While Ethereum eagerly looks forward to moving to PoS from PoW in 2020, the discussions around economics of block issuance in PoS are picking up steam. Miners, or validators in the case of PoS, are rewarded through newly minted coins for their services towards securing the health of the network. Currently, as ETH is still in PoW, the mining reward is set at 2 ETH per block. Designing incentives for miners (or validators) involves striking the right balance between security and inflation, almost akin to the tradeoff central bankers face when they have to lean on the monetary policy lever. A stingy approach towards block rewards would leave the network vulnerable as miners (or validators) are not sufficiently incentivized to secure the network; being too liberal in terms of rewards stokes inflation, and will suppress the price of ETH due to excessive selling pressure. Figure 1 below shows the history of Ethereum’s mining rewards and how they have evolved over time.
How would policy look like in the new PoS (Proof-of-stake) scenario? Vitalik Buterin recently proposed a new PoS rewards schedule, which generally received positive feedback from the Ethereum community on Reddit and Github. As the total ETH staked increases, the network becomes more secure and the average return for validator decreases. As we can see in the table in Figure 2, the max annual return rate for a validator decreases as the total ETH staked in the validator pool increases. At 134 million ETH staked, which is roughly equal to the total ETH in circulation, the max annual return rate decreases to 1.56%. Another interesting aspect is that as the overall security of the network increases, which is a function of total ETH staked, the reward rate automatically decreases to factor in for the lessened risk of the total system.
Total Incentive to Stake = Validator Rewards + Network Fees – Cost to run a Validator
The following section gets into some detail around validation on PoS systems. For a quick primer you can check out our previous post on staking here.There are many things to consider for one to become a validator. These factors will be considered by every validator when contemplating if the staking rewards are “worth it”. They are as follows:
-Users will need to run validator clients and likely a beacon node as well. This requires computing resources
-Beacon Node: similar to running geth/parity today, will want to run 1 of these
-Validator client: lightweight and need one per 32 ETH stake
-Rough estimates on costs are $120/year for a beacon node and $60/year per validator client
Capital acquisition and lockup
-The user must acquire the necessary 32 Ether either via purchase or mining
-Stakers can’t directly sell staked Ether while it’s staked
-If the user wants to withdraw funds, there is a set amount of time they must wait to get their ETH back. However, this time has come down considerably in the latest versions of the spec. The minimum withdraw queue wait is 18 hours. This could go up if a lot of people are exiting at the same time but 18 hours will likely be the norm
Other risks include code risks and security risks, which may not be detected beforehand and in the case of a malicious attack on the network, the validator can lose all of his ETH staked.
Another important factor to consider while deciding incentives for validators is to compare the PoS rewards with the alternatives available, such as lending ETH on DeFi applications such as Compound and Dharma, as well as off-chain lending platforms such as Dharma.
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