What does staking mean for the PoS network, statistically speaking?

Original author: & NBSP;Orange Book

Original title:What does staking mean for the PoS network in terms of Numbers?

The purpose of this article is to clarify some misconceptions about token inflation and staking earnings by comparing PoS and PoW networks. At the same time, metrics are introduced to measure how much the network itself is spending on infrastructure. All data used are based on snapshots of Cosmos, Tezos, Ethereum, and Bitcoin.

Many of the project's stakeholders have promised to earn high token earnings by taking part in staking. But that does not necessarily mean that staker can expect high returns. To understand why this is happening, we need to understand what staking in the PoS network is trying to achieve.

The PoS network rewards staker with an inflationary supply of tokens in return for their pledge. In turn, these tokens act as collateral for network maintainers (verifiers) to comply with network regulations and maintain the normal operation of the network.

& have spent Cyber security expenses & NBSP;

In the PoW network, all rewards in the form of inflation tokens (block rewards) and fees go to network maintainers (miners). But even in ethereum, where fees paid to miners account for only 3.12% of the total reward (compared with Bitcoin's 1.56% and earlier near-fee-free PoS networks such as Cosmos and Tezos), miners get most of their income from block rewards. In the Bitcoin network, annual fees and block awards total $3.6 billion, or 3.93% of the total market value of Bitcoin.

Ethereum miner's annualized earnings reached 4.91% of its total market value (of which 4.76% was block reward earnings and 0.15% was fee earnings). Miners often choose to sell the inflation tokens to pay for hardware costs and electricity bills, keeping some of the profits.

By diluting the tokens they hold, PoW token holders are effectively paying for the approval-less of the network. So by current standards, bitcoin holders' current share of the supply of tokens is shrinking by 3.7% a year, based on this mechanism.

In PoS networks, network security costs are more complex. There are multiple risk factors in the staking process of the PoS network -- the risk of losing tokens due to slashings, and the liquidity risk of tokens due to lock-ups in the pledge phase, for which staker will be compensated. Then there is the actual running cost of the infrastructure, which is required to participate in the consensus in the PoS network (that is, to run a verification node). Each holder of a token can stake, or delegate it to a verifier in exchange for a commission rate for the return of the staking.

In the following paragraphs, I will demonstrate that network security expenses paid to infrastructure providers can be deducted from the average commission rate prevailing in PoS networks:

According to the commission rate weighting method, each staking provider in the network (in this analysis, Cosmos and Tezos) charges for the tokens they represent and protect, so the weighted average commission rate can be calculated. This indicator can show under what token reward conditions, most of the entrusting people in the network are more willing to give up the reward and outsource the network verification work to staking providers safely.

Multiply this indicator by the total entrusted token value, and we get the approximate cost of maintaining the infrastructure in the PoS network (assuming that the verifier/principal market is efficient and the price data on the chain is accurate). The rest of the rewards will be distributed to token holders to compensate them for the risks involved in staking. But these people are not the providers who keep the infrastructure running (in the PoW network, all the rewards go to the miners).

From this perspective, the PoS network implements the de-licensing blockchain network in a more resource-efficient, scalable, and inclusive way (I won't discuss the pros and cons of PoS versus PoW in this article).

See from two early PoS network (Cosmos and Tezos) network and the two big PoW (bitcoins and Ethereum) on the data collected, we can find that in PoS networks, spending on infrastructure was calculated by the above measures network an order of magnitude smaller than the PoW (accounts for only about 10% of the original block reward) - although PoS network is still in its early development, and relatively weak.

In Tezos, 88.99% of the network rewards were distributed to staker and 11.01% were paid to infrastructure providers (based on the snapshot date commission rate weighted average algorithm, in Cosmos the ratio was 90.26% to 9.74%).

& have spent Impact on individual share in token supply & & NBSP;

By staking tokens, staker can receive a portion of the reward to offset the dilution in value from the inflation supply of tokens. At the same time, staking means either putting in the resources to run the infrastructure or outsourcing the work. In addition, the revenue generated by staking should also be considered for tax purposes. On the other hand, tokens held by holders who do not take part in staking will be diluted to ensure the security of the network (which is also the state of the PoW).

All in all, the party involved in staking always has a higher share of the scrip supply than the party outside. This is determined by the potential liquidity risk and penalty risk compensation in the staking process. In addition, whether staking will increase the ownership of the relative token supply depends on the rate level, the overall staking level in the network and the tax situation.

In a network of "low" staking participation, agents' share of the overall scrip supply increases even after deducting tax rates (as is now the case with Cosmos). Besides, since the handling fee will be allocated to the users participating in staking in the PoS network, long-term staking is a good way to earn profits.

Ethereum owners' share of the overall token supply is shrinking at an annual rate of 4.55%. Holders of Cosmos Atom can staking away the dilution of their token value. On a pre-tax basis, if he had stakes all the tokens, his share of the overall token supply would have grown by 3.9 per cent, rather than shrinking by 5.04 per cent (a margin of 8.94 per cent) -- assuming the snapshot data were still valid for the year.

In addition, some networks can bring new tokens into the supply system in certain ways, such as through development teams or other distribution schemes. If all these factors are taken into account, the change in the holder's and staker's share of the total token supply will be further affected. This is arguably a more important factor, but it is also beyond the scope of this article.

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