Staking Finance2 — Staking as a financial operation
Author：Liam
This is the 2nd articles of this series. In the previous one, We introduced the first financial attribute of Staking, Staking as a reward, as well as its second attribute, Staking as a service, which is derived from delegated staking. In this article, we will further analyze the financial attribute on third layer of Staking — Staking as an operation.
Staking was only regarded as the basis for consensus book-taking. However, on the application chain, Staking acts as another role, which is Staking as an operation. That is to say, except for consensus book-taking, Stakers also perform more operations. Similar to block-producing, those operations are also motivated by the system. On the other hand, different kinds of operations make motivation design colorful. We can say that, Operations give Staking the third layer of financial significance.
Different projects use Staking in different ways, but they all use it to interact with upper-layer business. With the development of the blockchain, the application chain which is specially designed for certain scenarios came out. Especially in 2017, a great number of ICOs launched their mainnet. The application of PoS on a large scale gave the development of Staking a resounding impact.
Slash is a typical mechanism on the late development of Staking. By cutting the intimidation of Tokens that are staked, the security of the system is further guaranteed. Apart from Slash, the development of Staking bore many other fruits. Since 2015, there are popular application chain projects coming up ceaselessly. Let’s take a look at the development of Staking mechanism of those projects.
Augur(2015)
Augur started its ICO in Oct 2015. It is one of the earliest ICO projects on Ethereum. More than 5million USD were raised. Any user can establish or join in a market through Augur, such as anticipating the price flow of an asset, the result of a political election, or the result of a sports game. At present, the most popular anticipation on Augur is about political elections.
The token of Augur is noted as REP, the holder of which would participate in the block-producing through Staking. Meanwhile, any possessor of REP can be a “reporter”, whose role is to input the anticipation results into the system. The reporter whose results are in line with the consensus will be rewarded. Those are not will be punished instead.
In terms of the Staking of Augur, The holders of REP can input the anticipation results and get rewarded.
Steem(2016)
The decentralized contents sharing project Steem is one of the earliest applied blockchain projects. It was founded in 2016 by Daniel Larimer(BM) who also founded Bitshares.
Steem described Staking as Powerup, and the cancellation of it is called Powerdown. In Steem world, the participation of Staking(Powerup) can be rewarded the right of block-producing. At the meantime, posting, like, comments and re-forwarded are also motivated. Virtually, Steem can be regarded as a big “casino”. If the contents you posted, liked or re-forwarded cannot be recognized by enough Steem Power (Steem that are Staked), your rewards cannot counterbalance inflation. In this “casino”, values are flown to those who can create or find quality contents.
In terms of the Staking of Steem, the holder of Steem Power can be rewarded through like or re-forward of contents s/he likes.
Filecoin(2017)
Filecoin is a decentralized storage project which financed more than 200 million US dollars in 2017. Filecoin did not adopt PoS consensus mechanism, but they have similarities. In PoS consensus, it is tokens that are Staked, but what are staked in Filecoin is storage space. Unlike PoS, tokens can be slashed, but storage space cannot.
To participate in Filecoin mining, you must first pledge storage space to become a storage node and provide storage services for the Filecoin network. There is also a special class of nodes in the Filecoin network: retrieval nodes. When they retrieve the file requested by the user the fastest, they get paid.
In Filecoin’s Staking, users can get incentives by Staking storage space or providing retrieval services.
Livepeer(2018)
Livepeer is a decentralized video infrastructure that utilizes people’s idle computing resources to transcode videos, reducing costs significantly. Developers can now use Livepeer to develop video dApps. Livepeer implemented its unique Merker Mine in May 2018, and ended in October 2018, during the time the initial issuance and distribution of tokens are completed.
In the livepeer network, a node that Stakes above 200 LPT can perform transcoding, and obtain transcoding fees paid by users. Of course, this is not mandatory. Even if you have staked more than 200 LPTs, you can still choose to participate in consensus block-production only and reject providing transcoding services. In this case, we can see 200LPT as the entrance ticket for performing transcoding services.
In terms of Staking of Livepeer, a holder of LPT can get rewarded by providing transcoding service.
Nucypher(2019)
Nucypher is a project founded in 2017. After its establishment, a great many of people have actively submitted codes they wrote, but the news coverage was thin. The project grabbed attentions attentively on October 9, 2019, when NuCypher received a strategic investment of $ 10.7 million. Nucypher is a distributed key management system that provides encryption and permission control services. It lies in Ethereum’s privacy layer.
The miner in Nucypher participates in consensus block-production by Staking Nu. Meanwhile, he needs to undertake encryption tasks. When the miner is rewarded for block-producing, he also get paid for encryption tasks, which is paid by users (either the data owner or the data user). If the miner leaks data or performs other acts of mischief or dereliction of duty, the pledged, the Staked Nu will be Slashed.
In terms of Staking in Nucypher, the holder of Nu can be rewarded through encryption services.
Staking plus: the additional operations of Staking (rights or obligations)
The change of the incentive mechanism is an important development after the reform of the Staking mechanism. The Staking Finance derived from this is also at the center of discussion in the industry. This layer of incentive mechanism is combined with the incentives of the first layer (Staking as a Reward) and the second layer (Staking as a Service) of Staking, becoming what we see now.
In addition to to block-producing, the additional operations will also be motivated.
These additional operations are to the “old consensus” of Staking means block producing. According to the new generation Staking mechanism, additional operations and block production enjoy the same incentive opportunities. These opportunities exist in the form of rights (optional), or in the form of obligations (mandatory).
