#31: Staking vs Lending

Binance 0% staking, token lending and PoS security implications, Stake DAO, updates on Eth2.0 and incentivized testnets.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

BINANCE STAKING
Binance is ramping up their staking offering and has announced support for Cosmos and 0% fee staking on Tezos. While many have been awaiting these types of moves, they are now quickly becoming a reality. Coinbase Custody quickly became the third biggest public validator on Tezos even with a 25% fee, their growth somewhat slowed down by Tezos’ bond requirement that Coinbase is posting themselves. It is currently unclear how Binance is approaching the potential of slashing of customer funds.

Token holder education and ways that enable non-custodial providers to compete with centralized, custodial players like exchanges (see e.g. Stake Capital DAO below) need to come into reality for Proof-of-Stake networks to achieve decentralization and avoid a Tron-like destiny in which Binance could control 25 of 27 nodes.

STAKING VS LENDING
A paper by Tarun Chitra modeling the impact of lending yields on staking participation in Proof-of-Stake networks. The basic conclusion is that a spike in lending rates could see stake migrating to higher yield lending protocols, potentially endangering the security of networks.

Haseeb Qureshi wrote a post summarizing the results. While the core insight is relatively trivial, the paper formalizes factors impacting this equilibrium and uses agent-based simulations to visualize outcomes. The core takeaway is that network monetary policy needs to be flexible to account for this type of attack.

STAKE DAO
Staking provider Stake Capital announced their plans to form a revenue-sharing DAO around their services. A token that is distributed to users providing collateral (staking) will allow holders to earn part of the fees earned by services offered by the DAO across blockchains.

Another core part of the design is the issuance of secondary tokens (LTokens) representing the claim on collateral provided to and rewards earned by the DAO. LTokens fall into the category of staking derivatives and are designed to overcome liquidity limitations of staked assets in current networks. You can find the whitepaper draft of the Stake Capital DAO design here.

This ambitious vision sees other node operators providing services to the DAO over time. Many implementation details and the legal implications of associated tokens currently remain unclear, but overall this feels like an important experiment worth following.

ROAD TO MAINNET
A block explorer for Eth2.0’s beacon chain testnet: https://beacon.etherscan.io/. Prepare for ETH staking and refresh your memory of the phases of Eth2.0 and learn about the distinction between nodes and clients, as well as the protocol’s design philosophies here.

Many testnet competitions are in progress with the goal to test protocol software and to get validators ready for mainnet:

HARMONY ECONOMIC ANALYSIS - A post diving deep into the economics of Harmony in different scenarios prepared by the team in collaboration with Delphi Digital.


Follow Staking Economy on Twitter or subscribe to the newsletter to make sure you don’t miss an issue.

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.

#30: Validating Infrastructre

Bison Trails raising $25.5m, high availability validation on Solana, taxation of staking rewards, OAN Unity launch and more.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

BISON TRAILS RAISE
With $25.5m raised in their Series A, white-label blockchain infrastructure provider Bison Trails takes the crown for the largest non-protocol raise (to our knowledge) in the space in 2019. Congratulations!

This round shows that the market believes there is a large opportunity in operating secure infrastructure for blockchain networks. We expect this raise to increase interest in this space and hope that the team will contribute back to the ecosystem by improving tools and practices to enable diverse and performant networks.

SOLANA STRONGGATE
An upcoming open-source protocol developed by the Chorus One team to allow for high availability validation on the Solana network.

Infrastructure failure handling in Proof-of-Stake blockchains is a highly sensitive topic since mistakes can mean loss of funds in the form of slashing penalties. StrongGate will allow validators to run failovers while eliminating the risk of accidental double-signing. The protocol could also be adapted to help validators automatically scale their infrastructure depending on network load, potentially reducing costs significantly, see also Solana CEO Anatoly Yakovenko’s tweet thread on the topic.

