Is Proof of Stake fair to all parties?

ouroboros

#21

Not sure what you mean by this statement, @werkof. Are you suggesting that HODLing is a bad or a necessary thing? If the former, people buy and hold traditional stocks/equities for long periods of time and make a killing while contributing absolutely nothing to humanity. This happens everyday and will continue to do so well into the future in both the stock markets and crypto markets. Also, why is it that the “saving humanity” buzz statement must always be bundled here? First and foremost, buying and holding ADA is an investment in new technology that might have transformative effects.


#22

Well you too are right on this. The question is if staking revenues are at similar a level like PoW mining (just without spending on HW and electricity) or way lower (as the https://antipalos.github.io/cardano-calculator assumes)

In my opinion staking revenues are composed by a (over time) decreasing part from the reserve pool (affecting inflation) and also by a (over time) increasing part from transaction fees (affected by adoption)

So if staking will bring much higher revenues than most/all other investments YES: this would mean staking create locked value and so illiquidity. That’s in fact what I meant by HODLers. I haven’t anything against investors in general, BUT whenever a (passive) investor expects (way) more revenue and gain than the rest of the humanity can see, I consider it as unfair and generaly wrong. Then it’s not “this elite and politicians” no then it’s it “this to-the-moon HODLers” who act in a bad way. And then #IHate because beside of the unfair (because passive and not productive) activity, HODLing also means illiquidity. And this - as I already said and still believe - is very bad for every economic system (ancian goods, FIAT money, and of course also crypto-currencies) because it is the by far most massive obviator for one of the main problems of the entire crypto world: use-cases and daily life adoption.

@Risus76 I know that long time investments existed before and will continue to exist. let’s say this is the lesser bad version of HODLers because they only create illiquidity but at least don’t expect to 100x their investments between 6 months. (where does this values came from if not stolen from others?)

Let’s remember the original question: “Is PoS fair to all parties?”
Let’s make one step back and ask first: what are “all parties” ?
Are we considering only different types of HODLers (whales and poors, long-time and day-traders) or are we considering Cardano as one of thus crypto currencies who can evolve and support our humanity like Ford, Chrysler, Mercedes, Toyota… did 100 years ago?
In a whole ecosystem investors (hopefully) represent only a very small part of the entire trading volume (if not why move away from this mad FIAT/debt/banking world?)
And then the question is: "is PoS fair to rich, poor, employers and employees. producers, traders, consumers, and many many more? What’s your opinion about this? Or is it really only about investors, traders and moonwalks?


#23

I’m planning on HODLing whatever I can accumulate pre-Shelly and HODL the staking rewards if they do not impose to much of a tax burden on me (low value relative to USD). If/when the value relative to fiat of my staking rewards gets large enough to pose a tax consequence I will start cashing out all staking rewards into fiat on a quarterly basis and using the proceeds for taxes and whatever else I want to spend it on. I plan on only cashing out what I HODL on a as needed basis for family emergency or the occasional Lambo.

I’m probably not the only one who who will act in such a manner.


#24

I see what you mean. This is a classic clash of deterministic vs. probabilistic way of thinking. I say there is nothing wrong with passive investing because it creates value in the marketplace. Even though you don’t see the ‘real’ contribution of investing, it adds value through the interplay of supply and demand in the marketplace.

To your point of unfairness:

  1. Do you think it is fair for those who do not possess much stake to make 100x while those who do get a lower return? if yes, then why? Because, if the efforts of being useless HODLer in both cases are equal shouldn’t there be an equal return? The only difference is how much money each one puts into the system. One could argue that the guy who put in more money is transferring more of his created value into the system and should be paid the same percentage as anyone else. #WhyHate?

  2. What if I am a rich guy but decide to put a small fraction of my wealth into ADA? Do I still deserve greater return on my money than a poor guy who put 100% of his life savings into ADA?

  3. Here is another scenario: What if I am a rich guy who bought ADA at 1.3 and and you are a “poor” guy who buys the same amount at 0.15? Should we be treated the same?

As you can see, the pursuit of ‘fairness’ creates a host of issues that can’t be meaningfully addressed by the system. Trying to determine what’s ‘fair’ requires knowing the circumstances of each individual and that is impossible to know, let alone very contentious from an individual’s point of view of fairness.

That’s why markets are the most efficient way to address these questions. As long as rules are clear to everyone, markets help individuals make decisions and be responsible for their own future. They reward those who have correct predictions, even though the ride to the final destination turns out bumpy, and they punish those who buy/sell at the wrong time. This is the level of fairness that every individual could understand and subscribe to.

