Cryptoeconomics Moscow Meetup #6: Proof-of-Stake

Cryptoeconomics Moscow Meetup

Another Cryptoeconomics Moscow Meetup, the sixth one, is over. As usual, we post the most important details from the discussions for those who missed the event. This time the meetup featured even more guests than before, four guests. Let’s see what they talked about. 

Part one 

Konstantin Lomashuk from had a speech about PoS blockchains in general and Cosmos blockchain in particular. 

He started from defining what proof of stake is. Proof of stake isn’t a consensus algorithm. It’s a method of choosing who signs the block, using hashrate in PoW and the size of stake in PoS. Cosmos is a blockchain, based on Byzantine Fault Tolerance consensus, using PoS model and the on-chain governance. BFT consensus was invented in 1999 long before Satoshi. What are its features? 

  • Every block is finalized, there’s no replay possibility.
  • Required 2/3 of the validator set to sign on a block to commit
  • 1 block finality.
  • Proposer changes every round.
  • Doesn’t scale as number of validators increases. Has a limited number of nodes – around of 300 nodes.

Konstantin declared that PoS is a greener solution than PoW, it can scale better, and it’s more decentralized. Cosmos Hub, the main blockchain of Cosmos, works on a PoS implementation. It has validators and operators, which stake coins. If a validator node violates the rules, he gets punished by slashing, a part of his stake gets destroyed. Also there’s a lot of token holders who just delegate their voting power to validators. The process of delegation is implemented in the core of cosmos, not with some external smart contracts. If validators get slashed, token holders lose a part of their delegated stake as well. 

Delegators choose validators off the criteria such as:

  • Validator track record
  • Validator’s security setup. Some setups may be even audited by external auditors. 
  • Self-declared, protocol-enforced minimum self-bond
  • Commission rate on fees/rewards

To unbond tokens, stakers have to wait 3 weeks after the last block confirmation. It creates the problem with redelegation of tokens to another validator node. As there’s a 3 weeks period for unbonding a stake, the token holder can lose money by trying to switch to another delegate. Cosmos implements a unique system which allows to choose and switch another delegate instantly without having to wait 3 weeks.  If the previous chosen delegate has violated rules during the staking period, the stack of the delegator gets slashed anyway even if he switched to another validator node. 

Cosmos incentives to involve more stakers:

  • Staking token.
  • Atoms are just a staking token for the Cosmos Hub.
  • Staking tokens are similar to asics.
  • Capital you need in order to be able to be a validator, and thus earn transaction fees, is pretty large, but anyone can become a delegator.

In cosmos network, transaction fees can be paid in any tokens: BTC, ETH, ATOM, etc. Validators can decide which tokens they do accept as a fee. Inflation schedule is designed to encourage staking (the lower the percentage of staked atoms, the higher the inflation rate). Those who stake don’t lose the value of their capital, because they get the amount of tokens equal to inflation. Those who don’t stake, lose to inflation. 

What about rewards? 

  • Block rewards split among all staked validators.
  • Block rewards start off unbonded.
  • Those validators who include transactions in the block, receive an additional reward. 

Inactive nodes which sign less than 5% of transactions get punished with a slight slashing. Also they get put in jail for 10 minutes, after that period they can choose to rebond. The jailed node and its delegators don’t receive rewards during that period. The most severe punishment comes for consensus faults – double signing on a block will cost a node 5% of its stake, and this node will never participate in staking again. 

Answering to the audience’s question, Konstantin said that staking can’t be regulated, the payouts can’t be considered as dividends because it’s paid to delegators by the network, not by validators. 

Part two

Alexey Bondar had prepared a speech about the economics of staking and collateralized debt positions (CDP), and presented a new Kava network. Kava is a multi-collateral cross-chain CDP. They plan to launch an ecosystem of decentralized finances working on Cosmos. 

Since the beginning of 2019 the amount of staked assets in crypto has grown 7 times and currently exceeds $5 billion. MakerDAO currently has more than $250 million in ETH put into CDP. Lately, stablecoins have become very popular, being the only non-volatile class of assets in crypto. There are two major types of stablecoins: backed by fiat money in banks and backed by crypto tokens. Kava works on creating a decentralized stablecoin, backed by collateralized crypto assets. They’ve been working on the problem of decentralized stable assets for 18 months. Together with the developers of Cosmos they want to connect all popular blockchains, creating a larger universal blockchain ecosystem. They already have a testnet and are looking for validators, currently they have 90 validators out of 100. It has its own token KAVA for staking. KAVA holders make decisions in the ecosystem and get rewards for staking. The staking system follows the general Cosmos rules. Every user can transfer his/her assets to Cosmos blockchain and lock them in CDP to create new USDX stable tokens. 

How does CDP work? It’s similar to a decentralized loan, but there’s no need to go to bank in this case, the user gives the loan to himself/herself by providing a collateral, which is bigger than the loan. The current minimum collateral ratio is 150%, $1.5 of collateral for every $1 in the newly generated asset. If the value of the collateral goes below that ratio, the CDP position gets closed automatically and its owner gets punished with a fee. If there’s too many stablecoins with insufficient collateral, new KAVA tokens get created to buy these stablecoins and return the balance to ecosystem. To get the latest prices, KAVA uses the price oracles.

