Staking is emerging as a way of ensuring Sybil-resistance in permission-less, public blockchain networks. Delegation protocols allow anyone holding a Proof-of-Stake (PoS) cryptoasset to participate in securing these networks and being rewarded for it. An industry surrounding the staking ecosystem is forming. Low barriers to entry mean that any party dealing with staking tokens may become involved directly or indirectly.
After learning about validation and delegation, as well as the incentives in play when considering to participate in staking, this third part of the “Proof-of-Stake Ecosystem” series will cover which players can be expected in a PoS network.
The first group of stakeholders in PoS network that comes to mind are investors, which are usually split into a retail and institutional market. But not only investors will be holding staking tokens; a significant portion is usually held by foundations funding the development of a decentralized network. Other holders include entities dealing with cryptoassets as part of their business activities or as a result of their funding. Similarly, projects hosting their applications or assets on a PoS network might consider to improve the security of it by participating in staking.
Another important stakeholder group are third party services that facilitate the purchase, trading, storage and access to cryptoassets. These will need to consider if and how they will enable their customers to participate in this emerging space. Centralized exchanges, cryptoasset custodians and wallets belong to this group.
An essential emerging part of the PoS puzzle are third party infrastructure providers that enable participation in staking for all of these token holders. This group is also referred to as staking pools, staking providers, or delegation/staking services.
Finally, block explorers, rating websites and potentially delegation marketplaces will assist token holders in choosing fitting staking providers by aggregating information and curating available delegation services, which can be done in a variety of ways. The following graphic depicts an overview of potential participants in the PoS ecosystem:
As highlighted in the second part of this series, the decision to participate in staking comes down to a cost and risk versus rewards analysis that should be carried out by each potential participant. While some may choose not to participate in staking at all, those who will are essentially faced with the decision to either run staking infrastructure themselves, delegate to (a set of) staking provider(s), or potentially a combination of the two.
In the following, I will cover each stakeholder group shortly discussing their connection to staking including some examples.
This is the most diverse group that consists of individuals owning the staking token, ranging from developers and enthusiasts to a grandma that got gifted some cryptoassets by her grandson for Christmas. Retail investors may become part of the staking ecosystem in a variety of ways depending on how they store their cryptoassets. Some technology enthusiast will run staking nodes themselves to improve decentralization of their favorite project. Others might participate in staking through the exchange they decided to leave their cryptoassets on. Some will delegate to their favorite staking providers based on their own research, other will rely on information provided by staking service curation sites or marketplaces (current examples include sites like MyTezosBaker and marketplaces like Rocketpool or Vest).
The staking space for institutional investors differs from that of retail investors, as these entities are mostly bound by regulations or other limitations guiding how they may store and utilize their cryptoassets. Institutional investors include VC firms that invested in an early stage PoS project, hedge funds that may own a staking cryptoasset, and potentially a wide range of other traditional investment companies such as family offices or even banks. These entities may simply hire their own team to run staking infrastructure. Another option would be to partner with a professional staking provider, or to participate in staking through their custodian (see below). Finally, institutional investors can also make use of delegation protocols and outsource validation work by delegating to staking services. We are already starting to see early examples of institutional investors running their own validator infrastructure (e.g. Polychain), hybrid fund/staking provider structures (e.g. Mythos Capital and Mythos Services), as well as partnerships between funds and staking providers (e.g. Bison Trails and Notation Capital).
This is a group that is seemingly largely disregarded, but that might make up a significant portion of the staking market. Many companies and projects involved in the blockchain space will or do currently hold cryptoassets that could be staked. At this point these were mostly received in ICOs or through grants, with a few crypto payment processing companies serving as examples of businesses that are holding cryptoassets.
In line with the previous group that may hold stakeable tokens received in the fundraising process or through business activities, many projects and companies involved in the blockchain ecosystem may have an interest in securing the PoS network on which their application or assets are built. By staking the network’s native cryptoasset, such projects can help to improve how difficult it is to attack the network on which they are relying. An example of a blockchain startup that voiced their interest in staking is Gnosis.
