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Orange Book (ID: chengpishu), the original text comes from:, Author: Felix Lutsch, translation: ClockworkPrince, reprinted with authorization by Odaily.
Today's article is more about arousing discussions on the topic of staking. Some data involved in the article are worth reading, although
According to the "PoW and PoS Great Debate" released yesterday
The purpose of writing this article is to clarify some misconceptions about token inflation and staking revenue by comparing PoS and PoW networks. At the same time, the paper also introduces metrics to measure the investment of the network itself in infrastructure. All data used are based on snapshots of Cosmos, Tezos, Ethereum and Bitcoin.
Many project parties have promised that participating in staking can obtain high token-denominated returns. But this does not necessarily mean that stakers can obtain high returns. In order to understand why this is the case, we need to understand what exactly staking in a PoS network is trying to achieve.
PoS networks implement an inflationary supply of tokens to reward stakers in return for staking tokens. These tokens are used as collateral for network maintainers (verifiers) to comply with network norms and maintain the normal operation of the network.
secondary title
Cyber Security Spending
In a PoW network, all rewards in the form of inflation tokens (block rewards) and service fees will flow into the hands of network maintainers (miners). But even in the Ethereum network, the fees paid to miners only accounted for 3.12% of the total rewards (compared to 1.56% in the Bitcoin network and early PoS networks that were almost free of fees such as Cosmos and Tezos), the main source of income for miners in block rewards. In the Bitcoin network, the total annual fee and block rewards are as high as $3.6 billion, or 3.93% of the total market capitalization of Bitcoin.
The annualized income of Ethereum miners has 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 these inflation tokens to pay for hardware costs and electricity expenses, and keep a part of the profits.
By diluting their token holdings, PoW token holders are effectively paying for the permission-less nature of the network. So based on this mechanism, by today's standards, Bitcoin holders' current relative token supply share is shrinking by 3.7% per year.
In a PoS network, network security costs are more complex. There are many risk factors in the staking process of the PoS network - the risk of token loss due to slashings, and the liquidity risk of tokens caused by lock-up during the pledge phase, and stakers will be compensated for this. Then, there is the actual running cost of the infrastructure that is necessary to participate in consensus in a PoS network (i.e. run a validator node). Each token holder can stake, or delegate tokens to validators in exchange for a certain commission rate in return for staking.
In the following paragraphs, I will argue that network security expenses paid to infrastructure providers can be deducted from the average commission rate prevalent in PoS networks:
According to the commission rate weighting method, each staking provider in the network (Cosmos and Tezos in this analysis) will charge for the tokens they represent and protect, so the weighted average commission rate can be calculated. This metric can show, under what token reward conditions, most delegators in the network are more willing to forego rewards and instead securely outsource network validation to staking providers.
From this perspective, the PoS network realizes the permissionless blockchain network in a more resource-efficient, scalable, and inclusive way (I will not discuss the advantages and disadvantages of PoS and PoW in this article. topic).
Looking at data collected from two early PoS networks (Cosmos and Tezos) and two major PoW networks (Bitcoin and Ethereum), we can see that in PoS networks, the infrastructure overhead calculated by the above metrics is smaller than in PoW networks An order of magnitude (only 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 network rewards are distributed to stakers, and 11.01% are paid to infrastructure providers (commission rate weighted average algorithm based on snapshot date, in Cosmos, this ratio is 90.26%: 9.74%).
secondary title
Impact on individual share of token supply
Through staking tokens, stakers can get a part of the rewards to offset the value dilution brought about by the token inflation supply process. At the same time, staking means either committing resources to operating the infrastructure, or outsourcing that work. In addition, the income generated by staking should also be included in the scope of taxation according to law. On the other hand, the 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 quo of PoW).
All in all, the party participating in staking will always have a higher share of the token supply than the other party staying out. This is determined by the potential liquidity risk and penalty risk compensation in the staking process. Additionally, whether staking increases relative token supply ownership depends on the level of fees, the overall level of staking in the network, and taxation.
