This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.
Since this issue is the last one in 2019, we decided to collect people’s thoughts on staking in 2019 and their outlook for 2020. You can find these opinions that include protocol designers as well as validators in the second part of this issue.
STAKING DERIVATIVES & CENTRALIZATION
The past two weeks have seen some interesting discussions on centralization issues in Proof-of-Stake: Dan Elitzer, who coined the term superfluid collateral, wrote about his take on the impact of staking derivatives on Ethereum PoS centralization. His core point is that staking derivatives might increase centralization because some, e.g. those issued by large custodial players like Binance and Coinbase, will manage to attract superior liquidity.
Furthermore, Arianna Simpson wrote up a thread to which, among others, Vitalik Buterin responded, Arianna’s key points:
Delegation causing stake to accumulate to publicly-known validators increases the risk of collusion
Power laws favor larger validators with reputation and scale
Slashing is needed to impose a commitment to the network
Potential anti-centralization measures from the thread:
Social consensus around a minimum fee
Incentivizing delegation to smaller validators
Cryptography (zk-proofs) might help by limiting the value an attacker can extract
Vitalik’s added his thoughts on anti-centralization mechanics:
Lower performance requirement (i.e. lower block times, less high uptime requirements)
Sharding cuts down economies of scale by requiring validators with higher stake to run more nodes.
Finally, Vitalik's counterpoint to the cryptography argument is that you cannot ZK prove that you did not sign a conflicting message, meaning consensus will always rely on cryptoeconomic guarantees.
VALIDATOR BUSINESS MODEL DISCUSSION- Chainflow and the Decentralized Staking Defenders organized this first ever validator business model discussion. A diverse panel of validators shared their perspectives as key participants in the emerging Proof-of-Stake economy.
Here's a short-list of Chris’ conclusions and take-aways:
Validators need to offer value-added services on top of core validator operations.
Validators are well-positioned in the emerging staking economy.
Business models are in the experimentation stage.
Despite the uncertainty, some investors are willing to invest in validators at this stage.
You can find the full recording here.
SHELLEY LAUNCH- Cardano’s incentivized testnet launched with 240 external staking pools and over $200m in ADA staked. There’s a block explorer that seems to be missing some summary statistics, but it allows users to browse epochs, blocks, and existing staking pools.
NEAR ECONOMICS - Felix had the pleasure to host NEAR Co-Founder Illia for a Chorus One Podcast episode focusing in-depth on sharded blockchain economics in NEAR. NEAR also updated their slashing mechanism to adjust penalties proportional to the stake committing an offense (see also Staking Economy #28).
TERRA UPGRADE - The Terra network successfully upgraded from Columbus-2 to Columbus-3. Something notable about the upgrade is that validators are now required to run a price feed oracle. Running an oracle was optional and voluntary before Columbus-3. On Columbus-3 not operating one will result in a validator getting slashed. This seems to be the first example of a validator having to do something other than simply operating the validator itself as a condition to not get slashed. See the full release details here.
Now let’s hear what people have to say about staking in 2019 and what they are excited about in 2020. If you’d also like to contribute your thoughts to be featured in the upcoming first issue in 2020, please reach out to me (Felix) in any form (reply to this email, comment on Medium, join the Staking Economy Telegram, or DM me @FelixLts).
Gleb Dudka - T-Systems (Deutsche Telekom)
2019 has been a year of blockchain infrastructure and figuring out business models around its provision.
Representing Deutsche Telekom, Europe’s largest telco, I believe that providing and operating public network infrastructure is the next logical after telephony (voice), internet (information) and now public blockchains (value). I can also see more traditional enterprises entering the industry and helping favorably shape its regulation.
One might think that big corporates entering the space will further increase centralization and phase out smaller providers, but I tend to disagree. On the one hand, one of the niche markets for such Staking-as-a-Service are large institutional investors, where security and insurance are more important than low fees (B2B focus). On the other hand, ironically, corporates could leverage existing resources to come up with better services/tooling helping to democratize node operation and decrease barriers of network participation. This can potentially contest rising dominance of someone like Binance.
My main concern going into 2020 is the long-term sustainability of infrastructure provisioning business models and whether we as an industry got our network economics right.
Julius Schmidt - Staking Facilities
For us at Staking Facilities, 2019 was the first year where we felt a movement in the right direction in regards to blockchain regulations.
The German government published its blockchain strategy and put a law on the road regulating the custody of tokens. While those are great news in the first place, regulation is much needed, we quickly realized that regulators and policymakers all over Europe are still way behind on understanding the complexity of the technology. There are still some significant uncertainties for Staking-as-a-Service providers. AML 5 regulations, GDPR, taxation, to name a few.
While we as a PoS-community are moving full steam ahead on a technological and development level, policymakers started to regulate and understand crypto in 2017, mainly Bitcoin and PoW.
So what is needed?
We, as a community, have the unique chance to help shape blockchain regulations for the better. It is about nothing less than laying a rock-solid foundation for the adoption and growth of PoS networks. 2020 is going to be much about educating regulators/policymakers about the benefits of PoS vs. PoW, and every voice is needed.