This is one of the most important and controversial participants in a PoS network, as foundations are usually controlling a large share of the staking token. Participating in staking would potentially increase a foundation’s control over the network even further. On the other hand, foundation support for staking might be necessary to secure the network (especially in the early days). Furthermore, staking may provide a way to continuously fund development of a decentralized network. Delegation also enables additional ways to support parties advancing it (e.g. by delegating to validators that contribute to the project). The Tezos Foundation’s approach is an early case study in how foundations might participate in the staking ecosystem by seeding the ecosystem and lowering their influence overtime.
Cryptocurrency wallets have a variety of choices on how they may incorporate staking opportunities in their products. Some potential directions include running their own validator infrastructure or partnering with a staking provider to offer staking to customers. Another direction would be to simply incorporating the delegation protocol and to let users decide how they want to participate in staking themselves. Here, Balance is leading the way with early experimental drafts of how staking might be integrated in their wallet.
Centralized exchanges are another interesting case, as they are essentially controlling their customers funds and may potentially participate in staking on behalf of their users. Another option could be to create some separate type of staking account in their system or integrating a delegation option in the exchange interface itself. An early examples of an exchange participating in staking is gate.io.
Some cryptoasset owners are required to store their assets with a third party and others do not want to be in control of their private keys themselves, which is why a large market of cryptoasset custody services has emerged (BitGo, Coinbase Custody, PolySign, etc.). As an example, US hedge funds with over $150 million in assets under management need to store their assets with a certified custodian. This circumstance puts custodians in a potentially powerful position in the staking economy. Custodians might run their own validator infrastructure or enable customers to delegate tokens to a set of curated partner staking providers etc. Because custodians are a strongly regulated business, it is currently unclear if and how these entities will be able to participate in staking.
Finally, one of the most important emerging parties in the staking context are professional staking providers. These are entities that are focusing on creating secure and reliable staking infrastructure for delegators and other partners. These teams can work together with all of the parties as described above. Chorus One is an example belonging to this group that aims to provide a high quality staking service in multiple Proof-of-Stake networks. Some notable other staking providers that are helping to advance and educate people around the validator and staking ecosystem include Certus One, Cryptium Labs, Figment Networks, Lunamint, and Staking Facilities.
The following post of the “Proof-of-Stake Ecosystem” series will go into some more detail regarding factors that could threaten the security of a PoS network. The series will conclude with a discussion of potential mitigation strategies.
About Chorus One
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Medium: https://medium.com/chorus-one
Slack: https://chorus.one/slack
Telegram: https://chorus.one/telegram
Originally published at blog.chorus.one on November 21, 2018.
As cryptonetworks mature and move from development to usage, cryptoassets will be utilized in many ways. For example, Proof-of-Stake networks enable token holders to participate in securing the network and receive rewards by staking their tokens. To make the most of an investment in a cryptoasset, simply holding it will likely be a suboptimal strategy. Many networks reward participation by inflating tokens and handing them out to protocol following participants resulting in a dilution of non-participating token hodlers. The following post will go into the economic considerations that go into the decision of participating in a Proof-of-Stake network.
This is the second post of the “Proof-of-Stake Ecosystem” introductory series. The first post provided a basic introduction to PoS and the concepts of validating and delegating, you can find it here in case you missed it. Upcoming posts of this series will go into more detail regarding the parties involved in a Proof-of-Stake network, their positions and potentially centralizing factors.
Until now being a long-term cryptoasset investor was a rather straightforward experience: you obtain the desired cryptoasset, store it (or leave it on an exchange) and wait. The popularized “hodl” meme is the epitome of this approach that contrasts short-term trading strategies employed by many speculative crypto investors.
With the advent of protocols that allow for utilization of crytoassets, e.g. staking in Proof-of-Stake networks or lending out tokens, the optimal strategy for long-term investors probably won’t be to simply hodl.
In the following analysis, I will focus on the incentives of participating in a Proof-of-Stake network versus alternatives, especially contrasting validation and delegation. An owner of a Proof-of-Stake cryptoasset can essentially choose from the following options:
1.) Hodl, i.e. keep tokens liquid
2.) Stake
3.) Utilize tokens in another way
From an economic perspective, a rational investor should choose the option with the highest risk-adjusted return. In practice this means that a token holder should figure out what kinds of risks are involved (ideally quantify them), what the expected returns (after subtracting costs and considering other limitations) of the various options are, and finally compare the various alternatives to each other to make the optimal decision based on her risk profile.
