The brilliant use of game theory discourages malicious behavior and rewards honest actors in cryptocurrency networks, allowing consensus to progress safely. Effectively it is the “value” or threat of losing that “value” which discourages fork creation or downtime of the network operators (miners, authorities or validators). If there was no “value” that can be lost (at stake) then there would be no cost for network operators to create forks and attempt to double spend. Without any “value at stake” and without incentives, cryptocurrency networks cannot exist.
In Proof of Work mining shorter chains wastes electricity, in Proof of Stake slashing prevents validators from proposing two blocks at the same height, and in the case of Proof of Authority consensus, a legal contract might carry financial or social consequences.
In this article, we will explore
- What is “Value”, “Trust” and “Security”
- What is Multi-Staking
- How existing token holders can profit from Multi-Staking
- Risks and further security considerations
Value, Trust and Security
Value is a measurement of the benefit provided by “goods” or “services” to the economic agent or system. Usually “value” is measured in terms of currency units (for example USD). The “value” is however NOT the same thing as the market price. In many cases, the value of an asset can be much higher or lower than the market value (price at which asset can be exchanged for another asset).
Trust is a form of relationship where one party is willing to rely on the actions of another party. In decentralized networks “trust” is established thanks to “value” at stake. If network operators can lose “value” in case they misbehave, then users of this network can execute, observe, and trust that their interactions, such as token transfers or queries will be executed properly. As long as there is “value” at stake the network can be “trusted” by the users.
Network operators can be trusted as long as penalties are greater than incentives to misbehave, and as long as we can assume them to be rational actors. Generally, cryptocurrency network operators are required to possess their own skin in the game or delegated stake (“value” entrusted by others to vouch for their honest operation), this “stake” usually has a form of a native token (asset issued by the network itself).
The “value” at stake (skin in the game) is a measurement of “trust’’ and a synonym of “security” for cryptocurrency networks. Operators usually possess full control over the network, where they are capable of creating forks, updating state of the ledger or behavior of the virtual machine. For that reason, operators collectively become custodians of the value stored within the network. If the “value” within the network does NOT originate from that specific network (not native tokens) and if it exceeds the total “value” at stake, then such decentralized network is no longer secure, as operators have incentives to become dishonest. For example, it would not be secure to transfer BTC from Bitcoin to Ethereum 2.0 to access some DeFi smart contracts if the value of BTC we are sending would be higher than the total value of ETH tokens “at stake” on the Ethereum chain.
Assessing “value” at stake (judging “security” of a network), especially in the case where “stake” is an artificially created digital token, is difficult and depends on a multitude of weights and factors that are subjective for every individual actor (user). For that reason securing cryptocurrency networks with the value of a single token issued by the same network will unlikely inspire trust in every actor, and greatly limits the amounts of other assets that can be interchain-transferred to that network. It also limits the value of such mono-stake networks in terms of shared-security that could be offered to new projects trying to deploy their own blockchain applications in the form of parallel-chains or zones.
Kira Protocol proposes a revolutionary solution that resolves issues of insufficient “trust” and “value” at stake by enabling staking of multiple assets.
As we previously established the value of an asset is NOT the same as the market price, so we can’t bluntly allow staking of any random asset and assign a voting power to this asset in proportion to the market price. Instead, a governance curated registry is used to assign subjective “value” to foreign tokens measured in units of a native token. For example staking of 1 BTC could be equivalent to staking 10'000 XYZ (native tokens).
In some cases it might be profitable for a network to allow multi-staking of tokens which have no market value however their presence could generate higher network fees which would translate as a higher intrinsic value for the native staking asset. In other cases, a network governance could undervalue multi-staking assets such as Tether if there is no sufficient evidence that those assets are 1:1 backed by the equivalent USD value or if their market price is suspected to be manipulated.
As a result users can assess the value “at stake” based on their individual preferences to conclude if the network “security” is sufficient for them to interchain-transfer their assets into that network. Furthermore there is no limit to the total value of assets that can be transferred to the network secured by multi-staking, in other words, it becomes viable for the user to transfer, deposit, trade, and lock up tokens in DeFi which total value exceeds even the entire cryptocurrency market cap.
Multi-Staking using Kira Protocol allows to generate revenue from staking real-world assets such as digital fiat, commodities and trusted crypto-assets like Bitcoin, Ethereum, ATOM, DOT and other tokens including NFT’s. Revenues are generated through block and fee rewards and depend on capped interest rates which are individually assigned to each token. Capped Interest Rates work by assigning maximum revenue claim or voting power to each type of stakeable asset, this ensures that a malicious token issuer would not be able to take control over the entire network or claim all of the revenues for himself by printing unlimited amounts of tokens.