A poor HODLer with 1000 ADA could be richer in the long run than a guy who buys 100K ADA and sells it at the wrong time. The main lesson here is that your rewards are probabilistic. It is not like you invest and you are guaranteed a return. Your returns will be dependent on the decisions you will make, rich or poor…

If you re-frame your thinking to consider probabilities, you will see how HODLers add enormous value to the ecosystem, on par with users, developers and even day traders. They all have their own reasons to use/hold ADA.

It all works like a beautiful symphony.


#25

When I asked this question, I thought we are all just a bunch of begginers and didnt hoped I will get this amount of highly professional answers and discussions for it. I dont have a clue why, but I have huge respect for Cardano and what it tries to do in this world. I also believe that all this hard work will pay off, not in matter of wealth and money, but it will succeed as one of a few solutions in this ruined world that actually puts faith in regular people. I have a month salary of 600euros,and half of that goes on rent and bills. I will put as much as I can into this, cause I want to be part of revolution, if it becomes one.


#26

I agree. I love the direct use of game theory and behavioral economics to help build the system. That is one of the things I am most excited about seeing as it works it’s way out into the world.

I’m also working on several hardware and software ideas above and beyond passive investment to make Crypto in general and Cardano in particular easier and safer for the masses. Any gains I make with passive investments will probably help support those efforts.


#28

Staking rewards from the start will be negative return, and in the far future it will be negligible in real reward for stakers as most of it will go the staking pool operator (as it should) remember that operator provide a service for us all so the network can run - they provide the hardware and computation - the staking itself does not add any direct value to the chain, is just a necessary component for decentralization of the computation, and because it is the least valuable component in the chain it will also be rewarded the least.

If the staking system is made at the most efficient it would mean staked coins could be pullet at any time, this would mean a pretty inelastic supply/demand of staked coins, since most coins will be staked at all times and it wont matter if the rewards are 5% or 0.1% cause if there is no downside to staking, it will be staked, cause why not. We dont want staking rewards to be high, we we want them to be as LOW as possible, we want the operators who supply the hardware and computation to make enough to buy, maintain, upgrade + labor to be covered by rewards, and the absolute least to the stakers - cause the less the stakers received, the lees fees the network has to have which we want for the project to succeed. There is absolutely no reason whatsoever to reward stakeholders with more than absolute necessary as it adds no value to the project. The perfect solution for ADA would be a solution that ADA can be staked and unstaked within a short period of time if not instantly, this will achieve the goal of maximum staking for the least paid since there will be no need to encourage staking. It will be a default.

and a inverse-auction house style system could be made for the disbursement of staked ADA to be dispersed over many pools to make it as close to a free market supply/demand system as possible with no central planning needed to achieve the goal of decentralization.

If ADA succeeds and grow, and once all ADA has been distributed. staked ADA will just be something for deadpool ADA which are not being used, and will be a very marginal but risk free return something you will take advantage of, but not something you will ever think of. Nobody will ever be HODLing for the purpose of staking, this will never happen.

In fact, what likely will happen is that your wallet provider will run pools and take your staking reward for the service of providing you a “free” wallet. Assuming that competition in terms of wallets will rise in the future, who knows what will be made. But they wont be free to develop and maintain, and this could be a great fee structure.

Anyone interested in ADA should completely disregard staking as any reward metric - and yes POS is fair to all parties and it is far superior to POW in governance and efficiency. The perfect world would be no POS at all, because that meant we could run the network for free but that is impossible. Just to remind everyone, POS and the reward mechanism is not a feature of Cardano, it is a fee and drain on the project, it is just something that we HAVE to have - not that we want it in any way.

Your speculative reward will come from capital appreciation if any, not staking, and there is nothing wrong with this.

And If you are deadfast on making a buck from the POS reward mechanism and not capital appreciation - you have to become a mining pool operator and provide computation, yes there is no free money, you actually have to provide value.


#29

If staking is not valuable, then what is the purpose of staking? There has to be incentive to do so.

I may have this wrong, but the stake is what secures the network, albeit via a pool, this is a valuable aspect in its self and there has to be incentive to do it or people won’t.

I can’t get past this point on your argument.

What are your thoughts on this?


#30

I think it will be initially 3% to 5% return decreasing over time as the coin gains genuine utility.