PRIMER ON TOKEN DESIGNS
A comprehensive walkthrough on the state of token economics. Richard Li, COO of Certus One, goes into different mechanism designs currently being explored in the space providing examples and insights from other ecosystems (e.g. in-game economies).

The long read also includes some cool ideas on how validators could differentiate their service, e.g. through an insurance pool or by offering benefits like gift cards to delegators. It also teases an upcoming guide on validator economics and a fungible staking token design, so stay tuned for more content from one of the strongest validator teams out there!

TAXATION OF STAKING REWARDS
Taxation of staking rewards is a highly debated topic. Are they income? Do you have to account for rewards when you receive them or when you withdraw them? Or only when you sell tokens? Is there a difference between block rewards and transaction fees? What about staking provider commissions?

The article above presents an argument for why block rewards should not be taxed as income, focusing on explaining how staking prevents network maintainers from getting diluted. There are many initiatives forming to represent the interests of the staking industry (e.g. PoSA) and aiming to educate regulators about this new paradigm of securing public infrastructure. It remains to be seen how different jurisdictions will deal with these issues.

OAN UNITY LAUNCH - The Open Application Network (OAN), formerly known as Aion, launched the Unity upgrade on November 20th. The OAN follows in Decred's footsteps and uses a hybrid consensus protocol. The OAN team developed a staking interface that allows AION holders to stake to the set of validator launch partners. You can also see the list of validators on Staking Facilities without having to login to the OAN interface. Finally, there is an updated whitepaper answering questions about incentives, block distribution, and network security.

KAVA LAUNCH - It turns out the third time’s a charm for Kava’s launch. The network launched successfully on November 14th, 4 days before Maker’s Multi-Collateral DAI went live. Congratulations to the team for responding quickly and consciously to the lessons learned and applying those lessons thoroughly and consistently to enable mainnet launch!


COSMOS VALIDATOR MONITORING AND ALERTING- Chris is building a Cosmos validator monitoring and alerting tool after receiving an ICF grant to do so. He’s published an initial spec for comment and would appreciate the community’s feedback. This initial feedback window will close in the next few days. The tool is being built to benefit any and all validators on networks built using the Cosmos SDK. It will be open-sourced when completed. If you plan to use the tool when it's available, this is your chance to help shape it to your specifications!


Follow Staking Economy on Twitter or subscribe to the newsletter to make sure you don’t miss an issue.

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.

#29: 0 to 100 (% Slashing)

Discussions of 100% slashing penalties, Celo and NEAR PoS economics, Kava relaunch, and various other network updates.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

SLASHABLE STAKE
discussion on the Solana forums around the possibility of slashing penalties that amount to 100% of the staked tokens. Currently, most Proof-of-Stake protocols are designed so that only a fraction of the staked amount is actually at risk. As an example, in Tezos only the baker bond which amounts to 8.25% of a validator’s overall stake is slashable, while in Cosmos currently a maximum of 5% of funds staked with a validator can be slashed.

Higher slashing penalties may incentivize diversification, as well as a more secure and robust validator set. On the other hand, especially in the early phases of a network, the extra risk might not be worth the reward resulting in less participation in staking overall, which would make the system more vulnerable to attacks.

It seems likely that penalties will increase over time once hardware and software have matured and when audits and insurance products are commonplace. As there’s a large spread between current slashing rates and 100% slashing, it will be interesting to watch as networks experiment to see how validator and delegator participation are affected.

CELO PoS 
Two posts on Celo’s Proof-of-Stake model: the first one serving as an intro to PoS highlighting Celo’s unique mobile-first light client model, and the second one diving deep into Celo’s consensus protocol, the staking process, as well as associated rewards and penalties.

Celo is innovating on quite a few fronts with respect to their economic design; some interesting factors are the introduction of validator groups, separating rewards for stakeholders voting for validator groups from those of elected validators, and finally an “uptime score” that impacts rewards to incentivize long-term validator availability.

