Quadratic Staking — Idena’s Ideological Turning Point
Idena has just made a significant shift in its tokenomics. On August 29, the Idena network voted for a hard fork that enables Quadratic staking. This is the primary change being brought about by the proposed IIP-5 update, and it has been created as a solution to an emergent problem inherent to the equal mining rewards distribution– many individuals are stopping running their nodes because their mining rewards do not always cover the cost of running a computer to mine; despite the low cost and energy needed to mine in Idena’s ecosystem. Simultaneously large pools are seizing a major portion of the mining rewards and are growing at a rapid rate due to pool-owners hiring of economically disadvantaged people to populate them. The business model for these pools is based on selling the iDNA coins they earn to cover their labor costs. As a result, this causes iDNA’s price to stagnate, ultimately making Idena’s tokenomics net negative, which further discourages solo miners from continuing, with them responding by turning off their nodes. It goes without saying that this harms the project’s economy, and therefore hurts the morale of the community.
Incidentally, this has meant that there are fewer individual miners compared to those who have joined pools. Not only this, but when users join a pool they relinquish their ability to vote as an individual, meaning that not only does this create a smaller distribution of mining power spread across the globe, but it reduces the amount of distributed voting power. Understandably, this can stunt the decentralization of the network, and so the Idena team and community saw this as antithetical to the goal of its ecosystem– to stay decentralized over time.
IIP-5 aims to change this situation by encouraging people to mine alone by offering increased rewards for solo miners who stake their iDNA (even if only staking a small amount). Since IIP-4, staking rewards are calculated in a way that gives small-scale stakers a higher percentage of rewards compared to larger stakers, which is a process that has been named by Idena as quadratic staking. With IIP-5, this process now influences how mining rewards work. This is a significant change to the way Idena currently operates– let’s examine what this means for the project on an ideological level.
The Symbiotic Relationship Between Quadratic Staking and Governance
The protocol for calculating rewards for mining will be directly connected to a user’s stake. However unlike a traditional PoS system where the rewards are linearly distributed dependent on the size of the stake, with Quadratic Staking small-scale stakers are rewarded more, relative to their large-scale counterparts. This is to encourage individuals of any wealth bracket to engage with Idena’s system and keep their nodes running.
It is important to note that this specific type of staking cannot happen in a traditional PoS ecosystem. For Quadratic Staking to function, there must be Sybil-resistant architecture that underpins it. In other words, this can only happen in a system where every account is attached to a unique identity, and where nobody can create multiple illegitimate accounts. This is because the purpose of quadratic staking is to prevent imbalances of wealth and to enfranchise solo and lower-economic users to partake. By combining this functionality with mining, Idena is further reinforcing its goal of uniqueness between accounts, and supporting greater economic incentives for individual users.
The biggest change this brings is that miners will now need to invest some money to stake if they want to increase their mining rewards. The initial investment for mining does not need to be increased, as people can still mine with almost zero stake and receive basic rewards for this (along with validations), but they now have the choice to earn more by staking more– this makes breaking even from mining more viable.
However, it must be remembered that IIP-5 invokes no change to the nature of voting and consensus within the network. Despite the relationship between money staked and money earned through mining, one node will still be equal to one vote. This means that no matter how much or how little you invest, your vote will always be equal to your fellow community-member– regardless of the money involved.
A Marriage of Ideologies
Idena is imbued with the noble concept of equality– in the form of voting, capital, and identity. Typically, these are viewed as socialist ideological concepts, which has helped Idena gain traction in the politically left factions of the online world. However, IIP-5 can be argued to have changed this situation by requiring people to invest more money to receive rewards. In essence, IIP-5 places capital in a higher position than previously, as people must stake to earn higher mining rewards.
To some, this can understandably feel like Idena is turning its back on its goals of equal opportunity, but viewing it like this could be a mistake. Rather than seeing it as a compromise of concepts, it makes more sense to view this as a merging of ideological notions, connecting socialist tendencies with more capitalist ones.
Time appears to have proven that the idea of equal mining rewards was too idealistic to prevail in this setting, as rewards could be seized by pools. As a result, this has caused individual users to turn off their nodes. Idena’s means of combatting this is to allow people to get the returns they need to run nodes by staking a small portion of iDNA, making solo mining more lucrative and enticing.
The sad truth is that this may discourage some solo miners to get involved if they cannot invest in Idena via staking, but overall IIP-5 is designed to increase the percentage of solo miners compared to mining pools, which is extremely important for ensuring there is a plurality of nodes spread across the world. This matters greatly as it ensures that power is distributed globally, increasing decentralisation– which is important for the strength of the project and all its inhabitants.
By imbuing Idena with these capitalistic incentives, the protocol is allowing for more decentralisation to enter, whilst increasing incentive to participate. It should still be remembered that mining rewards are skewed in the favour of solo and small investors, meaning that individuals make a higher percentage of returns compared to whales and large stakeholders (which is another way of preventing concentrations of power in Idena).
A Necessary Strategic Change
Quadratic Staking is a key change to Idena’s ecosystem. By restructuring the nature of mining, the project is encouraging more solo activity, which in turn helps with its global health and infrastructure. The aspect of needing to stake to earn when you mine may prevent some from getting involved, but this may be a somewhat necessary move to increase overall solo miners in general. In essence, this is a highly strategic change, and not one that Idena’s team or community took lightly. This is a new ideological milestone for Idena, bringing together two often polarizing concepts to create a more fulfilling and robust structure.
