State of Stake #11: Into The New Year with A New Paradigm

Paradigm
Paradigm
Dec 31, 2019 · 14 min read

14th December — 31st December

“Inflation in Proof of Stake is not some slimy way to transfer wealth from the poor to the rich; it is quite literally how non-stakers pay stakers to secure their network. Stakers are performing actual work with skin in the game. This is called being compensated appropriately.” — @spencernoon

Market overview

Current Value in Staking by Asset

  • Staking Yearly Yield is the annualized yield for staking at current supply levels, as calculated by stakingrewards.com.
  • Real Staking Yield is the annual yield expected from staking, after accounting for the network’s inflation. Real Yield is calculated as the nominal staking yield adjusted for the inflation rate.
  • Token Staking is the number of tokens currently staking on the network, as reported by stakingrewards.com.
  • Network % Staking is the % of current circulating supply that is currently staking, using data provided by stakingrewards.com.
  • 5 Years Yield is counted like compound interest.

Think & Stake

“As regulation of Proof Of Stake networks continues evolving, albeit slowly and somewhat painfully, in the US and from my validator advisory work with some of the top staking networks, one contrast continues surfacing in my consciousness. The contrast is between the regulators’ view that “sufficient” decentralization must exist to avoid a staking token from being classified as a security…while simultaneously, making it difficult for the network to achieve decentralization, because of the restrictions on how validators can be allocated tokens. Because current allocation restrictions tend to favor large, well-capitalized validator investors. This results in stake centralization among these validator investors when the network launches. And due to current staking economics, these investor validators become harder and harder to unseat, as their initial advantage compounds, in turn centralizing stake even more.”

  • Tezos progress of outcoming year:
  • ICON Network — Paradigm’s on-chain observation of ways to reach scalability — check our very own proposal!
  • 25 Crypto Mega Theses with Multicoin’s Kyle Samani — Multicoin Capital is one of the best known crypto-focused funds worldwide. The team subscribes to three major theses in the space: open finance, Web3, and stateless currencies. In this episode, Brendan is joined by Kyle Samani from Multicoin to dive into how Kyle sees the future for the crypto space play out. The interview goes into the role of centralized exchanges and implications for the ecosystem, starting with taking a look at Binance’s approach that Multicoin has dubbed “blitzscaling”. Brendan and Kyle further explore networked liquidity and the DeFi ecosystem discussing who might dominate in the space of protocols, aggregators and robo-advisors if non-crypto players with better distribution channels join the space. During the second part of the podcast, Kyle and Brendan dive into Multicoin investments like Torus and Solana and the role that Kyle sees these projects playing in advancing crypto adoption. Finally, Kyle shares his views on a multi-chain environment and the two discuss shared security approaches and associated challenges. You can also check Five Key Takeaways in this post.
  • No Sharding — The Solana Podcast, with Evan Saphiro, CEO and co-founder of O(1) Labs (building Coda Protocol). Evan and Anatoly Yakovenko go deep into a discussion around SNARKs & what CODA is planning for phase 3 of their testnet.
  1. Binance Is The One To Beat
  2. To Beat Binance, Bring Your Own Customer Base
  3. Network Effects & Aggregators
  4. The Case Against The Interchain
  5. Solana: One Chain To Rule Them All
  • 26 Economics of Proof-of-Stake versus Proof-of-Work with Eric Wall — There’s a long-standing argument about the wastefulness of Proof-of-Work mining. To some, Proof-of-Stake is a viable, less wasteful alternative to achieve distributed consensus in a permission-less setting. In this episode, Brian is joined by Eric Wall, Fund Manager at Arcane Assets, to discuss the thought process that brought Erik, who is a strong Bitcoin advocate, to re-consider Proof-of-Stake as a potential alternative to Proof-of-Work. The conversations starts by going into Eric’s background in the traditional financial exchange market working with Cinnober on their blockchain strategy. Eric also explains how he got involved with Bitcoin, his approach to Crypto Twitter, and his new fund Arcane Assets. The two then cover what attracted Eric to Bitcoin before they transition to discuss Proof-of-Stake. The discussion goes into different arguments related to the social costs of both PoW (electricity) and PoS (locked up capital). In the final part of the conversation they also discuss tokenization of staked assets and the interplay with decentralized finance protocols, as well as the role of custodial players.
  • Zaki Manian and Dean Tribble: No Blockchain Is An Island — On this episode they discussed a lot of philosophical questions around a multi-chain vs few chain world, chain sovereignty, Agoric’s targeting the world’s 20M javascript developers for its smart contract platform, the use cases IBC enables across chains, the status of IBC and so much more. The discussion involves how Cosmos plays into IBC, and how eventually IBC will be a part of Cosmos’ SDK.
  • Thread about staking rewards on Proof of Stake networks by Lucian Todea, Co-founder & COO Elrond Network.
  • Proof-of-Stake is less wasteful — an article by Eric Wall.