NEAR ECONOMICS-  An insightful video explaining the economics behind NEAR’s Nightshade sharding design. Interesting features include a new concept NEAR calls “hidden validators”, an adaption of Ethereum’s proposed EIP-1559 fee model, expiring transactions, and dynamically adjusting issuance to have a minimum annual reward of 5% on the total supply. To illustrate this clever mechanism: if there is no income from usage through fees the token supply will be inflated by 5% to reward validators, while if an annual equivalent of 4% on the total market cap is earned through gas fees, newly issued tokens will only amount to 1%.

KAVA MAINNET (RE)LAUNCH - The Kava Network launch was scheduled to happen last week. Validators were prepared and started the launch process at the scheduled time. After achieving quorum on the first block, then failing to achieve quorum for over two hours on the second block, it became clear that a network fork had happened.

As a result, the launch was cancelled and rescheduled for Nov 12th, 2019 at 14:00 UTC.  The Kava team published both pre- and post-mortems. Their analysis pointed to the late release of an updated genesis file and only a small number of validators participating at launch as root causes of the failed launch attempt.

INCENTIVIZED TESTNETS

  • Celo Stake Off: The team at Celo announced their incentivized competition running on top of the Baklava testnet. In total, the top 50 teams by accumulated testnet tokens and various other criteria will be rewarded with up to 2 million mainnet staking tokens (Celo Gold, dollar-equivalent value unknown).

  • Cosmos Game of Zones: With the first version of the inter-blockchain communication protocol IBC going live, Cosmos just officially unveiled a testnet competition to battle-test communication between chains. Total price money amounts to 100,000 ATOM (~$370,000 at the time of writing). Also check out the new website to learn more about IBC.

  • Matic Counter StakeLayer-2 scaling solution Matic announced the launch of their incentivized testnet to test their Plasma implementation. Matic node operators process transactions on their PoS sidechain while also checkpointing to Ethereum. Total price money will amount to more than 3 million MATIC (>$42,000 at the time of writing).

AION UNITY & OAN - Aion announced validator launch partners of their Unity mainnet, which is a hybrid PoW and PoS network, in advance of the upcoming launch. The team also announced a re-branding campaign. The network will now be called the Open Application Network (OAN), an “open source public infrastructure that creates a new design space for Open Applications”. The network will be “secured by AION, its digital asset”.

STAKERDAO - Jonas Lamis, founder of one of the earliest Tezos bakers Tezos.Capital, announced his plans to form the StakerDAO, a project making use of an adaption of the Tezos governance process to launch and manage decentralized financial products.

PRYSMATIC and CASPER REDDIT AMAs - Two Ethereum-relevant AMAs took place this week. The Prysmatic team went on the EthFinance Reddit to talk Eth 2.0 and Casper researchers updated the Ethereum community on their progress on the consensus algorithm. Some insights from these AMAs:

What needs to be finalized before the launch of Eth 2.0 Phase 0 (Prysmatic):

  • Multi-client public (incentivized) testnet

  • Client security: security audits of code and libraries used

  • Finalize economic parameters

  • UX improvements with real users around staking experience, monitoring, etc.

  • Implement and optimize slashing

The biggest bottlenecks in CBC Casper:

  • Load balancing across shards to optimize scale and performance

  • Designing architecture requirements for a production system without putting protocol guarantees at risk

  • Adapting the consensus protocol to a public Proof-of-Stake network


Follow Staking Economy on Twitter or subscribe to the newsletter to make sure you don’t miss an issue.

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.

#28: Proportional Slashing

Adjusting slashing based on stake, validator governance, network updates from Kava, NEAR, and more.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

SLASHING AS A MEANS TO DECENTRALIZE
Cosmos Hub proposal by Sunny Aggarwal to adjust slashing penalties to more severely punish correlated faults in a Proof-of-Stake network. This mechanism would increase the slashed amount if a higher degree of the voting power got slashed within a certain time frame. The design’s goal is to incentivize secure and diverse validator setups.

