New research: DeFi cannibalizes PoS security!
medium.com/dragonfly-rese…
Turns out, there's a deep and intrinsic tension between PoS consensus and on-chain lending markets. TL;DR below. 👇1/7
medium.com/dragonfly-rese…
Turns out, there's a deep and intrinsic tension between PoS consensus and on-chain lending markets. TL;DR below. 👇1/7
PoS is secured by staked assets. But stakers will only stake if the interest rate is attractive. If you can make the interest rate MORE attractive on Compound, this will drive away stakers from the base protocol and siphon away network security. 2/7
This can be done as an active attack (gobbling up borrow on Compound), or it can happen inadvertently by VCs just subsidizing lending markets and thereby driving down staking rates. (That's pretty scary!) 3/7
Is this worth worrying about? You can actually model this using agent-based simulations, which @tarunchitra of @gauntletnetwork does in his paper. By simulating economically rational stakers over thousands of possible parameters, he arrives at several key insights. 4/7 
The biggest one is: PoS protocols *cannot* use deflationary monetary policy. A Bitcoin-like deflationary policy on Ethereum 2.0 would eventually result in all stakers transitioning over into lending. This would leave PoS completely insecure. 5/7
In light of this, it seems that the best monetary policy is one that is dynamic: it should be able to adapt in real-time to competitive market pressures. Its should actively modulate its interest rate in response to market conditions, much like a central bank. 6/7
If you find this interesting, check out the full blog post and delve into the paper! And give @tarunchitra a follow if you haven't already. (7/7)
medium.com/dragonfly-rese…
medium.com/dragonfly-rese…
