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.
Cosmos Bonded Proof-of-Stake is the first major implementation of a permission-less BFT protocol. The well thought out protocol features many nuances ensuring that the Cosmos Hub blockchain is performant and that the security of the system is economically guaranteed even in the presence of malicious actors. Yet, in our view, the design space of Bonded Proof-of-Stake has barely been scratched. It’s important to explore alternative designs that can improve the user experience and the economic potential of Proof-of-Stake.
During the Cosmos Hackathon (Hack4Atom) in Berlin, the Chorus One team in cooperation with Sikka implemented changes to the staking logic in the Cosmos SDK that would allow stakers to increase utilization of their staking positions and additionally allow for a more user-friendly delegation process. These changes will open up a wide range of use cases that, in the current implementation, can only be achieved through custodial counterparties (e.g. exchanges).
We achieve this by creating a representation of staking positions we call “Delegation Vouchers”; validator-specific fungible tokens that can be traded and used in decentralized finance (DeFi) products. The following post aims to lay out the details of our implementation, its advantages, and potential use cases. You can find our implemented hackathon code on Github and a recording from the hackathon presentation itself on YouTube.
We implement a delegation pool for each validator on a Cosmos SDK chain. Instead of directly delegating to a validator, delegators transfer their Atoms to their desired validator’s pool. The pool automatically delegates to the respective validator and accrues rewards on behalf of the collective of delegators. Delegators receive delegation vouchers representing their share of the pool in return. These vouchers are fungible tokens that can be redeemed with the pool to receive their share of the pool’s updated holdings (a fraction of the delegated Atoms + accrued rewards — slashings). This is achieved by tracking a conversion ratio (Atoms/vouchers) between delegation vouchers and bonded Atoms for each validator pool. Accruing rewards increase the conversion ratio, while slashings decrease the conversion ratio.
All staking operations can be modeled using delegation vouchers. The user experience of staking on such a Cosmos SDK chain improves because rewards don’t need to be manually claimed by delegators anymore. Instead, rewards accrue for each validator pool on a per block basis. Unbonding is modeled as the burning of vouchers and receipt of underlying Atoms (calculated as vouchers times conversion ratio) after the unbonding period. Redelegation is modeled as the burning of vouchers combined with the issuance of new vouchers corresponding to the validator that received the redelegation. Newly issued vouchers resulting from a redelegation are non-transferable (frozen) for one unbonding period to make sure delegators remain accountable for infractions that were committed by the validator they redelegated away from.
Delegation vouchers could be traded at a discount bringing liquidity to staked Atoms, e.g. allowing delegators to sell vouchers on a decentralized exchange instead of unbonding. Additionally, delegation vouchers can be used in decentralized finance applications, e.g. as collateral in a DAI-style stablecoin system or in a Compound-like money market protocol. In addition, we believe delegation vouchers could allow for a market-based mechanism of ranking validator quality because delegation vouchers will need to be priced based upon their liquidity and the slashing risk associated with validators. Pools of delegation vouchers can be implemented allowing the creation of diversified tokenized delegation indices such as a Decentralization Index (pictured below). An example would be a Decentralization Index voucher tracking the delegation pattern of the Interchain Foundation. Holders of the Decentralization Index voucher will be able to foster geographic and voting power decentralization without requiring them to pay the mental cost of researching and evaluating validators. These are just a few of the possible use cases. Since one will be able to easily transfer delegation vouchers to other chains via IBC, they will enable permission-less and unbounded innovation.
While delegation vouchers may increase the security of a PoS system because there is less need for unbonding or holding liquid staking tokens, there may also be emergent types of attacks, e.g. a validator shorting his own delegation voucher and double-signing. Implications of this model need to be researched in detail. The model also raises concerns about systemic risk that could potentially arise from multiple usage of collateral. It remains too early to definitely comment on the second and third order effects of such a design.
We will do a more detailed write-up and explore extending functionalities to enable products like staking indices. In the medium term, we would like to explore a proposal to change the staking model of the Cosmos Hub to increase the utilization of staked assets. If you have feedback on our design, please let us know! Reach out to us on Telegram with your comments or if you are interested in collaborating.
Originally published at https://blog.chorus.one on June 20, 2019.
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