Competitive equilibria between staking and on-chain lending

https://arxiv.org/pdf/2001.00919.pdf

Competitive equilibria between staking and on-chain lending

Tarun Chitra∗ February 5, 2020

Abstract

Proof of Stake (PoS) is a burgeoning Sybil resistance mechanism that aims to have a digital asset (“token”) serve as security collateral in crypto networks. However, PoS has so far eluded a comprehensive threat model that encompasses both Byzantine attacks from distributed systems and financial attacks that arise from the dual usage of the token as a means of payment and a Sybil resistance mechanism. In particular, the existence of derivatives markets makes malicious coordination among validators easier to execute than in Proof of Work systems. We demonstrate that it is also possible for on-chain lending smart contracts to cannibalize network security in PoS systems. When the yield provided by these contracts is more attractive than the inflation rate provided from staking, stakers will tend to remove their staked tokens and lend them out, thus reducing network security. In this paper, we provide a simple stochastic model that describes how rational validators with varying risk preferences react to changes in staking and lending returns. For a particular configuration of this model, we provide a formal proof of a phase transition between equilibria in which tokens are predominantly staked and those in which they are predominantly lent. We further validate this emergent adversarial behavior (e.g. reduced staked token supply) with agent-based simulations that sample transitions under more realistic conditions. Our results illustrate that rational, non-adversarial actors can dramatically reduce PoS network security if block rewards are not calibrated appropriately above the expected yields of on-chain lending.

Citations include:
18. Kiayias, A., Russell, A., David, B., and Oliynykov, R. Ouroboros: A provably secure proof-of-stake blockchain protocol. In Annual International Cryptology Conference (2017), Springer, pp. 357–388.

This would potentially be an issue for ETH staking, presumably it generalises to all POS protocols and therefore has applicability for Cardano at the point that lending via Smart contracts becomes an option? Appreciate any feedback or views from forum members.

Apologies if I have posted this into the wrong forum, I wasn’t sure on the best location.

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Thanks for posting. I read the abstract and put the whole paper on my reading list.

When the yield provided by these contracts is more attractive than the inflation rate provided from staking, stakers will tend to remove their staked tokens and lend them out, thus reducing network security.

Yes, in this scenario stakers will have an incentive to lend out their ADA. However, the borrower would then stake the ADA, or am I making a terrible reasoning mistake?

Can ADA belong to a smart contract and still be staked?