To do this kind of analysis, it is important to consider important factors that validating and delegating in a Proof-of-Stake network introduce. These are:
Liquidity risk is prevalent in most Proof-of-Stake protocols; there is often a lockup period associated with staking to be able to penalize potential offenders and to prevent long range attacks. Without this period a malicious party could attack the network and withdraw their stake immediately leaving no chance for the protocol to punish the offense. Because a Proof-of-Stake network is permission-less, anyone fulfilling requirements (i.e. staking enough tokens) can join the validator set. That also means that there needs to be a way to disincentivize not following the protocol. Staked tokens in a PoS network are often subject to being slashed (destroyed) should a malicious action be detected by other network participants. A common slashable offense is the signing of two blocks at the same height, also referred to as double-signing or equivocation.
Additionally, returns in a Proof-of-Stake network depend on the performance of a validator. Failing to propose or verify blocks of transactions means missing out on rewards and can even result in liveness slashings, due to being offline for some extended period of time. Continuously signing and sending messages on behalf of staked tokens as part of the consensus process requires technical and operational excellence. Sound system architecture facilitating a high degree of security is a requirement to be able to guarantee continuous operation of validator infrastructure and to avoid slashings. A validator is an attractive target for parties that want to attack a Proof-of-Stake network. Compromising a validator node could potentially allow double-spend attacks on the network at no cost to the attacker, as only the validator (and his delegators) are subject to slashings should the attack fail. There are countless attack vectors such as DDoS attacks, compromise of validation keys by rogue employees or extortion by outsiders that should be considered when designing the technical architecture and key management system of a validator.
These factors show that building and maintaining a well-performing and secure validator requires technical expertise, time and a complex infrastructure including surrounding tools. When contemplating whether to start a validator operation these requirements should be considered and the associated costs calculated. At Chorus One, by the time of launch, we will have had three people spend a significant portion of their time for roughly a year working on our Cosmos infrastructure. A rational token holder will choose to delegate to a (set of) professional delegation service(s) when the cost incurred of building and operating validator infrastructure exceeds the cost of commission paid when outsourcing validation work.
For many parties whose core business is outside of this scope of secure infrastructure and key management operations, it likely makes sense to delegate tokens to (a set of) professional validators both from a cost and risk minimization perspective.
When considering to run validator infrastructure, there is also the option of accepting delegations, i.e. turning a validator into a delegation service. Doing this will incur further costs associated with operating a validator as a business. These include costs for marketing, customer support, business development, legal, etc. This will likely require a dedicated team and the success of such an operation will largely depend on the quality of the service provided.
The following table shows the most important dimensions and the associated characteristics from the possibility space of a cryptoasset investor introduced above.
As most of the listed options (currently) exclude each other, there are opportunity costs associated with e.g. choosing to delegate instead of loaning out staking tokens. As such, it is possible that staking yields and borrowing rates will converge (as Jake Brukhman from CoinFund notes in this blog post). Furthermore, in some PoS protocols, additional considerations such as varying treatment of reward payouts can also influence decisions.
Finally, there are many not purely financial motives that might be considered when choosing how to participate in staking. These include wanting to support particular parties (especially important in light of protocol governance), improving decentralization of the network, regulatory implications, conflicts of interest, user experience, benefits of staking with a validator on multiple networks and other value-added services that a third party delegation service may provide.
I hope this post gave you a basic understanding of how to think about incentives in a Proof-of-Stake network and the possibilities and risks that token holders in such an environment face. In the next post of the “Proof-of-Stake Ecosystem” series, I will go into what parties can be expected in a PoS network.
Chorus One is a provider of staking services and validation infrastructure with a focus on providing the highest degree of security and quality possible. Our goal is to help token holders earn interest on their cryptoassets. Visit our website and contact us to find out how we could support you in upcoming Proof-of-Stake networks.
About Chorus One
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Medium: https://medium.com/chorus-one
Slack: https://chorus.one/slack
Telegram: https://chorus.one/telegram
Originally published at blog.chorus.one on November 7, 2018.
