The OMG token has one purpose, to be staked. Staking is a process in which a token holder locks away their tokens for a certain period of time. In return for locking their tokens, the token holder is given the right to run a validator node on the blockchain and earn rewards for processing transactions.
There are many unanswered questions surrounding staking at this point, but we’ve compiled all known information up to this point below.
Transaction Fees & Staking Rewards
Staking rewards will come from the transaction fees associated with using the OMG network, which get paid to validator nodes. Unlike the Bitcoin or Ethereum blockchains, which reward validator nodes using the Proof of Work consensus algorithm, OmiseGO nodes are rewarded by locking away (“staking”) their tokens in a smart contract that punishes bad behavior and rewards good behavior. As detailed in this blog post, no central authority controls or sets the transaction fees:
“Fees are not controlled by any algorithm, or central party’s decision, but are instead 100% dynamically determined by supply and demand within the network.”
The validators will control the fees. If they set fees too high, users will be less willing to use the OMG network, resulting in fewer transactions and fewer fees collected for validators. However, if fees are set too low, validators will make hardly any money. This is an important balance and works to incentivize validators to set reasonable fees that will drive network growth and adoption.
In this blog post, OmiseGO revealed that there will be a minimum transaction fee hard-coded into the network, though we have yet to receive additional information about it. Validators with larger amounts of OMG tokens to stake are expected to be willing to accept lower fees, undercutting smaller validators who won’t be willing to set their fees so low. With this minimum fee in place however, smaller validators are protected against this exploitation to an extent, thus encouraging more decentralization in the validator nodes. .
OMG token holders who don’t have enough tokens to qualify for their own validator node or who don’t want to set up and manage their own node can band together to form a staking pool that collectively can rival the size of larger individual validators. In these pools, tokens are securely locked in a smart contract and unequivocally remain in possession of each participant, but are used to power a single validator node that is run by the pool operators. Fees gained by this validator node will be distributed to participants proportional to each person’s contribution, with a small fee paid out to the pool operators for their service of hosting and maintaining the node.
David Knott (OMG Plasma Researcher) stated in this discussion that fees could be set as a flat fee, a percentage based fee, or a combination of both. See our calculator to estimate staking rewards. The team has previously mentioned that rewards can be paid out in several forms, such as OMG tokens or Ether.
Becoming a Validator
In Town Hall 0x2 the team revealed that the initial amount of validators will be about 200, a balance between decentralization, speed, and network stability. If you are in the top 200 token holders, you may be able to stake tokens yourself. If not, you can join a pool to stake your tokens.
The staking period, also known as an epoch, will last one month. There will be a period during each epoch in which people will “join,” allowing them to stake in the next epoch.
The above graphic should help clarify. During epoch 10, there is a “Join Window” in which people will be applying to stake in epoch 11. This happens during each epoch.
If a token holder wishes to stop staking, they will simply not join for the next epoch.
OMG Pool
OMG Pool (omgpool.org) is building the first open-source, community-driven staking pool for OmiseGO.
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