Thread by @fmoulin7

[Thread]: Staking yields do not allow to correctly evaluate staking incentive structures. They provide an incomplete view that can be misleading. Here is why:

Staking yields are usually calculated by taking into account network issuance and staking participation. Network issuance itself may take many different forms in the case of staked-based protocols. Let’s first take a look at 6 models currently used for issuance:

Target Total network stake --> @cosmos features a maximum inflation of 20%. If more than ⅔ of ATOMS are being staked, block rewards decrease gradually down to a floor of 7% inflation. The current outstanding supply inflation is 7.66%. mintscan.io

Sliding scale based on total network stake → The more total supply that’s staked, the higher the system-wide issuance rate (to incentivize high cumulative participation), but individual yields decline as the percentage of network stakers increases ( $ETH 2.0.)

Fixed inflation rate → the inflation rate is fixed & total emission increases each year. $EOS has a fixed 1% inflation rate. The inflation was previously set at 5%, with 4/5th going to an illiquid saving account but a vote led to the burn of those illiquid EOS.

Fixed emission rate → The emission is fixed & the inflation rate decreases each year. This is the case for $TRX. Although it’s still unclear if @Tronfoundation will pay for rewards or not.

@Tronfoundation stated it would pay for inflation until 2021, but the outstanding supply is still growing with each block produced according to @TRONSCAN_ORG. Maybe the Independence day burn last year was meant to pay for inflation, but this was not stated clearly.

Decreasing issuance → The inflation rate decreases exponentially each year and the stakers split. This is how the current preliminary specifications for $ADA looks like, although it’s not clear if this will be implemented. staking.cardano.org.

Secondary Token Issuance → Staking rewards are denominated in a token different from the native token. The native token supply does not inflate with this model. @wavesplatform uses this model with its Miners' Reward Token.

Think it’s too complicated? Well, knowing the different issuance policies is one thing, but it’s not enough to precisely estimate staking yields. Hidden inflation - supply managed centrally by founders and projects that enters circulation over time - is equally important.

Let’s just compare numbers. The @ethereum Foundation currently holds just over 600,000 $ETH, or less than 0.6% of the current outstanding supply. Conversely, @Tronfoundation holds over 33% of the current outstanding supply, which will become liquid in January 2020.

$TRX current staking yield is a bit over 4% but once the Foundation supply is free to enter circulation, it’s probable that the “real yield” will be negative.

In some cases, foundation tokens are also staked even though they have not fully vested. The @TezosFoundation is baking both its allocation and DLS allocation even though both have not fully vested.

Conversely, advertised issuance and staking yields, do not incorporate potential burning mechanism such as transaction fees burnt and slashing penalties, that reduce supply and increase yields. @VitalikButerin made a great point on this on Reddit about ETH 2.0 specifications.

But the incentives to stake do not depend solely on supply dynamics. Rights provided by staking, costs and risks, taxability of rewards, as well as the opportunities to compound an investment in a given crypto asset ecosystem, are all variables to take into account.

Apart from the right to produce a block, staking can be used to provide a variety of rights. In the case of Work tokens, staking allows to perform a given work on the network and the dynamic can be compared to Taxi Medallions as described by @jpurd17
medium.com/messaricrypto/…

Staking can also provide access to a given market, or discounts for the services operated on the market. For example, one needs to stake $SAN to access @santimentfeed SANbase.

Staking may also provide on-chain governance governance rights: electing a block producer, voting on protocol upgrades such as the minimum required to become a validator, the inflation rate, voting on allocating a community-governed treasury etc. messari.io/article/tezos-…

Those rights are not visible when looking solely at staking yields. Neither are the costs (computing, maintenance, capital acquisition, capital lockup, third-party services commissions), risks (slashing, smart-contract risk, client risk etc.) and taxability events.

On this subject, @ChorusOne recently published an interesting article on staking costs and taxability and calculated an average weighted commission rate for @cosmos and @tezos. blog.chorus.one/the-truth-abou…

@CollinMyers15 from @ConsenSys ran the calculation to find out how much it would cost to run a validators in a very detailed two-part article: Validator Economics of Ethereum 2.0. tokeneconomy.co/validator-econ…

In the long-term it will be interesting to see how staking returns and other returns (lending, market-making etc.) will converge. Will there be people staking even though the short-term yields are lower but they believe in the long-term benefits of having a secure network?

The important takeaway is that each staking-based protocol has a unique structure & that Staking Yields alone do not allow to entirely comprehend it.

In @MessariCrypto Pro (coming soon), we’ll be adding more data to help you get a better sense of each protocol’ specifications. Until then, you can subscribe to our research briefs to stay ahead of the crypto curve. messari.substack.com/p/staking-on-e…