This post is the first of a series that will introduce major Proof-of-Stake smart contract platforms. We will regularly add profiles to the “Proof-of-Stake Contenders” series covering the founding history, the team and basic components of the projects, including how their protocol is incorporating staking. The first contender will be the project that we at Chorus One have until now spent most of our time on: the Cosmos Network.
The main vision behind the Cosmos Network is that of an interoperable, scalable “internet of blockchains”. The project’s goal is to enable developers to easily spin up blockchains on a per-application basis, with components that can be switched out to fit the desired use case. To achieve this, the Cosmos Network is utilizing a modular design and a Hub and Spoke model, facilitated by a multitude of technologies and developer tools that enable communication between blockchains and pluggable features such as staking, slashing, governance, etc.
Before the Cosmos Network whitepaper was released in 2016, co-founders Jae Kwon and Ethan Buchman had already been actively working together on Tendermint, a BFT (Byzantine fault-tolerant) algorithm devised to achieve consensus in an adversarial distributed setting, which serves as the basis for the Cosmos Network. Jae Kwon is the author behind the 2014 Tendermint paper, which was one of the first papers that described a possible alternative to Proof-of-Work in public blockchains drawing on distributed system research. Ethan Buchman’s thesis from 2016 on Tendermint remains one of the best technical introductions to blockchains to this day. The two are the leading forces behind the company Tendermint, which is developing the Cosmos Network on behalf of the Interchain Foundation.
The Cosmos Network fundraiser took place on the 7th of April 2017 and was one of the most popular at the time. In the Cosmos fundraiser, participants contributed over $16m in around 30 minutes to receive 168,475,963 Atoms at network launch (at a rate of ~$0.10 per Atom). The rest of the Atom allocation (25%) are distributed to the Interchain Foundation (10%), All in Bits (aka Tendermint) (10%) and seed investors (5%) at launch. The fundraiser raised a record amount at the time, on par with the Ethereum fundraiser but completed in a much shorter time.
The project has been in development since and managed to gather an active community, especially around the staking and validation ecosystem, with over 250 entities registering for the final incentivized testnet (300,000 Atoms are going to be distributed) taking place in November 2018 before the mainnet launch that is scheduled to happen at the end of this year. The testnet dubbed Game of Stakes will test the security and performance of validator infrastructure by simulating and encouraging adversarial behavior between participating parties.
The Cosmos Network is made up of many components, many of which are modular to allow for high degrees of freedom for developers that want to use the Cosmos Network to host their decentralized application. There are two main technical components to the Cosmos Network, the consensus engine (Tendermint Core) and the application interface (ABCI). The Cosmos SDK is a toolkit written in Golang that developers can use to write applications using their own modules or the ones provided by the Cosmos team.
The heart of the Cosmos Network is the Cosmos Hub, which is going to be the first blockchain in the Cosmos Network. Zones connect to the Hub and are able to send transactions to each other through the Hub. Zones will host applications built on the SDK. An example could be a decentralized exchange (DEX) that runs on its own zone. The IBC protocol developed by the Tendermint team provides a standardized way for blockchains to communicate.
In the future there could also be other Hubs with their own Zones that connect to the Cosmos Hub. Zones can have their own set of rules, modules, and even validator sets. There are many concepts for zones in various stages of development, some of the most interesting ones include Ethermint and Ethereum or Bitcoin Peg Zones.
Ethermint is a fully Web3-compatible implementation of the EVM running on the Cosmos Network; it allows Ethereum applications to be ported over to Cosmos to benefit from higher throughput and instant finality. Peg Zones describe bridge blockchains that implement a way to transfer tokens from foreign blockchains into the Cosmos Network via a two-way peg. The Cosmos team has also come up with interesting ideas on how one could onboard the Ethereum community to the Cosmos Network, e.g. by issuing a token (Photon) that essentially mirrors balances of ether holders through a so-called hard spoon (you can learn more about this concept here).
The Cosmos Hub is a Proof-of-Stake blockchain that is secured by the native cryptocurrency of the Cosmos Network: Atoms. Atoms are bonded to (staked with) validators either by validators themselves or by other stakeholders (delegators). Delegators are able to delegate their stake with whichever validator(s) they wish to. If you want to learn more about validation and delegation in Proof-of-Stake, check out this blog post first.
