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Decentralization in Proof-of-Stake is a multifaceted topic. Many theories and designs have been suggested in the wider ecosystem on how a PoS system may decentralize power over multiple entities. The Cosmos Hub is one of few of these experiments that has been live for a couple of months. The following analysis covers stake distribution and diversification on the Cosmos Hub and aims to shine some light on how token holders have actually engaged with this early PoS network.
In a PoS network, the way token holders decide to participate in staking influences power distribution in the network. Do holders stake tokens themselves, do they pick one validator and stick with it, or do they diversify across validators? Diversifying stake should come with benefits: it lowers the impact a slashing would have on the token holder and helps to support different entities, thus strengthening decentralization and the ecosystem in general.
To find out how Atom token holders are participating in staking, I took a snapshot of data from the 5th September using the Stargazer API (thanks to Certus One for providing this API). The data takes into account all active delegations, as well as their size and the corresponding delegator and validator addresses. It should be noted that addresses don’t equal entities, there could be holders that hold their funds in different addresses, or holders that share addresses (exchanges/custodians), which will not be reflected in the following analysis.
Let’s start with a summary of the snapshot data. In total, at the time of the snapshot, 177,771,881 Atoms were being staked. The snapshot contains 11,387 active delegations from 6,459 addresses on the Cosmos Hub, which means the average address has 1.76 active delegations. From that we can already see that a large number of holders don’t seem to diversify.
Before we go more in-depth regarding stake diversification, let’s first consider the stake distribution. The following graph shows Atoms at stake with validators ordered by stake and colored according to the commission rate bracket that the validator belongs to (5% or lower, between 5–10%, and greater than 10%).
Looking at this we can see that the largest validators either charge a low commission rate below 5%, while others charge above 10%. These often signify funds that validate their own stake, or providers that focus on larger holders. Looking at the validator set ranked by stake visualizing the amount of addresses that delegate stake to them, we can see that low fee validators are popular especially among smaller holders. The top 3 validators by number of delegations charge no or a low fee:
This graph also contains some interesting outliers: e.g. Huobi Wallet on rank 43 has delegation from 636 addresses. Similarly, Coinone Node on rank 15 has 745 delegators. Both of these are exchange run validators. Another interesting mention is Cosmostation at rank 7, who managed to attract 678 delegators to their validator with a 12% fee, potentially a result of their successful wallet.
Now that we got an overview of stake distribution among validators, let’s take a closer look at delegations and the addresses they are coming from:
This data contains some interesting insights. For one, only about a quarter of addresses actually diversify their stake, but together these addresses account for about 64% of the total stake. What this means is that addresses that diversify on average hold about 5 times as many Atoms as those that don’t, providing us with insights that diversification is more popular with larger holders.
Taking a closer and counting the number of addresses given how many active delegations they have (n), we see a swiftly declining curve. While there are still 786 addresses with 2 delegations and 347 with 3; addresses with more than 5 delegations become very rare. There are a few interesting outliers that were cut off this graph. Specifically, an address maintained by B-Harvest sports 119 delegations with low Atom amounts that were carried for tracking purposes. 6 other addresses with seemingly similar patterns (<500 Atoms across 67 to 83 validators) exist.
Finally, if we visualize the Atom amount staked by addresses sorted by the number of validators they diversify amongst, we are presented with some more data points that stand out:
The peak of holdings with 36 delegations is from the Tendermint team address, which stakes ~21 million Atoms. Another peak with 46 delegations and ~7 million Atoms at stake is due to the ICF address. The most diversified address with significant holdings delegates to 51 validators. The two peaks with 16 and 18 delegations also signify well-diversified large holders.
In conclusion the data presented clearly indicates that Atom holders largely don’t diversify across multiple validators. In addition, we also saw a preference for low fees among smaller holders.
Our team at Chorus One believes that stake diversification is important to create a thriving validator set that engages with the network and contributes to ecosystem growth. It might be that currently token holders don’t care about diversification, are unaware of benefits, or that it is simply too hard, or not worth the effort to diversify (low slashing risks, diversifying requires increased research on validators, bad UX of having to carry out multiple transactions to delegate and to withdraw rewards,…).
We are researching ways to make participating in staking and diversifying easier. Join our Telegram to discuss and let me (@FelixLts) know what else you’d be interested in for future analysis. Interesting extensions could be to expand on differences between whales and small holders or to take a look at other Proof-of-Stake networks (e.g. Tezos). If you have a dataset for other PoS networks or want to help obtaining the relevant data please reach out.
