This article is written to provide background information for the Taraxa community so they may make the most informed decisions during governance votes.
- Staking secures a PoS network by making attacks expensive.
- Staking is not free because both Stakers and Validators need to be compensated for their opportunity and operating costs.
- Stakers and Validators are typically compensated with a mixture of Staking Yields and Transaction Fees.
- Staking Yields are typically replaced over time and gradually replaced with Transaction Fees within the total Staker and Validator compensation to ensure the ecosystem's sustainability.
Staking Secures the Network
Proof of Stake (PoS) decentralized networks use staking to guard against Sybil attacks. Stake can be delegated to specific nodes on the network called Validators, which receives eligibility to participate in the networks' consensus mechanism from the delegated stake. The staking requirement raises the cost of attacking the network, making it expensive to pretend (Sybil attack) to be many Validator nodes at once.
For example, if a network had no protection against Sybil attacks, then anyone can participate in consensus for free. That means a malicious player could set up a large number of nodes to create their own version of reality, perhaps to give themselves all the assets on the network. Having a staking requirement to participate in consensus makes having a large number of nodes expensive, because that stake is not free. Staking does not eliminate the possibility of such attacks - no network is impervious to attacks, but it makes the attacks far less likely to succeed.
Staking secures a PoS network by making attacks expensive.
Staking is not Free
For Stakers, they are locking up their assets to help secure the network, thereby incurring many opportunity costs. For example, they're not able to spend the assets to purchase other assets, convert them into fiat, or simply engage in short-term trading. Stakers need to be compensated for these opportunity costs, otherwise no one will stake.
For Validators, they are operating nodes which incur operating costs. Nodes are run on servers that cost money to either purchase or rent (e.g., via a cloud service) as well as time and expertise to operate. Validators need to be compensated for these operating costs, otherwise no one will become a Validator.
Staking is not free because both Stakers and Validators need to be compensated for their opportunity and operating costs.
Staking Compensation Components
Typically, Layer-1 protocols compensate Stakers and Validators via a mixture of Staking Yields and Transaction Fees. It is also typical that as an ecosystem matures, Staking Yields will decline and Transaction Fees will rise as the market moves towards an equilibrium.
Staking Yields in a PoS network can be thought of as interest earned on the coins being staked into Validators. Yields typically are emitted, or minted, which adds to the existing supply, and are awarded to verifiable on-chain activities critical to the operations of the network. In Taraxa's case, DAG block production and PBFT voting are activities that reward Staking Yields. Eligibility to participate in these activities are determined by non-coordinated randomness, weighted by the size of the stake each Validator has. The higher the stake a Validator has, the higher its chances are at participating in these activities, and therefore higher chances are to earn Staking Yields, which correctly correlates earned Staking Yields with the size of the stake on each Validator.
Transaction Fees are paid by anyone who wishes to use the network. Whenever a transaction is submitted to the network, e.g., a coin transfer, a smart contract call, fees must be paid. The size of the fees are determined by the network of Validators, who can be thought of as independent and homogeneous service providers. During times when the network's transaction throughput is under the maximum capacity, fees tend to remain low. As the network's transaction throughput approaches or exceeds the maximum capacity, fees tend to rise as transaction authors compete to have their transactions prioritized to be included in a block.
Stakers and Validators are typically compensated with a mixture of Staking Yields and Transaction Fees.
Balancing Incentives vs. Sustainability
Before an ecosystem matures, Staker and Validator compensation mostly comes from Staking Yields, because there won't be enough transactions on the network for the Transaction Fee component to be sizably meaningful. But due to the inflationary nature of Staking Yields, it needs to be phased out over time and replaced by Transaction Fees as the ecosystem matures and on-chain activities increase.
Staking Yields need to be phased out over time because unchecked inflation erodes the value of the coin in the ecosystem. In general, excessive inflation tends to destroy the value of currency and should be avoided. The analogy with real life economies is however limited, for example there is no consensus on exactly what level of inflation is appropriate for a decentralized ecosystem since it's unclear how to measure purchasing power.
Different projects adopt different strategies to achieve the gradual phase out of Staking Yields to be replaced by Transaction Fees. We can look at a few examples in the next section as a reference.
Staking Yields are typically replaced over time and gradually replaced with Transaction Fees within the total Staker and Validator compensation to ensure the ecosystem's sustainability.
A Few References
Here are a few examples of what other projects are doing to balance Staking Yields vs. Transaction Fees. In many cases the projects' official websites lack clear and detailed descriptions of these mechanisms, it's unclear why that is the case.
- Supply capped at 750M
- Total supply is capped, with yields using the gap between current supply and capped total supply as a basis and distributing it depending on the percent of coins are being staked
- Reference: https://docs.avax.network/learn/avalanche/avax#tokenomics
- Supply uncapped
- Yields on a decaying yield curve that starts at 8%, with annual -15% decrease and terminates at 1.5%
- Reference: https://docs.solana.com/inflation/inflation_schedule
- Supply uncapped
- Yield is adjusted according to staking rate with an ideal staking rate at 75% which reaches the maximum annualized yield of 10%. The staling yield decays below and above the ideal staling rate.
- Reference: https://wiki.polkadot.network/docs/learn-staking-advanced#inflation
- Dynamically adjusted yield curve
- The yield curve is negatively correlated with transaction volume, and negatively correlated with the percent of total coins staked. Since it's dynamically adjusted there doesn't seem to be guarantees of capped supply. The protocol also seems to have a fee burning mechanism similar to ETH, but that's outside the scope of this article
- Reference: https://near.org/blog/near-protocol-economics
- Supply uncapped
- Yields are a mix of fees and inversely proportional to total staking, current annualized yields seems to be between 4-5%
- Reference: https://finance.yahoo.com/news/surging-popularity-ethereum-staking-keeps-004805233.html
- Note: no official documentation could be found on the yield calculations
- Supply uncapped
- Validators don't seem to receive any rewards at all and staking yields have ended in 2022 and all transaction fees go to a wallet managed by the Foundation. There is a governance vote reward program which occurs periodically that awards yields to those who lock up ALGO, since this will occur in perpetuity it's assumed the supply will be uncapped.
- Reference: https://www.reddit.com/r/algorand/comments/s53pxl/no_monetary_incentive_for_running_a_validation/
- Note: no official documentation could be found on yield calculations