Delegators or no Delegators? Which path does Tgrade follow?
Proof of Stake (PoS) and the variation Delegated Proof of Stake (dPoS) are well understood consensus models for securing a blockchain. In designing Proof of Engagement(PoE) we set out to address some of the issues we found in PoS and dPos, such as concentration of power in a handful of validators, and the lack of incentives for the wider community. The PoE model incentivises collaboration by the introduction of Engagement Rewards which are available for all of the community to earn.
When we were developing PoE, we were left with a big question of what do we do with Delegators? By introducing Engagement Rewards which are for all the community, how does a Delegator demonstrate engagement? What can a Delegator do, over and beyond staking their tokens? Difficult. This then got us thinking, what is the role of a Delegator in general?
Delegators help validators build their stakes, and the staked tokens provide the required security for the chain. This, as we discovered, can lead to a concentration of power if the Delegators all pile into the same validators some of whom can afford zero commission. We see examples in Cosmos where Sikka was the first to demonstrate the “zero commission attack” using it to become the second highest ranked validator on the Cosmos Hub before raising their fees. Binance is currently using a subsidized low commission to maintain top position.
The classic case for the Delegators is where there is a solid validator outfit, with good technical skills, masters of security, and the right infrastructure, and all they are missing is tokens to stake to get started. This is where the Delegators ride to the rescue, as they provide the tokens to be staked leaving the validator to focus on operations. In the PoE model, things are more complicated as the validators combine stake with Engagement Rewards, and again it is the validators being engaged and not the Delegators that bring in the Engagement Rewards.
We also have a hunch that the Delegators do not undertake the necessary due diligence on validators. Are they really seeking those out who were the most professional (and not likely to be slashed), is zero commission the top factor or do they just go with the biggest? Would they do the work to evaluate a validator’s track record in accumulating Engagement Rewards in addition to their normal due diligence? In practice, it seems delegators are often yield farming or going after “name brands”. Neither behaviour adds to the security of the dPoS model, but rather reduces security while diverting most of the block rewards from validators, especially the smaller validators.
One criticism of the dPoS model is that the validator itself has little to lose on a double sign, as maybe 10% of their voting power belongs to them and the rest to the Delegators. This undermines the security of the blockchain if the purpose of staking is to ensure that the validators stand to lose if they mis-behave, by diluting their “skin in the game” the punishments are diminished.
Continuing our thought process, we then asked the question what would happen if there were no Delegators? How would new validators build their businesses, not only do they need capital to secure and maintain their infrastructure, and now we are asking them to find the capital to buy the tokens to stake. This could build a big barrier so that only the well funded could take part and that is not what we intended for PoE as our prime motivation was for a fully engaged decentralised validator set by combining stake and Engagement Rewards.
We considered the alternative ways for validators to build their stakes outside of a traditional PoS or dPoS consensus model.
Drawing inspiration from the Schuldshein which are low cost debt instruments (for those who don’t know they are bilateral loans, not securities, and thus not registered or listed, and are constituted by an underlying loan agreement). We have a good vehicle for a validator to raise money for a defined period to buy tokens to stake and offer a return to the lenders.
The returns on the loan are, of course, derived from the revenues of providing a validator service on Tgrade. At the end of the loan period they return the capital and, if they choose, can then raise a further Schuldschein to cover the next cycle.
This achieves a number of things; the loan is backed by a legal agreement meaning that the borrower, the validator, has to repay the loan irrespective of the chain activity. The consequence of this changes the dynamics of staking as the validator now has real consequences if their stake is slashed. Knowing that the validator pays a fixed interest rate on the loan gives them an incentive to accrue Engagement Rewards to maximise their returns, say they borrow at 3% and they can produce a yield of combining stake and Engagement Rewards of 8% then the returns become attractive.
Now, walking into a bank in Germany, Austria or Switzerland asking to setup a Schuldschein to buy TGD tokens you might meet puzzlement? This is where Tgrade comes in, we are building a regulatory friendly DeFi chain, and this is exactly the type of instrument that we are looking at, namely to solve real world problems, and in this cast helping validators to grow and succeed.
In the Tgrade economy, we have validators who need tokens to stake in order to secure the network, and we have businesses and individuals who need tokens to pay for transaction fees, and commissions. The delegators typically bought tokens not only to earn a yield on staking their tokens but also for capital appreciation.
There is a clear demand to be able to invest tokens to get a return and this is a key driver for most tokens’ price. Providing this yield through dPoS is counter-productive to both security and the ability to grow sustainable businesses.
There is perceived wisdom in the crypto world that for a chain to be successful there needs to be hockey stick growth of the token price and this is achieved by good marketing, a credible team, a solid roadmap, and good old fashioned speculation. In many cases the rise and rise of tokens is disconnected from the underlying economics and we often are looking in the wrong place when we assess a blockchain. Should we not be assessing the economic model based on real businesses using a chain generating transactions, commissions and using the native token for its intended purpose?
The token value is derived from the businesses using the blockchains. The more businesses that are on Tgrade create a higher demand for the tokens which in turn leads to an increase in value of the token.
By focusing on real businesses and reducing incentives for speculators we build a solid, business focused, blockchain. We replace the conflicting goals of security and financial return seen in dPoS with alternative mechanisms for businesses to raise capital.
So what do we conclude about Delegators? Which path does Tgrade take? We are taking the bold move not to include Delegators in PoE and will work with validators to build sustainable models to acquire the necessary capital to invest in tokens to build their stakes.
Tgrade, the future of Finance.