Originally published at https://blog.chorus.one on September 10, 2019.
This article is an overview of staking on the Terra network. It covers risks to consider and rewards to expect, as well as how to participate.
First, let’s start with a basic description of what the Terra network is. Terra centers around an economy of price-stable cryptocurrencies that are integrated into various applications and processed on the network, e.g. via their mobile payment application CHAI. The network’s token Luna ($LUNA) mainly fulfills three purposes:
Luna is used…
The Terra protocol includes an automated market maker, a mechanism designed to algorithmically guarantee that Terra stablecoins stay at their desired peg. This is achieved as follows: the protocol enables arbitrageurs to exchange stablecoins and Luna at a fixed peg rate, which allows them to profit from deviations in the market. The protocol automatically mints or burns Luna tokens (expanding or contracting the supply) depending on how external parties interact with the protocol. Terra relies on arbitrageurs exchanging tokens with the automated market maker and trading on the open market to dynamically return Terra stablecoins to their peg. There are multiple resources that cover this mechanism in-depth, e.g. our whitepaper walkthrough or the official documentation. A key insight is that Luna is used as the lender of last resort should a stablecoin lose its peg downward. Luna holders are diluted to absorb this type of volatility.
The Terra design counters this in multiple ways. For one, rewards earned from transactions processed in the network are distributed to those staking Luna tokens. A larger portion of Luna tokens staked results in a larger share of the tx fees received. Transactions on the network charge a 0.1–1% fee per tx (capped at 1 TerraSDR). The percentage dynamically adjusts based on the demand for transactions on the network to smoothen economic cycles. Rewards are largely received in stablecoins, as most transactions on the network happen denominated in stablecoins.
Additionally, the protocol charges a small spread for atomic swaps between Terra stablecoins. These fees are distributed to validators that correctly vote on Terra price oracles (more below). Atomic swaps are capped to limit the volatility in Luna supply. Currently, the spread taken increases linearly from 2% up to 10% when the daily cap is reached.
Furthermore, the protocol also burns a portion of Luna (currently 5%) sent to the protocol when issuing Terra stablecoins. Burned Luna indirectly rewards Luna holders by contracting the overall supply. The official Terra documentation expands on these topics.
Finally, a recent change introduced an equivalent of block rewards to support the staking ecosystem while the network is in its growth phase. A community initiative that pays out a part of the Luna treasury to those staking was implemented. In the first year 21.7mn Luna have been committed to this effort. This corresponds to a ~10% staking yield at the current staking ratio (at the time of writing there are ~225mn Luna at stake, see e.g. here). In total 100mn Luna have been committed to keep staking yields competitive in the short to medium term. You can learn more about Project Santa here.
The Terra protocol includes a sophisticated oracle design to maintain the exchange rate between stablecoins and Luna. This design is still in flux. Core to it is that validators cast votes on price feeds and receive rewards from swap fees based on the correctness of their votes (measured by considering deviations from the median of all votes).
Finally, Terra uses the remaining seigniorage (Luna sent to the protocol for minting stablecoins) to stimulate growth of the Terra economy. This is out of scope for this article (more on this can be found here or in the whitepaper).
The following will focus on summarizing the factors that have an influence on the staking lifecycle, as well as provide details on the currently implemented values that need to be considered.
As Terra is using a design similar to that of the Cosmos Hub, refer to our more comprehensive Cosmos Staking Primer in case you are new to staking or unclear about what is meant with some of the following terms.
Automatic Unbonding. There are scenarios in which delegators unbond from their validators and stop earning rewards from staking as a result. In all of these cases, delegators need to manually stake their tokens again. Scenarios are:
To stake Luna, you need to first obtain $LUNA tokens. CoinGecko e.g. lists available exchanges. The easiest tool to stake your Luna currently is through the official Terra Station wallet. The Terra team released this guide that walks you through the wallet. Terra Station will soon also have Ledger support, meaning you can store and stake your Terra tokens on a Ledger.
Chorus One is operating a highly available and secure validator on the Terra network. Stake today to start earning while supporting our work. Visit our website to learn more about our Terra validator!
To re-iterate, returns from staking Luna depend on a variety of factors. Some of which are dependant on the performance of the validator you choose to delegate to, others depend on network activity and various parameters in the protocol. Do due diligence on the project and validator(s) you aim to delegate to. Take into consideration the various implications described in this article before obtaining and staking Luna.
