen duration, after which they are to be released back to Ethereum address of origin. Here’s the source code for the smart contract. If you’re like me, you may be a bit wary about locking up ETH in a smart contract, given that there have been a few high-profile incidents involving hacked and frozen funds. A participant may instead choose to signal instead of locking up ETH, but they will be awarded substantially fewer EDG and cannot validate on Edgeware’s network at genesis.
What’s the point?
In the words of the team, the Edgeware lockdrop event is a token distribution mechanism intended to:
- Select for longterm, committed participants of the ETH community that want to participate in the developer-accessible (Wasm runtime), secure, interoperable smart-contract platform, with radically community-owned governance, namely Edgeware.
- Distribute tokens to those entities in a more fair manner than previous token distribution mechanisms including initial coin offerings and others.
The Edgeware team released some last-minute revisions to the terms of the lockdrop, which have almost certainly opened the door to eligibility for the owner of the frozen ETH trapped in the Polkadot multi-signature fundraiser wallet.
In fact, the Polkadot multisig owner signalled their participation in Edgeware’s lockdrop earlier today. If that’s what you’re most curious about, you can skip to the bottom of the article.
What we know about staking
Edgeware proposes a unique method of proof of stake (PoS), called Nominated-PoS (NPoS).
With NPoS, a static amount of EDG is created every block (ie. block reward) and is divided evenly among each of the active validators — this part is key — regardless of the amount of EDG staked by or delegated to each participating validator. For example, a validator staking 10 EDG would receive the same block rewards as a validator staking 1,000 EDG.
However — and to me this gets even more interesting — the delegators of each validator must share the validator’s portion of the block reward in proportion to the EDG that each has delegated. So even though the validators get an equal share of the block rewards, their delegators do not. We think that these incentives may incentivize a more even distribution of delegations amongst validators, compared with other PoS models such as Cosmos. It is also likely to incentivize single entities to run multiple validators.
Economics (straight from the FAQ)
There are initially 5,000,000,000 (five billion) EDG tokens minted, divisible up to 18 decimal places. Initially, inflation is set to 158 EDG per block. This implies approximately 997,220,160 EDG in the first year, or just under 20% inflation.
The total amount of EDG minted will remain the same year after year, causing the percentage inflation to be disinflationary, with yearly inflation falling to approximately 16.6% in the second year. Additionally, a system-wide vote may further increase or decrease inflation.
One of the first proposals on Edgeware will be to tie inflation to a specific participation or security rate, with the inflation floating up or down to reach a desired total stake. The specified proposal will be voted on and performed via a runtime upgrade modifying the inflation rate.
If you like what you see so far, and you want to be a validator at genesis, you’ll need to nominate yourself as a validator at the launch of the Edgeware network. Here are the instructions for setting up a validator.
What we don’t know
Since NPoS validators receive an equal division of rewards, regardless of the amount staked, there should be a strong incentive to divide up one’s EDG and participate with as many validators as possible. This leads us to the first unknown:
1. We don’t know the minimum EDG required to be a validator.
Q. Will selection as a validator be determined by how much is staked to it (either self-staked or 3rd-party staked)?
For now we’ll assume that the Edgeware team will use the lockdrop to determine the minimum stake for Edgeware’s genesis parameters. That leads us to our second unknown:
2. We don’t know the maximum number of validators in the active set.
But we do know it will be limited:
While this process doesn’t guarantee that you will be a validator, it does enable your selection. At launch, Validators will be selected from the largest lock amounts from the set of nominated Edgeware Public Addresses.
We will assume that the active validator set at genesis will be those with the greatest number of EDG.
3. (We have more questions, but in the interest of expediting this article, I’ll leave this as a placeholder for an edit/update)
What to expect
Despite the unknowns, we still have to decide how we want to place our bets (after all, life is more like poker than chess.) How much is enough ETH for an Edgeware validator-hopeful? It’s hard to tell, but we do know that only the largest EDG holders will qualify. And we can expect some big players to participate.
One of them may be bigger and more unlikely than we could have anticipated — particularly due to the rule changes that were published about a day before the lockdrop started, on May 31.
Why are the new rules important?
