Introducing Staking Incentive Best Practices
Staking Incentive Best Practices is a new series that analyzes staking participation rate and the most effective ways to design a proof-of-stake network. Staking rates directly impact the security and strength of the chain, making it a key metric to watch over time.
Staked currently supports seven proof-of-stake cryptocurrencies: Decred, Tezos, Livepeer, Loom, Dash, EOS, and Factom. Each project made unique decisions about the way their proof-of-stake operates, with implications for the incentives of all network participants. While on-chain governance enables upgradeability, initial protocol architecture and economics has a drastic impact on the success of the chain.
Practice 1: Inflationary Rewards Drive Participation
We first compared EOS, a governance-only staking token, to Tezos, which provides an inflationary reward for participation in the network. Without burying the lede: it is clear that token holders prioritize getting paid, as Tezos participation is more than 2X that of EOS.
Money Talks, Governance Walks: EOS vs Tezos
EOS is pitched as crypto-utopia and operates a pure voting system for block producers. The top 21 block producers are rewarded with lucrative roles validating the network and the next 50 get paid as “stand-bys”. EOS block producers are prohibited from sharing rewards with their voters. Instead, educated voters will recognize bad block producers and vote them down over time.
Conversely, Tezos’s liquid proof-of-stake is designed to directly reward stakers. The protocol natively supports delegation and the annual yields to staking participants are generous: 7.75% annually.
The data reveals a clear winner: over 80% of Tezos participates in securing and governing the network whereas EOS struggles to reach 30% participation. While paying inflationary rewards for participation clearly increases the staking rate, does it do so at the expense of quality?
The EOS pitch is that enlightened voters are higher quality, voting out low quality teams. While this works in theory, it is not obvious this is performing as planned. Several block producers have been poor performers, many backup producers have disabled their nodes, and others have been accused of buying votes, largely without consequence.
Enlightened governance is tricky if voters are apathetic and unengaged. We have talked to several large holders of EOS who have told us that voting simply doesn’t justify the security risks of moving their keys from cold storage.
Data-driven tip #1 for proof-of-stake network designers: create an economic incentive for participation. Crypto utopia sounds grand, but the reality is turning out quite differently.
This is our unique opinion based on the data that we deal with in our day-to-day operations.
We live on this data and are proud to provide the crypto community with data-driven analysis about the effectiveness of crypto-economic incentives.
We look forward to revisiting the figures cited in this piece, as well as discussing lock-up periods, slashing penalties, and other variables that influence participation rate.
Staked helps institutional investors reliably and securely compound their crypto by 5% — 100% annually through staking and lending. Staked runs validation nodes for proof-of-stake currencies and offers access to on- and off-chain lending options that provide an annualized yield of in-kind currency.