Many of the variables described in this post are subject to change and will be governed by Luna holders to optimize for the success of the Terra economy. At Chorus One, we are excited to contribute to the success and health of the Terra network. By staking with our validator, you are supporting our contributions and the effort we put into helping Terra succeed. Follow us on Twitter or join our Telegram to stay informed and in case you have questions!
Terra Website
Official Terra Documentation (best to understand the actual protocol)
Terra Agora Forum
Chorus One Terra Whitepaper Walkthrough
Chorus One Interview with Terra Co-Founder Do Kwon
Originally published at https://blog.chorus.one on August 28, 2019.
Human economic relationships have been based on the same basic principles for thousands of years.
An over 4,000 year-old tablet discovered in Mesopotamia, present-day Iraq, depicts an arrangement about the payment of corn, the currency of that era. This is the first recorded history of what we call a surety bond today.
Portrayed on the tablet are three parties: the first party is the obligee, who is expecting a payment of corn at some later point in time. The second party is the principal, who is supposed to fulfill this obligation. The obligee requires a guarantee from a third party, the surety, should the principal fail to meet their obligation. This guarantee is called a surety bond. Surety bonds are commonly requested to ensure contractual promises are met. They are usually obtained in exchange for annual premiums to account for the risk of the principal failing to meet their obligations.
But what does all of this have to do with Proof-of-Stake (PoS)?
In some sense, stake in a PoS network is a type of surety bond:
By staking tokens with a validator, a token holder is providing a surety bond to the protocol that this validator will meet his obligation to stay online and to faithfully validate transactions. The token holder provides this surety bond in expectation of future premiums; the staking rewards. In PoS networks with slashings, the protocol can claim a part of the surety bond should the principal (the validator) fail to meet his obligations, e.g. by going offline or double-signing. The difference between common forms of a surety bond and a PoS protocol is that premiums aren’t paid by the principal, but by the obligee (the protocol) itself.
Let’s fast forward a few thousand years and find out how these fundamental economic principles made it into the world of distributed systems and digital assets.
Pro tip: from here on developments in PoS can be followed along in the Staking Economy newsletter ;)
I hope this article helped you to understand the key milestones in the history of Proof-of-Stake!
Even though there is already a rich history of work around Proof-of-Stake, we are still at the very beginning. The pace of innovation is rapidly accelerating and many interesting experiments are and will be conducted. Some examples include: Polkadot’s Nominated Proof-of-Stake algorithm, anti-correlation penalties, exchange staking, as well as designs that will allow staking positions to unlock their full economic potential (e.g. delegation vouchers).
The next few months and years will show which PoS design will help enable a secure, decentralized, and performant blockchain network.
We will see the staking and decentralized finance space merging and hopefully will be able to avoid some of the outcomes that made so many fall out of love with the legacy financial ecosystem. I remain hopeful that the crypto community can solve this puzzle and create more sustainable systems for human collaboration.
Follow Chorus One on Twitter and give our podcast a listen (there’s an episode dedicated to this article)!
Originally published at https://blog.chorus.one on August 9, 2019.
This week we witnessed the first slashing on the Cosmos Hub. A misconfiguration of one of the validators led them to double-sign a block, which the Cosmos Hub punishes with a 5% slashing of staked Atom deposits:
While in this case, the slashing was neither the consequence of an attack on the network nor the result of a compromised validator key, it demonstrates that slashing is real and that validators should carefully design their infrastructure to mitigate the risk of losing their own and their delegators’ funds.
We have already published a high-level overview of our architecture earlier, as well as carried out an audit to test if our architecture is at risk to be compromised by outside attackers. Today, we are following the practices of some of our fellow validators (notably Iqlusion, Certus One, and Figment) and release a comprehensive (19-page) overview of our complete validation estate:
We hope that this document will prove helpful to those eager to learn more about building and running validator infrastructure. Our architecture was designed following common security best practices without compromising the ability to scale and onboard new networks and upgrade node software swiftly, even as a distributed organization. In case you are left with questions or suggestions after reading this document, don’t hesitate to contact us on Twitter or through our Telegram community channel!
PS: Some of you that have checked out the document may have wondered why there’s no blurry pictures of our server racks; sadly, our vendor doesn’t allow mobile phones on the datafloor, so have a picture of Roosevelt, our platform engineer’s cat instead:
Originally published at https://blog.chorus.one on July 4, 2019.
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