Revenue from network operations (block and fee rewards) can be shared among multiple staked assets thus increasing the value proposition of both the native and foreign tokens at stake. Value of the native token increases due to growing network “security” and use, while the value of foreign tokens increases due to new value propositions — access to the network revenue share. It’s up to each individual network governance to decide how much revenue should be shared among different token types to induce the optimal level of security sufficient for users of decentralized applications.
Token holders benefit not only from the block and fee rewards but also from maintaining full liquidity of assets at stake thanks to staking derivatives supported natively by the Kira Protocol. Staking Derivatives work in a way that for every token staked a derivative representing that staked token is issued 1:1. Those derivatives can be transferred and traded freely but cannot be slashed. This implies that access to the capital is never limited, and can be used up to its full potential rather than remain permanently locked in a protocol. Permanent asset locking not only does not benefit the protocol but can decrease its security, as custodians such as centralized exchanges can act as operators offering features not available with other network operators thus causing centralization of assets at stake.
To prevent the possibility of the death spiral due to possible native token price fluctuations, all node operators in the Kira Protocol are incentivized by equally sharing 50% of all network fee rewards. Furthermore validators can charge commission fees from their delegators who earn block rewards in proportion to the value of their tokens at stake delegated globally, as well as network fee rewards in proportion to the value of stake delegated locally to each individual validator. This strategy implies that purely profit-seeking delegators (those not concerned with maintaining decentralization of the network) have to distribute their stake equally among all validator nodes to optimize their revenues.
Kira Protocol uses a governance assisted slashing mechanism to prevent malicious behaviour of network operators. There are many reasons why a validator node might misbehave (double sign / attempt to create a fork) ranging from intended malicious acts to software bugs, hardware faults or for other reasons which were not intended. Assets at stake should never be put at risk in case of single network operator misbehaviour or non-intended faults, only in case of organized attacks threatening network operations, tokens should be at risk of slashing.
In the case where organized malicious attack of multiple node operators is detected, all operators participating in the attack will be jailed and governance will begin an investigation to decide if capital punishment (slashing and permanent jail-time) should be executed. Tokens slashed will not be destroyed but rather deposited in the community pool as destroying tokens originating from foreign networks is not possible in practice. The Non Fungible Tokens (NFT’s) will always be slashed at the rate of 100% (the entire token is lost), this will enable governance to refund the NFT back to the user if the penalty is paid, as well as to sell the NFT to the highest bidder or use it to incentivize decentralized development.
Risk of validator node centralization or malicious actors becoming operators (e.g. by sybil attacks and stealing tokens) is solved through governance permissioned validator set. This implies that new operators can join the validator set only if they are approved by the governance. Kira Protocol has only a single slashing condition (double-sign slashing) and for that reason governance will maintain power to evict validators violating the governance-curated Code of Conduct. Code of Conduct or SLA (Service-level agreement) contains a set of off-chain rules that network actors such as validators or governance members themselves must comply with. Publicly available service-level agreement allows users to evaluable what they should expect when transferring their assets to the network. The SLA rules can range from ethics to philosophy, execution of vision, upgrades, undesired behaviours of operators (such as off-chain culture or on-chain downtime) and other rules required to motivate various social behaviours that can’t or should not be controlled by the blockchain application logic.
Many cryptocurrency communities created dogmas which in the near future will become scrutinized for the first time. The new era of interconnected blockchain applications and trustless value transfers between them introduces new risks that designers of early consensus mechanisms didn’t take into account. Despite that, solutions exercising the most maximalist tendencies are the ones valued and respected most in the cryptocurrency community, which was supposedly focused on achieving financial freedom from the hegemonic financial systems…
Until now cryptocurrency networks had a limited potential for attracting capital originating from outside of its own ecosystem. The only value available for the purpose of DeFi was originating from custodian addresses, token premines, sales and was mostly limited to the single network such as Ethereum. Thanks to the raise of Interchain Standards and networks such as Cosmos and Polkadot it becomes viable to trustlessly access foreign assets that would otherwise be unreachable for a vast majority of the cryptocurrency networks.
The Multi-Bonded Proof of Stake consensus offers not only unprecedented security and new utility for the “store of value” assets such as Bitcoin or Digital Gold but most importantly enables virtually unlimited inflow of capital from outside of the cryptocurrency ecosystem. It is our responsibility to ensure that the decentralized economy becomes the world economy, outside of the influence of malicious groups of interests possessing the ability to hinder access to wealth and freedom of current and future generations.
Milana Valmont, Co-Founder & CEO
Mateusz Grzelak, Founder & CTO