PoS economics questions

Originally posted in Telegram by Dario Tg

In general, I think there is a missing document in the POS scheme (Albatross) and it should address at least the following question:
1.) What are the incentives for small investors running a full node.
Albatross document (ava. at https://arxiv.org/pdf/1903.01589.pdf).
foresees that
“The issue then becomes that many coin holders will not have the technical knowledge or disposition
to run a full-node, a task that is necessary to produce blocks”
I would argue that the technical entrance barrier for small holders should be as low as possible.
Community initiatives, core team support for this sector and quality instructions prior main net 2.0
launch are just some ways how there can be many small investor validators.
There is also a key role in weighting, which I will more elaborate in point 3.
2.) Pool operators.
It is not know if there will be any software ready for pool operators at the beginning of main net 2.0
In my view it is quite possible that only very few pools will exist that will dominate the nimiq
scene. This would be a decentralization killer. Beside pool software availability at the main net
start, it is crucial that all pools have the same access to potential stakers in the nimiq wallet.
3.) Geographical dispersion as a measure of decentralization.
Even if the first two points are satisfactory met, leading to a high number of validators I think
that the quality of the geographical dispersion is utmost important. It would be a pity that most
of the validators are in the Western World on AWS servers. In this regard we are running into problems
of having a single point of failures (AWS or big Internet junctions in Western world).
My proposition would be that with time additional weighting is added (beside only Deposit) that
favors specific locations (i.e. Africa or South America) and/or networks (i.e. Starlink).
4.) Traders and Speculators.
While locking down the funds for longer time does have impact on day traders and speculators, locking
too much of the circulation supply does the opposite and 100% (from yesterdays theoretical example)
supply lockdown would certainly kill any liquidity and killing any dynamics in opening private
validators (point 1.) as well creating monopolies in pools (point 2).
The whole story started yesterday by examining the sense behind the ability that all the people
can stake all the time, with no or little constrains to funds being locked in stake (meaning
the unstake period is less then 24h and the barrier to lock is only one click away).
While a high percentage number of staked circulating supply is not desirable because it creates
low liquidity and only does adjust the stake for inflation, the opposite can be told as well.
Low staked circulating supply would indicate a low level of decentralization and low protection
from bad actors.
The current proposition of staking rules and amounts is nowhere set, and this is something
that will define the future 2.0 network.
So far I could only find out that the maximum lockdown period will be “until the end of the
epoch” and that there is just minimal amount of funds necessary to get the funds staked
(100 for wallets and 1000 for pools/validators/full nodes).
In my opinion this will lead to the first scenario where everyone will lock all their funds
and having the new minted coins distributed amongst all addresses linearly. Which as an end
effect negates any positive initiatives for may small validotors and many independent pools.
My suggestion is, that the reward system and time lock period is much better adjusted and
thought true, then the current 100/1000 nimiqs and max. 24 hrs. lockdown.

1 Like

Those questions are more about Nimiq 2.0 and the Nimiq ecosystem than about Albatross, so I don’t think that they belong on the Albatross paper. But I’ll answer them here.

  1. The incentives for small investors to run a node are the same as for anyone, to make a profit. If they can make more money from rewards than what they spend in hardware, time, etc then they should run a node.
    I do agree that the technical barrier should be as low as possible and of course we will provide documentation before the mainnet. But in the end running a validator will always be more complex than being a staker.
  2. We don’t have any plans to provide pool software. We might support such work by the community (either financially or technically), but we don’t feel that pool software created by Team Nimiq is needed.
    All pools will have the possibility of being shown to the Nimiq Wallet users (provided that they meet the minimum requirements). Furthermore, Nimiq Wallet users will be incentivized to join smaller pools. More details about this will be shared with the community shortly.
    Lastly, anyone can join any pool by simply sending a transaction. Pools are free to market themselves as they see fit and users can use any wallet to join pools.
  3. It is trivially easy to fake your geographical location in the internet. So, even if this was desirable (which I personally think it’s not), it’s certainly not possible to implement in practice.
  4. Having 100% of the supply staked is of course a hypothetical scenario. It will never happen. Not least of which, because providing liquidity is itself a profitable activity and it is especially profitable if there are no other liquidity providers.
    As I’ve said before, the purpose of staking is to secure the network and not to give a profit to the stakers. Having a high percentage of the supply being staked is actually very desirable since it means that the network would be incredibly secure.

The staking rules are not compiled in a single place (they will be when we start producing documentation) but they have already been decided and have been documented in the code and other places. To recap:

  • There is a minimum of 1000 NIM to become a validator (e.g. a pool).
  • There is no minimum to become a staker (e.g. joining a pool).
  • You can stake and unstake your funds at any time. But it will only take effect at the end of the epoch. Epochs don’t have a fixed duration, but we expect them to be around 24h.

I don’t see the situation that you describe as a problem. We designed our staking economics to maximize the amounts of funds staked, which in turn will maximize the network’s security and decentralization.
It would only be a problem if you are mainly worried about making a hefty profit from staking. But, by definition, staking profits come only from the dilution of coinholders that weren’t able or willing to stake.
I think you are suggesting that we should increase the barrier to stake (either by increasing the staking minimums or the unstaking time) in order to decrease the percentage of the total supply that is staked. However, increasing the profits of some coinholders at the expense of the dilution of other coinholders and the overall security of the network, is not something that we are interested in.

5 Likes

I just wanted to point out that anecdotal evidence might suggest that pools won’t want to make their code open source to help competitors, and fee percentages are a race to the bottom, so only a few pools will be able to cover the costs or even observe some gains long term. Since we as a community care about decentralization we’ll have to cover the development costs and open source the software used to run a pool. Also any score system to incentivize pool decentralization could eventually be gamed by pool owners, for instance think someone could create a bunch of pools and allow only a maximum number of stakers or a maximum amount of NIM for each pool. In theory that could make the network more robust, but in practice it might just be equally centralized with a bunch of pools controlled by only a few.

1 Like

We might be willing to fund the development of the open-source pool software. We do support other community projects like that.
The score system can be gamed, as you said, by opening different pools. But at least that forces the pool owner to run several nodes. Human decentralization is of course impossible to incentivize in blockchains (they are anonymous systems after all).
But I don’t want to get into the pool centralization topic, this thread was mainly about the barriers to staking. We already know that PoS is not a solution to pool centralization. It helps, but is not a solution.

2 Likes

Thanks @Bruno . Indeed, the topic of centralization is rather a philosophical/subjective one :sweat_smile:
Fortunately you guys are always searching for ways to make the network more decentralized and secure :ok_hand:

2 Likes

Low liquidity can be a good thing for the price too though, and I think NIMIQ is very balanced in their approach for 2.0

1 Like