An introduction to Proof-of-Stake token yields: Assessing risks and rewards

Will Little
Sep 18, 2018 · 7 min read
Monitoring validator node voting power & uptime. Image from: https://figment.network/cosmos/hubble

Earning yield from Proof-of-Stake blockchains

In general, PoS approaches promise to solve the scalability problem while addressing a number of other problems related to governance, network security, maintenance, and improvement. Another key benefit is, of course, to move away from burning large amounts of energy.

  • Running (or pooling into) Masternodes = interest earned — Many networks grant rewards, or a higher degree of rewards, based on holding a certain minimum number of tokens and participating in the network to some capacity (voting, validating blocks, etc…). The most notable network that leverages masternodes is Dash (1k min), but others include PayDay Coin (20k min), Horizen (SecureNode = 42 min, SuperNode = 500 min), PIVX (10k min), and Zcoin (1k min). Notably, Ethereum’s proposed Casper protocol (moving toward PoS from Proof-of-Work) will be functionally similar to a masternode (e.g. a minimum of 32 ETH stake plus running and maintaining hosted software). In addition, companies such as Neptune Dash run pooling operations so you can participate in yield even if you don’t have enough token to meet the minimum threshold for running a masternode yourself. (FYI: Comprehensive lists of masternode networks can be found at https://masternodes.online/ and https://masternodes.pro).
  • Voting/delegating = earning yield — In order to speed up the production of blocks to solve the scaling problem, many PoS chains have adopted a system of choosing a relatively small set of nodes to arrive at consensus as rapidly as possible. One way to decide which nodes are allowed to be block producers/validators is to allow the community to vote/delegate their tokens toward one or more of them (often called Delegated Proof-of-Stake, dPoS). In exchange, these nodes share rewards and/or fees with the addresses that are delegating tokens to them, which often includes a lockup period of a couple weeks or more where the tokens can’t be made liquid. Notable PoS chains that leverage some form of delegating include EOS, Cosmos, Tezos, Lisk, Ark, OxyCoin, BitShares, Steem, Nano, Cardano, Dfinity, LivePeer, Polkadot, Hedera Hashgraph, RChain, AION, etc…

What are the basic risk/reward factors to be aware of when holding and/or delegating tokens from these networks?

For networks that simply grant additional tokens for holding (not spending) tokens, there aren’t many risk factors to consider beyond basic diligence of the network (i.e. whether to get involved at all) and knowing how to claim the dividends via the appropriate wallet(s). For many users, venturing outside of exchanges and installing custom wallet software is a daunting task, so some exchanges are willing to share (or give all of) the dividend tokens to their users. Regardless of your approach, you should expect to receive between 4–6% per year yield (sometime much more) via these networks.

Multi-network staking UX in wallet apps

Let’s be honest, diving deep enough into any one PoS blockchain project to monitor block producer/validator nodes and protect your stake rewards is difficult. There is a massive opportunity for wallet application developers out there to educate the general blockchain public about the risk/rewards and provide a UX to monitor validators and bond/stake appropriately.

Protip: follow block producer/validator teams for insightful content

Overall, as you’ve likely experienced, it’s difficult to keep up with all the nuances of each of these emerging networks and decide where to spend your time (and your tokens). Obviously Twitter and Medium are great resources, as are the forums and chat applications that the various networks use with their communities, but a helpful tip is to identify the validator teams (e.g. via block explorers) that you believe are doing solid work and follow their content (newsletters, Twitter, Medium, etc…). These teams are highly incentivized to not only educate people about the networks they are involved in, but publish tools and content to help attract votes.

Figment Networks

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Will Little

Written by

Managing Director @ProtaVentures

Figment Networks

Updates and Content from Figment Networks