A similar approach is taken in ETH2.0, where an increase in the percentage of stake going offline or equivocation will result in lower rewards/higher punishments (see also this explanation of the inactivity leak).

Check out the forum post for an interesting discussion around the impact this proposal might have.

GOVERNANCE & VALIDATION
A case study dealing with the downsides of linking staking for network security and governance decision power in a PoS network (as done on the Cosmos Hub). Gavin Birch takes a look at how seeking governance influence as a prime motivator is challenging other validator business models.

One suggestion is to separate delegation for network security and governance, e.g. enabling holders to delegate their governance voting weight to any other account. Such a distinction might allow parties seeking political power to gain influence without requiring them to run validation infrastructure. There’s room for a lot of experimentation in this space and it remains to be seen which model will work best to foster a secure network and an engaged community.

VALIDATOR BUSINESS MODELS — Chris is organizing a validator business model roundtable discussion. A growing thesis within the staking community is that running validators is a commoditized service. To differentiate themselves, validators also need to offer higher value services. The roundtable will discuss key questions related to this thesis, among a balanced group of larger and smaller validators.

ETHEREUM KILLERS— Placeholder’s Chris Burnsike put out an excellent piece with his thoughts on the valuation of many of the upcoming smart contract platforms competing for Ethereum’s throne. The post goes into the various reasons why Chris expects there to be extreme downward price pressure for these token projects focusing on the current disparity between supply and demand for trustless computation.

KAVA IEO & TOKEN MODEL — Felix wrote a summary of Kava’s design and token model for the Chorus One blog. Check it out to learn how the Kava token unites security, governance and stability of the CDP platform.

NEAR STAKE WARS— The team at NEAR released their “Star Wars”-themed incentivized testnet plans. NEAR plans to announce the Stake Wars start date during this week’s San Francisco Blockchain Week.

Stake Wars appears to deviate a bit from existing incentivized testnet models, as the focus is on rewarding bug reporting, tool building and bench-marking, rather than simply running validators and executing pre-determined tasks.

NPoS INTRO— A quick summary of Polkadot’s “Nominated Proof-of-Stake” validator selection mechanism from the Staking Facilities team.

CELO FACTS — Two staking-related AMAs with Celo team members took place recently: the Chorus One team had Marek on Telegram and found out more about Celo’s mobile-first approach, the staking and fee model, stablecoin design, etc. (read the transcript here). Staking Hub released a summary of their AMA covering the Celo platform in detail.

BINANCE PoS STAKING — Binance announcing support for staking for some of their launchpad projects, e.g. Harmony ($ONE), which is interesting because this will be their first addition of Proof-of-Stake tokens with slashing.

TEZOS BABYLON UPGRADE — The Tezos Babylon upgrade activated on 18 October. This was the second automatically activated upgrade on the Tezos network since its launch. Chris launched a baker shortly before the upgrade. He experienced the upgrade as well documented and coordinated.

OASIS MAINNET — Oasis just announced their roadmap to mainnet. This includes tentative dates for a public testnet, a staking competition, and a bug bounty. Sign up here to run a node at the time of the public testnet.


SFBW — While neither Felix nor Chris will be at San Francisco Blockchain Week, we think that this will be a very interesting event, especially for those interested DeFi and staking. Make sure the DeFi Hackathon is on your radar!


Follow Staking Economy on Twitter or subscribe to the newsletter to make sure you don’t miss an issue.

Staking Economy is written by Felix Lutsch from 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.

#27: Transitions

DevCon updates, Aragon Chain, OpenLibra, Trustwallet staking platform and more.

This newsletter is supported by Chorus One, an operator of validating nodes and staking services on Proof-of-Stake networks.

STAKING ECONOMY @ DEVCON
Chris attended Devcon 5 this year. He organized the first-ever Staking Economy meetup during Devcon week. What started as a brief mention in the last issue turned into a 50+ member Telegram channel and a lunch with about 25 attendees with attendees from Solana, Coda, Harmony, Skale, Livepeer, Matic, Althea, NuCypher, Incognito, Forbole and Chainflow. Thanks to everyone who attended!

