The economic incentives of staking is Cosmos


#1

(work in progress)

Introduction

The Cosmos Network is based on Bonded Proof of Stake. This means that rather than pay miners to secure the network, we will be paying validators to secure the network. It’s vitally important to get the economics of staking right so that the network stays healthy and secure.

If the incentive to stake is too low, the network will not get the minimum amount of validators needed to keep many staking pools. If the incentive is too high, the network is overpaying for security and inflating at a rate that is detrimental to the economics of the network as a whole.

Currently, the initial main-net is targeting 100 validators/staking pools. Ideally, each staking pool.

Terms

NOTE: Some of these are taken from https://github.com/cosmos/cosmos/blob/master/VALIDATORS_FAQ.md

  • Validator - a participant in the Cosmos PoS consensus system. You can become one by bonding ATOMs into the Cosmos PoS mechanism.
  • Validator Set Group of validators who will finalize/sign the block
  • Unbonding period - the number of days between a validator exit and the validator balance being withdrawable.
  • Inflation - The annualized rate at which ATOM supply grows.
  • Interest - The annualized rate at which validators are rewarded (in ATOM).
  • Block provisions: Native tokens of applications run by validators (e.g. Atoms on the Cosmos Hub) are inflated to produce block provisions. These provisions exist to incentivize Atom holders to bond their stake, as non-bonded Atom will be diluted over time.
  • Block rewards: For the Ethermint zone, block rewards are paid in Photons. The initial distribution of Photons will be hard spooned from Ethereum. This means Photons will be emitted 1:1 to Ether.
  • Transaction fees: The Cosmos Hub maintains a whitelist of tokens that is accepted as fee payment.

Validator Economic Incentive

There are many things that a user will consider when wanting to become a validator. In the base case, some users may believe in the Cosmos network so much that they would stake at a loss if need be. However, in the simplest case we can break down the thought process as follows:

Total Incentive to Stake = Validator Rewards + Network Fees - Cost to run a Validator

*One factor discussed later that validators will consider as well is competition.

Staking Rewards

In order to incentivize those that have ATOM to stake in the network, there must be some type of reward. It’s unlikely that many people would stake their ATOM for no reward. Cosmos accomplishes this by paying validators a reward for every block they successfully propose. Only bonded/staked ATOMs can earn the reward. So if total ATOM stake is low, the interest rate goes up and as stake rises, it starts to fall.

We can calculate this scale using the spec. There are a lot of variables in doing this. First up are the constants :

Constant Value
ATOM stake Own + Delegated ATOMs
Unbonding Period 3 weeks
Epoch Length x
Base Reward Quotient x