To be able to achieve high performance, the Cosmos Network validator set is limited to 100 validators at launch. There are many cryptoeconomic mechanisms (incentives and penalties) in place to ensure that the protocol runs at it is supposed to, some of these include slashings and lockup periods. Slashing refers to destruction of locked up stake when undesired behavior is detected (through cryptographic evidence). These attributable actions include signing two different blocks at the same height (also called double-signing or equivocation) and being unavailable (offline) for an extended period of time. The lockup of three weeks (in Cosmos: bonding period) is required to prevent long range attacks.
The important thing to note is that in Cosmos, token holders delegating their stake to validators are held responsible for their validators’ actions. This means that they receive rewards in relation to the performance of their validator(s), but also face risks of slashings due to validator misbehavior. This is done to ensure that delegators do their due diligence and choose to delegate to trusted, non-malicious validators with a secure infrastructure setup.
For taking part in securing the blockchain ledger, the Cosmos Network compensates stakers (validators and delegators) with block rewards in the form of inflated Atom tokens and transactions fees paid by users of the network in whitelisted tokens of the Cosmos Network (in the beginning only Atoms, but overtime this may include whatever tokens validators are willing to accept). Returns from staking in Cosmos are based on a variety of factors. Some of these are related to the state of usage of the network and some to the performance of a validator.
The network will likely have negligible transactions fees due to its performance, especially in the bootstrapping phase. This means that rewards for staking will mostly depend on inflated Atoms. The annual inflation rate is targeted to be 7%, which will be reached if more than 66% of the total Atom supply have been staked for an extent period of time. If there are less than 66% of Atoms at stake, the inflation rate will gradually adjust and rise up to a ceiling of 20%.
The image below shows the range of possible annual yields in Atoms when delegating at an assumed 15% commission rate. The chart is cut off at a 20% of total Atom supply staking because at very low staking levels effective yields from staking reach extremely high rates of above 100%. Because of the dynamically adjusting inflation rate effective yields will gradually move towards the upper bound when below 66% of the supply are staking and towards the lower bound when above 66% of the supply are staking respectively.
This analysis shows that incentives in the Cosmos Network are designed to heavily encourage staking, as the Atom is mainly designed to be a staking token on which the security of the Cosmos Network depends.
Finally, Cosmos also features an on-chain governance mechanism that is going to ensure that protocol upgrades happen in a formalized manner. Atom holders will vote on governance proposals with a 1-token-1-vote system. Governance proposals can be submitted by anyone, proposals with a minimum amount of deposits behind them enter a voting period. Delegators will inherit the votes of their validators, but are also able to vote on governance proposals themselves by overriding their validators decision. If a proposal fails, the deposited tokens are lost. To learn more about the Cosmos governance process, check out the documentation here.
Due to its proximity to the Ethereum ecosystem, focus on decentralized applications, and due to Tendermint being one of the most advanced BFT algorithms in production, many projects are already building or consider to host their applications on the Cosmos Network once it goes live. A collection of candidates that have expressed an interest or are experimenting with the Cosmos SDK and Tendermint, including projects like OmiseGO, BigchainDB, FOAM and many others is available in this thread on the official Cosmos forum.
Cosmos is a visionary project with a sound design that pioneered many concepts which were adopted by other cryptocurrencies. Our team at Chorus One is extremely excited about the upcoming Game of Stakes testnet competition and to finally be able to demonstrate the robustness of our validator infrastructure in an adversarial setting. To stay up-to-date with our operations and the nearing launch of the Cosmos Network, visit our website or join the mailing list and other social channels linked below.
About Cosmos
Cosmos Network Website
Cosmos Blog
Cosmos Twitter
Whitepaper
Cosmos For Developers
Introduction
Cosmos Academy
Documentation
Github Cosmos SDK
Github Tendermint
More on Staking and Delegating
Chorus One Proof-of-Stake Blog Posts
Cosmos Delegator FAQ
[Technical] Introduction to the Proof-of-Stake Security Model
[Technical] PoS FAQ Ethereum
About Chorus One
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Medium: https://medium.com/chorus-one
Slack: https://chorus.one/slack
Telegram: https://chorus.one/telegram
Originally published at blog.chorus.one on October 26, 2018. Featured image by Richard Lee taken from Unsplash.