Ateeta Sharma - Matic Network
Overall, I think it was a great year for Proof-of-Stake systems with lots of interesting developments and proposals. This year was an important period for us at Matic Network too. We finalised our staking economics in preparation for the final mainnet launch of Matic, and it was very important that we get the staking design in place. We also made significant progress on the implementation side as well, and released Counter Stake - our incentivised staking testnet as well. So far we have seen very good participation in the initial stage, and we are poised to build on this momentum next year.
Since we are a Layer 2 scaling solution, our staking design is noticeably different from Layer 1 networks. Matic PoS validators need to submit signed checkpoints of the snapshot of the Matic sidechain to Ethereum at periodic intervals. This is a key factor in our Plasma design. Our PoS layer is used for twin purposes - it is used to mitigate the data unavailability issue for our Layer 2 solution, and also to provide a standalone blockchain layer as well. Another key factor in our staking design was of the fixed token supply, and allocation of staking rewards via a fixed percentage of the supply.
We have seen good traction from the developer community as well, with a variety of use cases that we see being implemented across gaming, NFT marketplaces, social media, payments and others. We are also seeing a lot of interest from protocols on Ethereum now implementing on Matic as well and we believe this trend will quicken this next year. Looking forward to what’s in store!
Michael Ng - StakeWith.Us
Staking in 2019 felt somewhat like the 2017 ICO boom, with many delegated Proof-of-Stake chains launching and validator services starting out. My 2019 takeaway on staking are:
1. Initial 0% fees strategy proves that delegators are sticky. You might lose some price sensitive delegators when you raise fees later but the majority will stay. First mover + participating in incentivised testnet is key because foundation delegations contributes to substantial AUM and delegation aggregates towards "first page" validators.
2. Staking alone is not a VC-scale business, most validation shops have close to 0 differentiation and the staking business might not be sustainable. Reason being high inflationary rewards (selling pressure) is typically > any sort of buying pressure, for whatever reasons lol (speculation). Fees earned are denominated in tokens but fiat values usually doesn't hold due to selling pressure and market conditions. Validators have to innovate on other business models on top of staking to survive.
3. Starting to see centralized exchanges and/or custodians implementing staking to provide convenience (and liquidity, in the case of exchanges - almost akin to centralized staking deris) to keep users within walled gardens. Currently, delegators still values convenience over self-custody of funds (not your keys, not your money). This is concerning because you don't want the same 10 entities to control all proof of stake based networks. A truly decentralized and fungible staking derivatives with lots of buy-in from liquidity providers might be able to change that.
What am I excited for in 2020:
1. Continuous innovation in DeFi space, for e.g, i) a way to solve for undercollateralized loans, ii) a real fungible and decentralized staking derivatives, iii) some novel way of bootstrapping DEXs (global, cross-chain liquidity and trading protocol), etc.
2. Seeing new PoS projects launch or old project shifting onto Cosmos/Tendermint.
3. Any other novel ways to utilize blockchain technology without a token with forced utility.
Chris Remus - Chainflow / Staking Economy
It feels like 2019 was the year the staking economy’s floodgates opened. Cosmos going live was the catalyst. Since then, the number of staking networks launching continues to accelerate at an increasing pace.
Along the way, the difficult questions started emerging. Examples include whether PoS can ever achieve decentralization and how staking rewards should be taxed. The big question for me is whether the boom is sustainable or if a bubble is going to burst. And if it bursts, will a recovery follow that allows the staking economy to take root for the long term.
Chris Burniske’s article about the Fate of Ethereum Killers brought these questions into focus for me. There is a ton of smart contract capacity online and it’s increasing exponentially.
Will it result in an oversupply (probably)? If it does, how long will that oversupply last and what will it do to the underlying staking network economics? I find thinking about this within the Carlota Perez framework to be beneficial.
Validator communities also took early form this year. It’s been interesting to watch validators, core teams building the staking networks and delegators begin forming, storming and norming.
My sense is that the communities are for the most part supportive, yet could benefit from more critical thinking and discussion. There seems to be a general sense of not wanting to rock the boat in many communities. If it continues over the long term, this can hamper the staking ecosystem’s ability to innovate.
I’m also starting to sense a bit of elitism creeping into the staking “Old Guard” (very relative, of course). My hope is that validator communities continue to welcome and encourage new entrants. To do this validator communities need to exist as comfortable places for new and old to learn from each other.
Felix Lutsch - Chorus One / Staking Economy
While 2019 has been incredibly successful for staking, it also uncovered many challenges that we need to overcome if Proof-of-Stake is supposed to become the base layer for the internet of money.
The biggest challenge I see is whether decentralized networks will manage to create economically sustainable business models for participants and contributors. In my view, the focus needs to lie on protocol designs that encourage contributions and discourage centralization with a few large entities.
The community has made tremendous progress here and many promising experiments like testnet competitions, correlated slashing, tokenized staking positions, various decentralized governance and funding mechanisms, etc. are either out there as concepts, or were already adopted.
I want to conclude by thanking everyone that contributed their valuable opinions to this issue and to all readers that support Staking Economy - see you next year. Happy holidays!
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Staking Economy is written by Felix Lutsch from Chorus One with assistance from Chris Remus, operator of the Chainflow validators. Join us in the Staking Economy Telegram to discuss staking. Opinions expressed are our own and do not necessarily reflect the opinions of Chorus One. All content is for informational purposes only and not intended as investment advice.