DevCon Updates

ARAGON COSMOS CHAIN - Ethereum project Aragon focused on creating and managing decentralized organizations is going to launch its own Proof-of-Stake chain using the Cosmos SDK toolkit. They made this decision following a feasibility reportcarried out by Chainsafe comparing multiple scenarios and the state of development of Polkadot versus Cosmos.

OPEN & CLOSE LIBRA - Devcon also saw the announcement of OpenLibra, an initiative to fork Facebook’s Libra and development project to port the MoveVM to Tendermint (Movemint). Additionally, some of Libra’s most prolific fintech partners left the association (eBay, Mercado Pago, Stripe, Paypal, Mastercard, and Visa).

ETH2.0 TRANSITION, COMPOSABILITY & SHARDING DESIGN - Vitalik Buterin went on a research spree during Devcon and published six research posts related to Eth2.0 covering the transition, composability of DeFi applications, a proposed update to the sharding design, and 3 other topics.

ATHEREUM - AVA Labs announced their friendly fork of Ethereum (EVM + current state as an AVA subnetwork with 99% ETH and 1% AVA). Check out the Chorus One Podcast episode and AMA with Kevin Sekniqi if you’re eager to learn more about AVA and their feature-specific subnetworks.

ETH2.0 STAKING CALCULATOR- A community-led UI to calculate returns for staking once Ethereum Proof-of-Stake goes live teased during Devcon. Looking forward to seeing the live version of this.

COSMOS GUARDIAN EVENT - A Cosmos-focused event with around 50 attendees. Topics included an Iris Network introduction, Adrian's Brink validator business plan talk, and a wide-ranging panel discussion. During the event, Sikka also announced their fee increase fee from 0% to 3%. The Cosmos Ocean party happened afterwards. It brought together various members of the community including Tendermint team members, validators, delegators and other projects building on the Cosmos SDK.

Other Updates

TRUSTWALLET STAKING PLATFORM - Trustwallet released their staking platform with support for Cosmos and Tron. Through the platform you can stake with a curated set of validators using Trustwallet or other wallets that support WalletConnect. In the near future, Ledger and Trezor, as well as other PoS blockchains (Tezos, Waves, IoTeX) and DeFi applications (Compound) will be supported as well.

NUCYPHER FINAL COUNTDOWN - Proxy re-encryption network NuCypher announced their $10.5mn “professional staking” round in which a variety of companies including PoW miners (Bitfury, Bitmain) participated. These players committed to locking their acquired stake (8% of the initial NU supply) for 2 years. NuCypher is in public testnet phase and will host an incentivized testnet followed by their WorkLock token distribution and mainnet launch ~Q1 2020.

STAKING SECURITY MODEL - Bison Trail’s Viktor Bunin wrote about the cost of attack comparing PoW and PoS making the point that attacks in PoS are more likely to result from hacks and thefts than from someone buying up the staking token.

COLD STORAGE INTERACTIONS - Coinbase detailing how they build a solution that allows their customers to participate in MakerDAO governance from cold storage. Including key management recommendations for protocol designer of blockchains that require participation (staking, governance,...).

NETWORKS NOT APPS - Chris published a post discussing how staking networks are building networks more like apps instead of networks. He makes the case for staking protocols to add DevOps resources. His take is that this will create a more balanced development approach and bridge the gap between project teams and their validators.

STAKING RESOURCES - A wave of posts from staking provider Figment Networks, e.g. covering how to evaluate networks and slashing risks. Find more of Figment’s content here.


Follow Staking Economy on Twitter or subscribe to the newsletter to make sure you don’t miss an issue.

Staking Economy is written by Felix Lutsch from Chorus One with assistance from Chris Remus, operator of the Chainflow validators. 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.

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