The fundamentals of Proof of Stake and Eth2
Eth2 is a uniquely designed POS blockchain, the first of its kind to be deployed on a massive scale. There are other examples of POS, some more successful than others, but none quite like Eth2.
Ethereum’s transition from POW to POS isn’t the end goal, but rather the first major step on the road to a complete restructuring of the blockchain’s infrastructure, role in the community, and functionality.
The fundamentals of Eth2 are:
- A minimum threshold of 32 ETH required in order to stake.
- Running a piece of software that must be online 24/7.
- The protocol will assign your ‘user’ duties to execute, approximately every 6.5 minutes.
- Upon successful execution of your duties, you will be rewarded with ETH. If you fail at a task, you will be penalized. If you maliciously break protocol laws, you may end up getting slashed (significant financial penalty and loss of ability to participate in future tasks).
These attributes are unique to Ethereum. Most other POS blockchains operate on different types of delegation processes, resulting in a select few participants tasked with securing the network and processing transactions. In Ethereum, tasks are allocated across all participants, rendering the network significantly more secure and decentralized.
Introducing Blox Decentralized Staking Pools
Although the intent of Eth2 is in the right place, it is still in its infancy and consequently less accessible for some users. Blox’s Eth2 Decentralized Staking Pools are designed to tackle and resolve the following challenges:
- Enable staking of less than 32 ETH – with Blox you’ll be able to stake as much or as little ETH as you’d like.
- No coding, or technical installation processes – reduce the technical barriers to stake.
- Instantaneous liquidity and withdrawals – made available through a dedicated ERC20 token that is strictly decentralized and used solely for the purposes of staking.
- Completely decentralized and trustless – no single, centralized point of failure.
In order to maintain the integrity of the Eth2 protocol, while not compromising on security and network participation, Blox is designing a dedicated staking pools blockchain. This Pool-Chain will manage a vast network of staking pools – maintain their security, liveness and robustness, all without a central managing authority or single point of failure.
The Pool-Chain, a dedicated Eth2 staking pools blockchain
Imagine the Pool-Chain as a collection of multiple multisig wallets governed by a shared consensus mechanism. The wallets and consensus mechanism are operated by Block Producers (BPs) who are bonded (or staked) and willing to ‘put out the work’ needed to operate Eth2 staking, and receive rewards for their contributions.
BPs are rewarded for their work in two ways. The first, is directly from the Eth2 protocol – ETH rewards for successful signing of duties – just like any other participant willing to stake 32 ETH. The second comes from the Blox Pool-Chain which generates rewards in the form of a dedicated ERC20 token that fuels the chain.
While the BPs must perform the tasks and duties assigned to the pools network, the ‘regular’ or passive pool participants simply make a single deposit transaction (of any amount of ETH) in order to join the pools network and officially start earning staking rewards.
How are Pools-Chain Participants Incentivized?How are Pool Participants Incentivized?
In order for a network to autonomously and successfully function it needs to offer meaningful incentives that encourage actors to participate and that maintain and enforce protocol rules.
In Blox Decentralized Pools, participants are rewarded proportionally with the number of ETH they deposited in the network. As mentioned, regular stakers are not required to do anything besides make a single deposit transaction. In return, stakers pay a small fee for their ‘inactive’ participation.
Most of the network duties fall on the BPs, who are are required to:
- Stake ETH as collateral (150%) for their participation.
- Run node software 24/7/365.
- Execute honestly the tasks assigned to them by the network.
In return, BPs receive significant rewards. In order to make sure that BPs are properly compensated for the time and financial burden needed to maintaining their duties, the rewards must be lucrative enough to keep them incentivized and motivated to continue. Network rewards based on passive pool participant fees seems like the right way to go.
Let’s examine the numbers behind it:
As an example:
- The network has 10 pools, for a total stake of 320 ETH in Eth2.
- Since collateral for BPs is set at 150%, the BPs must collectively stake 480 ETH to keep the network safe (similar to other Defi collateralized projects).
- Fixing the BPs min ETH stake to 10 ETH would result in 48 BPs required in the example network.
- Assuming that the Eth2 yearly reward rate remains around 10%, the 10 pools would generate a total of 32 ETH in rewarded returns.
- Assuming pool fees for passive participants is 25% of total pool returns, the result will be 8 ETH to be distributed as rewards to the BPs for their work.
- Each BP, on average, would receive 0.166 ETH a year in addition to the rewards generated from their own staked ETH.
To ensure BPs are incentivised to participate and perform their network related duties promptly and diligently, another form of reward should be introduced alongside the aforementioned. Additional rewards will be pivotal in creating a robust network of BPs.
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CDT as an Additional Incencentivization Mechanism
As CDT (Blox’s native token) is already an ERC20 token, the Pool-Chain will use CDT tokens as additional rewards for the BPs. By creating an inflation policy around the token and applying a different tokenomics model to it, CDT will become an additional, significant compensation mechanism for the BPs in the Pool-Chain.
The collateral that BPs post in ETH will be staked in Eth2 in order to create a baseline reward rate which is similar to any other staker. CDT will be rewarded for all of the different tasks that will be assigned to them by the Blox Decentralized Pool-Chain protocol. This includes, but is not limited to: multisig tasks, block creation and attestations.
As mentioned above, regular pool participants will receive an ERC20 token (bETH) which will represent their initial staked ETH amount + the rewards generated by the network. This will be executed by having their account balance adjusted (up) depending on the reward amount generated by the pools.
To illustrate, if we assume that Eth2 rewards remain constant around 10%, a regular pool participant that staked 1 ETH and received 1 bETH in return, will see their balance increase to 1.1 bETH after a year of staking. Fees will be taken out of the ‘gained’ bETH.
As CDT is an already existing token, minting new tokens that will be automatically rewarded by the blockchain to active network participants (the BPs) will create inflation, which in return will impact all token holders.
The tokenomics behind CDT2.0 should take into consideration the following challenges:
- Rate of inflation.
- Counteracting the inflation effect on CDT holders.
- The fees paid out by regular pool participants for the services they receive.
- Selecting a sustainable model that supports network growth.
The Venn diagram below represents the tokenomics of the network, specifying the relationship between BPs, regular pool stakers and average CDT holders.
The Inflation mechanism is measured by two factors:
- the new CDT created.
- and CDT token velocity.
If many new CDT tokens are created but their velocity remains at 0 (meaning none are transferred) then the impact of minting them is close to 0. High velocity + inflation could be an issue for token sustainability.
To counteract this, a CDT staking scheme will be implemented. Any CDT holder willing to lock their tokens for a predetermined period of time (thus reducing token velocity) will be eligible to take part in the distribution of the fees collected from the pools, in the form of bETH. This distribution will happen continuously, not periodically.
Once again, this mechanism ties the success of the network to the value of staked CDT, benefiting all CDT holders and pool participants.
Summarizing Blox Decentralized Staking Pools Tokenomics
A token model should take into account all participating parties. The idea should be to tie the success of the network as a whole to the success of each individual participant.
CDT is needed in order to incentivize BPs in the pools network. Assuming that the model proves scalable, we believe that Decentralized Staking Pools will open up Eth2 to ALL ETH holders. As a result, Eth2 will become viable, lucrative and easy-to-use; serving a multitude of different people with varying levels of technical knowledge, but none required whatsoever. Similar to what leading Defi protocols offer today, perhaps even more so.
Currently Under Development:
- Simulate network rewards and inflation under different scenarios and edge cases.
- Create formal specifications, rules and guidelines.
- Refine general roadmap and timeline.
- Promote the initiative following the impending launch of the Beacon Chain.