What is the difference between KAVA and MakerDAO? 

  • MakerDAO uses only one asset, ETH, as the collateral, Kava supports many assets. 
  • Risk fee in MakerDAO is 20%, only 5% in Kava.
  • MKR token is used for governance, KAVA for governance and staking.
  • To close a CDP, it’s necessary to pay with MKR and ETH tokens in MakerDAO, it’s possible to pay with tokens from the closed CDP position in Kava. 
  • There’s a very low involvement in governance of MakerDAO – only 2% of the total supply of tokens participate in voting. The voting discussions are usually held on message boards and YouTube. Kava has its own staking token, which makes voting easier. If delegators don’t agree with the votes of their delegates, they can revote on the proposal. 
  • In MakerDAO there are 14 price oracles, in Kava there are going to be 100 price oracles. 

The targeted inflation in the network is 7%. KAVA tokens received by the system as the fee, get burned. Overall, it’s a great project, which can give a boost to decentralized finances. 

Part three

The third speaker is Nicholai, the CTO of Golos blockchain, now called CyberWay. Nicholai gave a speech about the obstacles they met during the implementation of PoS in their blockchain. is a social blockchain platform, a Steemit fork initially, now a fork of EOS with some alterations. Initially it seemed that EOS was an ideal blockchain for their goals, but after the migration the Golos team saw that it needs additional reworks. They reworked many EOS mechanics, particularly those related to distribution of resources. 

The main problem they wanted to solve is the common problem for all blockchain platform. To use any decentralized application, a user must hold the tokens of this application, and it’s really problematic for non-tech savvy users. As a result, Ethereum has only 72,000 active users which use dApps. EOS has 260,000 active users. The CyberWay team decided that the developers of dApps are the most interested in growing the user base, so the onboarding process should be extremely easy for end users. 

What alterations were made in CyberWay compared to EOS? In EOS, every user must have some tokens staked to use dApps. These tokens can be sent or delegated to users by developers, and both methods have weak points. 

  • In the first case, users can simply unbond and sell tokens.
  • In the second case the delegated resources are locked for 3 days, which isn’t an optimal use of resources. 
  • Also in EOS users with the highest stake can reserve the majority of resources for themselves, but the resources can stay idle. 

In CyberWay there are three methods to solve this problem. 

  • First of all, all currently unused resources can be used by other participants, even if their stake is lesser. 
  • Also they have an off-chain solution for providing bandwidth to users. 
  • And finally, CyberWay changed the consensus model, instead of giving 30 votes to 1 token, like it works in EOS, they implemented the dPoS1 algorithm, where 1 token equals to 1 vote. 

To force users to vote for validators, CyberWay keeps a high targeted inflation if only a small percentage of users votes. The more users vote, the less inflation they have in the network, and their stakes don’t lose the value. Validators get 10% of all fees, the rest get distributed among voters. 

Part four

And the last speech was by Sergei Loshakov, about staking in robot economy and 2nd layers. Sergei is a blockchain researcher, and he studies and develops blockchains since 2012. He thinks of Ethereum as of a first global decentralized computer and builds a 2nd layer solution for it with his team. 

According to Sergei, not every 2nd layer solves the problem of scalability for its 1st layer. Anyway, all of them have something in common – they enhance the basic features of protocols. If some feature is unnecessary for all network users, it can be implemented in the second layer solution. There are several types of 2nd layer solutions:

  • State channels: Lightning network, Raiden network. 
  • Side chain: Blockstream, OmiseGo, Plasma.
  • Off-chain computation: Golem, Truebit.
  • Bridge: Tokenbridge.
  • L1 extension: 0x project,

Sergei thinks that 2nd layer networks have a very small incentive for its validators to stick to the native token. Instead, if they process the majority of transactions, they can potentially switch to their own token, abandoning the initial network. For comparison, in Bitcoin and Ethereum network, miners don’t rely only on transaction fees, they also get a reward for each generated block, which keeps them motivated to generate blocks as fast as possible. 

Robonomics, developed by Sergei and his team, is a open-source software for connecting robots to a decentralized network. The team uses ROS framework for building software for robots, IPFS as a storage for executable code and logs, and Ethereum for storing hashes of these operations. Most operations are performed off-chain, except the final command which gives the command to robot to execute some action, for example, for a drone to fly to a destined location. For their network, the team of Robonomics implemented some interesting features, such as the Factory of Smart Contracts. It allows to create a smart contract which can create the copies of itself. It can be used for decentralized token emission to incentivize nodes with token rewards to sign transactions in the network, in a similar manner to Bitcoin or Ethereum network. 

Currently it runs in two networks, Ethereum and Polkadot. The team plans to give its users the free choice between these two network. 

In general, L2 layers are the opportunity to enhance major blockchain network that don’t require a hard fork. Soon they’ll become very actual, because on the path to building Web 3.0 the basic capabilities of existing networks won’t be enough, and second layers will allow to fulfill all possible needs for any tasks.

We hope you’ve enjoyed this article and it helped you to understand the concepts of zero proof, snarks, and starks. You can find the whole presentation here and if you’d like to support our initiative you can check our sponsors in the list below:

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We would like to take this opportunity to thank all of you for encouragement and support. See you next time!

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