#15: Rewards and Representation

This newsletter is supported by, an operator of validating nodes and staking services on Proof-of-Stake networks.

Staking Economy is back to a publishing cadence of every 2 weeks due to popular demand and Chris Remus assisting me (Felix) in writing this newsletter. I’m excited to have Chris share his unique insights as an independent, one person validator operator. Learn about his goals as a contributor to Staking Economy and his take on the Cosmos transfer enablement process at the bottom of this issue.

News & Updates

ETH2.0 STAKING REWARDS
A revision of the staking economics in Ethereum’s Serenity upgrade. The specification changes are based on community feedback to increase validator rewards to ensure participation when the PoS implementation launches. The table below shows the updated spec; annual issuance (inflation) will depend on the staking ratio (134,217,728 = 100% of ETH at PoS launch). Rewards will be distributed to those staking promising annual return rates of up to ~20% from block rewards with the global network inflation resulting from staking reward issuance staying below 2% in all scenarios.

POLKADOT NPoS
Polkadot will utilize a form of Proof-of-Stake in which nominators (in other blockchains: delegators) nominate a set of validators that they trust with their stake. An algorithm then automatically distributes the nominators’ stakes across the sets of validators they nominated. The heuristic used is trying to establish a validator set (expected to range between hundreds and thousands) with an evenly distributed stake based on the method of proportional justified representation by 19th-century mathematician Phragmén.

COSMOS TRANSFERS AND ZONES — The first Cosmos governance proposals passed and transfers were enabled on the network. Check out Chris’s take on the upgrade process below. ATOMs are now available for trading, e.g. on Kraken, Bittrex, and many other exchanges. Additionally, the first zones built using Tendermint and the Cosmos SDK are launching: Stablecoin and payment network project Terra just went live with their mainnet. Check out this launch video and the Chorus One validator announcement to learn more about the project and staking on Terra.

STAKING WALLETS — In addition to project-specific wallets and tools build by validators (as mentioned in the previous issue) popular wallets are now entering into the staking game with e.g. Trustwallet supporting Tezos staking and imToken enabling Cosmos staking. We are seeing many different interfaces emerging that will finally make participating in things like governance and staking accessible to everyone.

GALAXY CONSENSUS — The research team behind the blockchain interoperability solution Wanchain published a paper on their chain-based PoS consensus mechanism that is planned to go live in Q4 this year. This blog post gives an overview of that paper covering what their protocol is trying to achieve with references to other PoS protocols such as Casper, Ouroboros, and Algorand, who launched their public testnet recently.

STAKE-BASED LIQUIDITY — An interesting proposal (ZEIP-31) for the 0x protocol to include a liquidity reward based on fees generated by market makers and their stake in ZRX tokens including a third-party delegation mechanism.

NODE REGISTRATIONS — If you’re interested in running a node on upcoming PoS blockchains, there are two projects currently looking to gather information about interested parties: the first one is Trustlines, a minimal viable PoS sidechain to Ethereum that aims to map existing mutual trust relationships (e.g. debts between friends) onto trustless infrastructure. Learn more about becoming a Trustlines validator here.

The other project is Coda, a blockchain with a focus on keeping blockchain state size constant through zk-proofs. In the Coda network, there are two roles for nodes: computing zk-proofs and “classic” validation. The team is looking for parties interested in engaging with the network through this form.

Opinions & Observations

The Truth About Staking Yields

There are many statements describing staking rewards as risk-free or passive income floating around. Additionally, many staking projects bait with high token-denominated yields. Before participating in staking, one should be aware that staking tokens are usually used as collateral to ensure validators follow the network rules. PoS networks pay out rewards to those staking to compensate them for giving up liquidity of their assets and taking on the risk of being slashed in case of serious faults or extended downtime. In PoW, all rewards go to miners. Because these mostly consist of inflated tokens, holders of PoW coins are diluted to pay for the security of the network (at the time of the snapshot of data used that dilution amounts to around 3.7% per year in Bitcoin).

In PoS, token owners can avoid dilution by staking their tokens. As staking rewards are only paid out to those staking, the impact on a staker’s share of the total token supply depends on the staking ratio in the network, validator commission rates, effectiveness and security (slashings), as well as taxes paid on staking income. The following charts show the relative change in share of total token supply ownership comparing a hodler, a pre-tax delegator (using the average commission rates prevalent in Tezos and Cosmos), as well as a post-tax delegator that has to pay 30% income tax on staking rewards. Check out the full post I published on the Chorus One blog for more data and explanations around the purpose of staking rewards and implications for the cost of network security.

Cosmos Economics Discussion

A discussion between various Cosmos stakeholders on the economics behind Atoms and the Cosmos Hub centered around the question of how value could accrue to Atom holders.

The Cosmos model with independent, sovereign blockchains connected in a network brings up the question of whether the Cosmos Hub will establish as the root chain through which other chains in the network communicate. Put another way: what are the possibilities to ensure that Atom holders profit from the success of the network? A core point touched upon in the conversation is the idea of shared security with Cosmos Hub validators validating multiple zones “lending” the security of the Hub to and helping to bootstrap smaller blockchains.

Other parts of the discussion revolve around the idea of the Cosmos Hub validator set and Atom holders as a DAO and specific economic parameters on the Cosmos Hub, e.g. the inflation rate, slashing penalties, and the unbonding period. If you are interested in these topics I recommend listing to the entire discussion with the caveat that it may require a deep understanding of how Cosmos works to fully follow the conversation.

Introducing Chris

I’m feeling excited to join Felix as a contributor to Staking Economy. I’ve been a reader since it launched. It’s been a valuable resource to me as a staking system operator.

I’ve been interested in staking for about two years. I’m an original Cosmos validator working group member, dating back to October 2017. I run the Chainflow validator on Cosmos, as well as a few other networks. You can learn more about me and Chainflow here.

It feels like staking is starting to reach critical mass. My hope is the newsletter continues to help find the signal in the staking noise, as the noise level continues rising.

Cosmos Transfer Upgrade

Cosmos upgraded to v0.34.0 earlier this week. This is big news because it enabled Atom transfers on the Cosmos Hub. It’s also the first time the validators followed an expedited governance process.

I had my doubts about the upgrade a first. While I supported the upgrade, the process felt rushed and haphazard. For example, there was still uncertainty and confusion about which block number the network would stop on. Confusion persisted as late as 24 hours before the proposed upgrade time.

Fortunately, the upgrade went pretty well. My sense is the active and consistent communication from Cosmos team members Jack Zampolin and Alex, in the Cosmos Validator Riot channel, was a big reason for the upgrade’s success.

Yet in the future, my hope is these governance decisions aren’t rushed. My sense is that continuing to rush them will increase risk. Taking a more conscious and measured approach will decrease it. Less risk means a more stable and secure network.

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Staking Economy is written by Felix Lutsch from Chorus One with assistance from Chris Remus, operator of the Chainflow validator. Opinions expressed are our own and do not necessarily reflect the opinions of Chorus One. All content is for informational purposes only and not intended as investment advice.

Originally published at https://blog.chorus.one on April 26, 2019.