From the data point of view, what does staking mean for the PoS network?

Editor's note: Today's article is more about trying to get a discussion about the topic of staking. The text is worth reading. Although in accordance with the "PoW and PoS big debate" released yesterday, I don't fully agree with this article. Some conclusions from the data.

The purpose of this paper is to clarify some misconceptions about token inflation and staking revenue by comparing PoS and PoW networks. At the same time, metrics are introduced to measure the network's own investment in infrastructure. All data used is based on snapshots of Cosmos, Tezos, Ethereum and Bitcoin.

Many project parties have promised to participate in staking to get a high amount of token-denominated income. But this does not necessarily mean that staker can get high returns. To understand why this is happening, we need to understand what staking in the PoS network really wants to achieve.

The PoS network imposes an inflation supply on tokens to reward stakers as a reward for their pledge tokens. These tokens, in turn, act as network maintainers (verifiers) to comply with network specifications and maintain collateral for the normal operation of the network.


Network security spending

In the PoW network, all rewards in the form of inflation tokens (block rewards) and fees will flow into the hands of network maintainers (miners). But even in the Ethereum network, the fee paid to miners only accounts for 3.12% of the total reward (compared to 1.56% of Bitcoin's network and early near-free PoS networks such as Cosmos and Tezos), the main source of income for miners. Reward in the block. In the Bitcoin network, the annual fee and block rewards totaled $3.6 billion, or 3.93% of Bitcoin's total market capitalization.

The annualized income of the Ethereum miners reached 4.91% of its total market value (of which 4.76% is block reward income and 0.15% is fee income). Miners usually choose to sell inflation tokens to pay for hardware and electricity bills and retain a portion of their profits.

By diluting the tokens held, the PoW token holder is actually equivalent to paying for the network's permission-less. So based on this mechanism, the current standard of bitcoin holders' current relative token supply has shrunk by 3.7% per year.

In a PoS network, network security costs are more complicated. PoS network staking process has a variety of risk factors – the risk of token loss due to slashings, the risk of token liquidity caused by locks in the pledge phase, staker will also be compensated. Then, there is the actual operating cost of the infrastructure, which is necessary to participate in the consensus in the PoS network (ie running a verification node). Each token holder can take a stake, or by commissioning a token to the verifier in exchange for a certain commission rate for the staking return.

In the following paragraphs, I will argue that the network security expenses paid to infrastructure providers can be deducted from the average commission rate prevalent in the PoS network:

From the commission rate weighting method, each staking provider in the network (in this analysis, Cosmos and Tezos) charges the tokens they represent and protect, and thus can calculate the weighted average commission rate. This indicator can show that under the condition of which tokens are awarded, most of the principals in the network are more willing to give up the rewards and then safely outsource the network verification work to the staking provider.

Multiplying this metric by the total entrusted token value allows us to get an approximate cost of maintaining the infrastructure in the PoS network (assuming the certifier/contractor market is efficient and the price data on the chain is accurate). The remaining rewards in the network will be distributed to the token holders participating in staking to compensate for the risks they are exposed to in staking. However, these people are not providers of maintenance infrastructure (and in the PoW network, all rewards are attributed to miners).

From this perspective, the PoS network implements a de-licensed blockchain network in a resource-efficient, scalable, and more inclusive manner (I won't discuss PoS and PoW in this article) topic).

Looking at the data collected from the two early PoS networks (Cosmos and Tezos) and the two major PoW networks (Bitcoin and Ethereum), we can see that in the PoS network, the infrastructure expenditure calculated by the above measurement method is smaller than that of the PoW network. An order of magnitude (about 10% of the original block reward) – although the PoS network is still in the early stages of development and relatively weak.

In Tezos, 88.99% of online rewards were distributed to staker, and 11.01% were paid to infrastructure providers (a commission rate-based weighted average algorithm based on snapshot dates, which is 90.26%: 9.74% in Cosmos).


Impact on individual share in token supply

Through staking tokens, staker can get a portion of the reward to offset the dilution of value brought about by the token inflation supply process. At the same time, staking means either investing in resource-operating infrastructure or outsourcing this work. In addition, the income generated by staking should also be considered in the scope of taxation. On the other hand, tokens held by token holders who do not participate in staking will be diluted to ensure the security of the network (this is also the status of PoW).

All in all, the party participating in staking always has a higher share of the token supply than the other party who is outside the game. This is determined by the potential liquidity risk and penalty risk compensation during the staking process. In addition, whether staking will increase the relative token supply ownership depends on the rate level, the overall staking level in the network, and the tax situation.

In a network with a "low" staking participation rate, even if the tax rate is deducted, the agent's share of the overall token supply will increase (as is now the case with Cosmos). In addition, because the handling fee will be allocated to the users participating in staking in the PoS network, long-term staking is a good way to earn revenue.

The share of Ethereum holders in the overall token supply is reduced at a rate of 4.55% per year. Holders of Cosmos Atom can avoid the dilution of their token value by staking. In the pre-tax case, if he takes all the tokens, his share of the total token supply will increase by 3.9% instead of 5.04% (the difference is 8.94%) – we assume that the snapshot data remains in the current year. effective.

In addition, some networks may also allow new tokens to enter the supply system in some way, such as issuing tokens through a development team or other distribution scheme. If these factors are taken into account, the share of holders and staker in the total supply of tokens will be further affected. This can be said to be a more important factor, but it is beyond the scope of this article.


Author: Felix Lutsch

Original link:

Translation: ClockworkPrince

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