In Steem, it is Stakers’ rights to like, comment, or repost contents.
In livepeer, it is Stakers’ rights to provide transcoding services.
In Augur, a Staker is obliged to participate in the reporting of anticipation results.
In Nucypher,a Staker is obliged to provide encryption services.
In Filecoin, it is an obligation for a Staker to provide storage services and a right to provide retrieval services
The rights and obligations, similar to block production, jointly uphold the decentralization of the project. This is the further decentralization process of the application layer after the network is basically decentralized. People’s exploration of the application layer is actually not enough. The realization of decentralization still stays at the network layer stage. There is still controversy about the stage exploration of the application layer, but there is no lack of ideal decentralized practitioners in the dispute parties. A more reasonable incentive mechanism is being implemented.
The positive rewards of additional operations of Staking
Incentives for additional operations are the focus of design in Staking Finance. The holders entrust the service providers to perform additional operations through Staking. Because of the additional cost of additional operations and the need for sufficient incentives, most of the differences in project incentive design stem from different understandings of “full incentives.”
As for incentive sources, some projects of the incentive source are through additional issuance, and some projects are paid by the requesting users. Most of the incentives are not pegged to fiats. Most projects incentivize users through tokens. As for the incentives for operations, they are based on business scenarios. Due to early business usage is not as frequent as block production, business incentives account for a small proportion of additional offerings. In terms of payment types, some projects directly use a wide range of exogenous tokens (such as BTC, ETH, DAI). For example, the transcoding fee of Livepeer uses ETH as a payment method. Some others use their own tokens. Such as Nucypher, whose users pay encryption fees in Nu. The former can effectively use the value base of exogenous tokens to boost the success of the project, while the latter is more conducive to the value accumulation of its own token.
The problems that incentives need to solve are not just encouraging someone to participate in services on the chain. Good incentives can promote better, more stable, and more efficient services. In this regard, Ncypher’s availability reward is a good innovation. It can effectively improve the experience of the requester of the encryption service. For many application chains, how to select better service providers and give them more “orders” opportunities to improve their revenue is also a direction worth exploring.
Reverse incentive for additional operations of Staking: Slash
Of course, in order to prevent nodes from cheating during providing services, or the services provided are unreliable and unstable, Slash punishment is necessary. Its real purpose is to deter. The Slash mechanism is unique under the PoS consensus mechanism and is combined with Staking, like two sides of a coin.
Compared to PoW, Staking-Slash mechanism perfected the reward & punishment mechanism of PoS. In PoW, most of the punishment for evil is missed reward. In PoS, in addition to missing rewards, they also face a loss of their principals. With the same reward strength, Staking-Slash has a stronger deterrent to evil punishment, which allows PoS to achieve a higher degree of security with less resource consumption.
Slash mostly deducts a certain percentage of the mortgage as a punishment, which is about 1% to 5%, depending on the seriousness of the misbehave. In the existing PoS projects, Slash are not frequently occured, and the deterrent effect is more obvious. Most of the known Slashes are caused by mis-operations.
Both positive and negative incentives, in a certain degree, are determining the degree of decentralization. In theory, the better the incentive design, the higher the degree of decentralization. There is always a set of deterrent Slash mechanism behind an effective incentive design. It can be said that the Staking-Slash mechanism plays a pivotal role in Staking Finance.
The Evolution of Additional Operations in Staking Finance
The significance of inspiration design that centers on decentralization is Staking Finance. From motivating block producing to the stimulation of additional operations (such as decompression, encryption, voting, etc.), people are constantly exploring what a decentralized organization should look like. The application scenarios of blockchain are limitless, such as identity authentication, advertising transactions, health care, credit files, encrypted communication, Internet of Things, anti-counterfeiting traceability, content copyright, and so forth. People are exploring in various fields. In 2020, the voice that blockchain should serve entities is getting stronger, and there will be more examples of technology implementation. In various industries, the types of services are different, and the operations are more diverse. When we present these physical services as a decentralized organization, there will be great changes.
At present, the financial mechanism built on the basis of staking is gradually improving, and it is moving towards a rich ecological scale. When we talk about Staking now, we are no longer talking about block producing only. However, what remains immune is that Staking is still the most basic action to maintain the security of the entire network. No matter how the additional operations change, the underlying security is inseparable.
We may be curious, what will Staking be like when it continues to develop? Since the emergence of the PoS consensus, the emergence of Staking always comes together. In the first 7 years of the development of the PoS consensus, Staking has not changed much. In 2019, the large-scale adoption of PoS in the project has given Staking a new direction of development. Staking as a Service is a specific service; Staking as a Operation is the development of the business layer, and Staking as a Derivative stands for an important development course of decentralized finance in the future.
Some may have noticed the asset properties of Staking. Staking assets have the potential to develop financial derivatives, and this will be covered in next article, with the theme Staking as a Derivative. The Stafi team has been making attempts to issue dividend-paying bonds based on Staking assets, thereby solving the liquidity difficulty of Staking assets. This is the most basic derivative based on Staking assets. With this foundation, Staking Finance will evolve, at a higher pace, into a more colorful financial ecology.
About Stafi Protocol
Stafi Protocol is the first decentralized protocol that provides the liquidity for Staking assets.
Website: www.stafi.io
Twitter:@Stafi_Protocol
Telegram: https://t.me/stafi_protocol