Proof-of-Stake (PoS) is still a foreign concept to many, even within the blockchain space. Yet we see most next generation protocols adopting PoS approaches and a large ecosystem will form around the alternative to Proof-of-Work (PoW). Similar to how PoW gave rise to a multi-billion dollar industry centered around mining (ASIC producers, mining farms and pools, etc.) there is an opportunity for new types of network maintainers emerging.
To reason about how this market may evolve, we need to take a step back to understand Proof-of-Stake, its main actors, their incentives, as well as differences in PoS implementations. This post is the first of an ongoing series that will try to do just that by providing an analysis of the PoS ecosystem and how we at Chorus One have been thinking about this space while building out own staking operations over the past few months.
The first part of this series will provide a basic introduction to PoS and the concepts of validation and delegation. As some readers might know, I have already written about the different types of staking. The “Proof-of-Stake Ecosystem” series will focus on pure PoS implementations, meaning those in which the consensus process is directly influenced by the stake. But what does that mean in practice?
If we look at PoS from a high level the concept is quite clear; the term refers to a system where value at stake is the main determinant of which blocks are added to the blockchain. Participants in a Proof-of-Stake network essentially vote with their money on blocks of transactions that they deem valid, get rewarded if the majority of the network agrees and risk losing their stake (deposited tokens) if they try to cheat, e.g. by voting on two different blocks of transactions at the same time.
In PoS money is power; instead of requiring participants securing the network to spend electricity (PoW), PoS requires participants to acquire and utilize the network tokens themselves as security deposits to align them with the networks’ interests.
Staking in a PoS blockchain refers to depositing tokens in a smart contract to register the intent to take part in maintaining the blockchain ledger. Once these tokens (the stake) are registered in the network, the staking party is required to run node infrastructure that will participate in the consensus process by receiving, signing and sending messages (about blocks of transactions) to other peers in the network. The combination of stake and node infrastructure is commonly called a validator. The amount of stake registered in this way determines the influence in the consensus process and the rewards a validator receives for the work it performed. The graphic below illustrates this process that is often referred to as validation.
If the story ended here, to participate in Proof-of-Stake one would need to a) own the staking tokens and b) be able to run the infrastructure required to take part in validating the blockchain.
But then what would happen with token holders that want to stake their tokens to receive rewards but cannot, or do not want to operate the required validation infrastructure themselves? It turns out that the developers of most PoS protocols have thought about this case and figured out ways to enable token holders to stake their tokens with a validator that they do not run themselves, without requiring them to actually send the tokens to the validator, using a process that is commonly called delegation.
Delegating your tokens means letting them count towards the stake of a validator in return for a share of the reward received. In practice, a delegator deposits tokens in a smart contract specifying the validator whose influence in the network he wants to increase. As a result, the rewards earned in the validation process increase, but instead of only the validator receiving compensation, the rewards are automatically split between the validator and the delegator depending on how the delegation smart contract specifies it, usually by applying a simple commission rate as pictured below.
It’s important to note that this process is a) non-custodial, i.e. a validator can never access token holders staked cryptoassets, b) capable of being reproduced on any smart contract platform, and c) expandable in many ways, the example above only illustrating the idea behind the concept of delegation.
Point b) and c) become especially apparent when one looks at how PoS and delegation mechanisms are currently designed in protocols such as Tezos, Cosmos, Ethereum (developed by third parties, e.g. Rocket Pool), Cardano, etc. There are massive differences in how delegation is implemented in these protocols, especially with regards to payout distribution and the treatment of parties that delegated their tokens to malicious validators, I will touch on some of these differences in the final part of this series.
The next post of this series will be about incentives and disincentives in the Proof-of-Stake ecosystem. It will try to lay out which factors drive the decision to delegate tokens instead of operating validator nodes yourself, or even starting your own delegation operation. To be the first to hear about new posts, sign up for our email list, follow the Chorus One Twitter account, or join our other social channels.
About Chorus One
Website: https://chorus.one
Twitter: https://twitter.com/chorusone
Slack: https://chorus.one/slack
Telegram: https://chorus.one/telegram
Originally published at blog.chorus.one on October 19, 2018.
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