“From a narrow, economic point-of-view, there does seem to be advantages to PoS which I had not fully considered before, but I still believe that Proof-of-Work is the most robust way we have to secure a chain, and the soundest way to architect a cryptocurrency.”

Recent Staking Updates

  1. Increase the minimum treasury bond;
  2. Update balances pallet events to help block explorers;
  3. Identity module enhancements;
  4. Remove the proposal when it is refused.
  1. Win Game of Zones this New Year
  2. Cosmos Hub 3
  3. Get GoZ ready by testing the Inter-Blockchain Communication (IBC) prototype for token transfers

{Staking Derivatives & Centralization}

The past two weeks have seen some interesting discussions on centralization issues in Proof-of-Stake: Dan Elitzer, who coined the term superfluid collateral, wrote about his take on the impact of staking derivatives on Ethereum PoS centralization. His core point is that staking derivatives might increase centralization because some, e.g. those issued by large custodial players like Binance and Coinbase, will manage to attract superior liquidity.

Furthermore, Arianna Simpson wrote up a thread to which, among others, Vitalik Buterin responded, Arianna’s key points:

  1. Delegation causing stake to accumulate to publicly-known validators increases the risk of collusion
  2. Power laws favor larger validators with reputation and scale
  3. Slashing is needed to impose a commitment to the network

Potential anti-centralization measures from the thread:

  1. Social consensus around a minimum fee
  2. Anti-correlation penalties
  3. Incentivizing delegation to smaller validators
  4. Cryptography (zk-proofs) might help by limiting the value an attacker can extract

Vitalik’s added points:

  1. Lower performance requirement (i.e. lower block times, less high uptime requirements)
  2. Sharding cuts down economies of scale by requiring validators with higher stake to run more nodes.

Finally, Vitalik’s counterpoint to the cryptography argument is that you cannot ZK prove that you did not sign a conflicting message, meaning consensus will always rely on cryptoeconomic guarantees.

Validator Business Model Discussion — Chainflow and the Decentralized Staking Defenders organized this first ever validator business model discussion. A diverse panel of validators shared their perspectives as key participants in the emerging Proof-of-Stake economy.

Here’s a short-list of Chris’ conclusions and take-aways:

  1. Validators need to offer value-added services on top of core validator operations.
  2. Validators are well-positioned in the emerging staking economy.
  3. Business models are in the experimentation stage.
  4. Despite the uncertainty, some investors are willing to invest in validators at this stage.

You can find the full recording here.

Shelley Launch — Cardano’s incentivized testnet launched with 240 external staking pools and over $200m in ADA staked. There’s a block explorer that seems to be missing some summary statistics, but it allows users to browse epochs, blocks, and existing staking pools.

Terra Upgrade — The Terra network successfully upgraded from Columbus-2 to Columbus-3. Something notable about the upgrade is that validators are now required to run a price feed oracle. Running an oracle was optional and voluntary before Columbus-3. On Columbus-3 not operating one will result in a validator getting slashed. This seems to be the first example of a validator having to do something other than simply operating the validator itself as a condition to not get slashed. See the full release details here.

They also combined what people said about staking in 2019 and what they are excited about in 2020.

Gleb Dudka — T-Systems (Deutsche Telekom)

‘2019 has been a year of blockchain infrastructure and figuring out business models around its provision. Representing Deutsche Telekom, Europe’s largest telco, I believe that providing and operating public network infrastructure is the next logical after telephony (voice), internet (information) and now public blockchains (value). I can also see more traditional enterprises entering the industry and helping favorably shape its regulation. ..My main concern going into 2020 is the long-term sustainability of infrastructure provisioning business models and whether we as an industry got our network economics right.”

Julius Schmidt — Staking Facilities

“For us at Staking Facilities, 2019 was the first year where we felt a movement in the right direction in regards to blockchain regulations. ..We, as a community, have the unique chance to help shape blockchain regulations for the better. It is about nothing less than laying a rock-solid foundation for the adoption and growth of PoS networks. 2020 is going to be much about educating regulators/policymakers about the benefits of PoS vs. PoW, and every voice is needed.”

Ateeta Sharma — Matic Network

“Overall, I think it was a great year for Proof-of-Stake systems with lots of interesting developments and proposals. This year was an important period for us at Matic Network too. We finalised our staking economics in preparation for the final mainnet launch of Matic, and it was very important that we get the staking design in place. We also made significant progress on the implementation side as well, and released Counter Stake — our incentivised staking testnet as well. …We have seen good traction from the developer community as well, with a variety of use cases that we see being implemented across gaming, NFT marketplaces, social media, payments and others. We are also seeing a lot of interest from protocols on Ethereum now implementing on Matic as well and we believe this trend will quicken this next year. Looking forward to what’s in store!”