Edit: as Sunny pointed out, it looks to be problematic that contract creators and not the owners (like the creator of the Polkadot multig) have the ability to signal in the lockdrop using the ETH in the multisig — even if they no longer control those funds. This means that the creator of the Golem multisig, for example, could signal 386,000 ETH.
Prior to the May 31 lockdrop revision, the Polkadot multisig creator would have been entitled to:
306 276 * 0.2 = 61,255.2 EDG
Of the ~61k EDG from signalling, the they would have received about 15,313.8 EDG at launch and 45,941.4 EDG after 365 days.
Given the new lockdrop terms, the outcome is now very different for the creator of the Polkadot multisig wallet, assuming that the new rules apply:
These will be treated as a 3-month locks without early contribution bonuses, and at the end of the contribution period (post-August 30th,) will be added to the genesis spec of Edgeware, case-by-case. In these cases, we will strive to achieve the two goals outlined in this article on the Lockdrop Norms.
Thus, if added to the genesis spec, the Polkadot multisig creator can expect approximately 306,276 EDG at launch — a one-to-one award of EDG:ETH. The infamy of EIP-999 may bring a bad taste to your mouth on this one, but perhaps reconsider: Polkadot’s involvement in Edgeware is likely valuable, and perhaps it is better to think of the lockdrop’s potential distribution of EDG tokens in a more familiar way, like 72% to participants, 18% to Polkadot, and 10% to the team.
Edit: And given the problem inherent in the distribution mechanism, perhaps it makes sense for the Edgeware team to simply grant the Web 3 Foundation a sizeable allocation of EDG directly.
Prior to the deadline of August 30, 2019, any of the other victims of the Parity multisig bug may also qualify for a one-to-one EDG:ETH lockdrop for their frozen funds, including Iconomi, whose multisig contains nearly 115,000 ETH.
So far, none of the contract creators (with over 2k+ ETH) have signalled in the Edgeware lockdrop, but there’s plenty of time, since they won’t qualify for the early bonus.
This is an interesting and noteworthy (edit: and problematic) way of recovering value from the lost funds, though it’s also a particularly strange that DOTs weren’t used to signal or lock, as noted in the Edgeware Telegram channel by Hector and Chris:
Another big player is the Aragon community, which voted to lock 40,000 ETH of the Aragon community funds into a three-month lockdrop. That will entitle them to 40,000 EDG at launch, plus a 50% bonus of 20,000 EDG if they do so prior to June 16. The Aragon community has not yet indicated that they’ll be staking (nor have they locked in their ETH), stating only that “the goal of this action is to receive EDG tokens, allowing participation in the governance of the Edgeware blockchain, and indirectly in the Polkadot ecosystem.”
The 20% cap
Despite big players emerging on the scene, there will be a limit to what can be awarded: allocated EDG is capped at 20% of the network total for any individual lockdrop participant. That means that even if the Polkadot multisig creator’s signal equates a dominant share of EDG, we know it cannot be more than 20% of the Edgeware supply. However, nothing really seems to stop big ETH holders (with control of their funds) from dividing up their ETH into multiple accounts to bypass this cap.
Staking Hub & due diligence
For stakers, it’s important to fully understand the incentives and disincentives for participation, both inside and outside of the incentive mechanism. Knowing that big players like these could be stepping into the staking arena helps us to decide whether or not to participate, and if so, how much we should lock up in the lockdrop. It’s also important for us to understand the Edgeware team’s decisions (and reasoning) for issuing and distributing the staking tokens.
With proof of stake becoming so popular as an incentive mechanism, it’s getting harder to do enough of these essential deep dives. We recently started Staking Hub as a way of sharing the due diligence load for the projects that stakers are considering. In fact, this work is the fruit of those discussions. You made it this far, so you might as well join us ¯\_(ツ)_/¯
Special thanks to Andy, Crypto Twin, Chris, and Hector! Thanks for joining and working together to better understand Edgeware from a staker’s perspective. This was written in a day and is bound to have mistakes that I would be very grateful to have pointed out to me in whatever way suits you best :)
Hopefully you found this useful. Feedback is always welcome! I’m on Twitter.