Michael Ng — StakeWith.Us

“Staking in 2019 felt somewhat like the 2017 ICO boom, with many delegated Proof-of-Stake chains launching and validator services starting out. My 2019 takeaway on staking are:

1. Initial 0% fees strategy proves that delegators are sticky. You might lose some price sensitive delegators when you raise fees later but the majority will stay. First mover + participating in incentivised testnet is key because foundation delegations contributes to substantial AUM and delegation aggregates towards “first page” validators.

2. Staking alone is not a VC-scale business, most validation shops have close to 0 differentiation and the staking business might not be sustainable. Reason being high inflationary rewards (selling pressure) is typically > any sort of buying pressure, for whatever reasons lol (speculation). Fees earned are denominated in tokens but fiat values usually doesn’t hold due to selling pressure and market conditions. Validators have to innovate on other business models on top of staking to survive.

3. Starting to see centralized exchanges and/or custodians implementing staking to provide convenience (and liquidity, in the case of exchanges — almost akin to centralized staking deris) to keep users within walled gardens. Currently, delegators still values convenience over self-custody of funds (not your keys, not your money). This is concerning because you don’t want the same 10 entities to control all proof of stake based networks. A truly decentralized and fungible staking derivatives with lots of buy-in from liquidity providers might be able to change that.

What am I excited for in 2020:

1. Continuous innovation in DeFi space, for e.g, i) a way to solve for undercollateralized loans, ii) a real fungible and decentralized staking derivatives, iii) some novel way of bootstrapping DEXs (global, cross-chain liquidity and trading protocol), etc.

2. Seeing new PoS projects launch or old project shifting onto Cosmos/Tendermint.

3. Any other novel ways to utilize blockchain technology without a token with forced utility.”

Chris Remus — Chainflow / Staking Economy

“It feels like 2019 was the year the staking economy’s floodgates opened. Cosmos going live was the catalyst. Since then, the number of staking networks launching continues to accelerate at an increasing pace. Along the way, the difficult questions started emerging. Examples include whether PoS can ever achieve decentralization and how staking rewards should be taxed. The big question for me is whether the boom is sustainable or if a bubble is going to burst. And if it bursts, will a recovery follow that allows the staking economy to take root for the long term.

Chris Burniske’s article about the Fate of Ethereum Killers brought these questions into focus for me. There is a ton of smart contract capacity online and it’s increasing exponentially.

Will it result in an oversupply (probably)? If it does, how long will that oversupply last and what will it do to the underlying staking network economics? I find thinking about this within the Carlota Perez framework to be beneficial. Validator communities also took early form this year. It’s been interesting to watch validators, core teams building the staking networks and delegators begin forming, storming and norming.My sense is that the communities are for the most part supportive, yet could benefit from more critical thinking and discussion. …I’m also starting to sense a bit of elitism creeping into the staking “Old Guard” (very relative, of course). My hope is that validator communities continue to welcome and encourage new entrants. To do this validator communities need to exist as comfortable places for new and old to learn from each other.”

Felix Lutsch — Chorus One / Staking Economy

“While 2019 has been incredibly successful for staking, it also uncovered many challenges that we need to overcome if Proof-of-Stake is supposed to become the base layer for the internet of money. The biggest challenge I see is whether decentralized networks will manage to create economically sustainable business models for participants and contributors. In my view, the focus needs to lie on protocol designs that encourage contributions and discourage centralization with a few large entities. The community has made tremendous progress here and many promising experiments like testnet competitions, correlated slashing, tokenized staking positions, various decentralized governance and funding mechanisms, etc. are either out there as concepts, or were already adopted.”

  1. 2019 Dapp Review — Link
  2. IOST powered token economy adopted on Yoron Island — Link
  3. IOST staking ratio exceeds 35% — Link
  4. Thailand biggest exchange Bitkub official supports IOST mainnet token — Link
  5. IOST partners Kryton — Link
  6. IOST Cofounder Terry Wang Presents To State Leaders, Mayors and CEOs at China’s Enterprise Development & Blockchain ForumLink
  7. Metanyx Q4 contribution — Link
  8. Blockarcade Q4 contribution — Link
  1. Tezos
  2. Orbs
  3. Icon
  4. IOST
  5. Cosmos
  6. Theta

We wish you a Happy New Year and amazing vacations!


This is not financial advice.

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Paradigm fund

Paradigm Fund is an investment firm focused on blockchain technology, cryptocurrencies and cryptonetworks shaping data economy and financial industry since 2013.

Paradigm

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Paradigm

In chaos lies the truth

Paradigm fund

Paradigm Fund is an investment firm focused on blockchain technology, cryptocurrencies and cryptonetworks shaping data economy and financial industry since 2013.

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