#31

The reason we need staking is to decentralize the computation so that no one pool runs everything, that is where staking comes in. In that it is staked ADA that has a chance of being chosen which then leads to the computation of making a block in that pool. It has value but it is indirect, and the least value in the chain since the supply is inelastic - and everyone will be staking their ADA. If staking is done correctly, everyone will stake, regardless of reward, even if you got 0.1% reward a year, you will stake your holdings. Why wouldn’t you, if it is easy, no risk and can be pulled at any time. This would just be a default function in your wallet (done automatically so you never have to think about it other than the one time you choose a pool, or perhaps split pools)

The staked amount wont change much if its 0.1% or 5% it will be relatively the same.

The only reason you would need any form of higher reward to encourage people to stake would be if it is inconvenient (aka. time locked funds) or there is a risk of loss.

We might have to do it that way because of tech limitations, but we dont want that. Its not good for the network. It will be a cost to the network, cause that means we are forced to have higher fees to pay for something that adds no value to the network, making it less competitive/viable the higher the staking reward the higher fees we must have for people using the network. So the aim should be to make the staking reward as absolutely low as possible and the way to do this is to make the staking process as smooth as possible.

That is the reason why mining pool operators will eventually have most of the rewards, and that is for them to cover the purchase, maintenance, upgrade + labor those are the ones we actually need to cover. They will respond to supply/demand - if there is no money to be made or not enough to cover cost, you wont get pool operators - but the same does not go for stakers, stakers will take anything they can because every ADA out there wants to be staked if the process is made right. We do not need a “specific” group of hodling stakers, that would be very inefficient, we want every ADA and every user to participate at all times.

We might end with that, but that is a unfortunate bad design.


#32

Ive spoken again about this before - but yeh, thats never going to happen. Sure you might get 5% more ADA but the real return will be nothing like it, in fact I believe it will be net negative but again it depends on the amount of stakers. I did the calculations, but I think at about 60-70% staked ADA it becomes net negative in real terms.

I am not going to go through the explanation since it is already talked about in different topic - but just think about it logically. Where would the 5% come from? Who will be paying this? How can we just magically make people 5% richer every year.

The total ADA collected from fees at this point is prob still below 100k ADA which is about 3k usd far away from the 24M USD needed - and I believe the 3K will be burned, so… yeh not even they will be there.

5% of the 700M market cap is 35M USD, lets say 70% of ada is staked, Thats 24M USD… Where would the 24M be coming from?

Ill let you try figure it out yourself.


#33

There’s about 14 billion ADA that haven’t been created yet. Staking rewards will come from there and over time will be replaced with fees as the network gains adoption.

Fees are also necessary to prevent denial of service attacks, so making fees as low as possible may not be the best idea.

It’s all explained here https://staking.cardano.org/


#34

Yes… Exactly… That is called inflation my friend… The 14B ADA extra to hit max supply is just a cap on the inflation… The 14B ada is not a reserve, it is just inflation to come.

Lets go with the socratic method.

I ask you again, where will the reward come from when done through inflation?


#35

I’ll tell you again, “over time will be replaced with fees as the network gains adoption.”


#36

But right now the entire history of the network has generated about 3K USD in fees which is a little bit short of the 24M needed at 5% - So if the staking reward will avg. 5% at launch for the first year. Will you be 5% richer after the fact or even richer at all?


#37

The answer is. No. Cause who paid the 5%? YOU did. With the dillusion of your own holdings. The only difference is… It is not equally distributed, who else wants to get paid? The treasury and the mining pool operators and they have 0 ADA to be diluted.

So while they inflated the supply and divide up the inflation you only get a chunk of it back, while the rest goes to the mining pool and the treasury (here is where your loss comes in) the market cap of ADA will be exactly the same after the inflation, the only thing that has changed is the ownership of that market cap. Al though the market cap stays the same The price of a a single ADA will go down in direct relationship with the increase in supply.

Biggest loser will be non-stakers (they take the full loss on inflation), then stakers (they take a part loss, since a portion of it comes back) and on the other end the reward will go to the treasury and mining pool operator cause they started with 0 ADA and now have more ADA.

You start with ADA and now have more ADA that has less value, and the value that was lost went to the treasury and mining pool operator.

The only way you could sneak out a reward of this, is if the non-staker group is large enough, that their loss can cover the stakers too, then there will be a little reward in real terms but far less than the headline number.

and yes you are totally right that it will scale into fee, and that is where it will actually be a reward but it will be nothing like 5% or anything alike - but for now the fee is not even relevent, as I mentioned 3K which is a joke. So any reward has to come from inflation, and yeh in reality it is a bill, not a reward. But yeh reward sounds much better doesn’t it.

The biggest incentive to stake in that environment is just to not get inflated away and mitigate the loss.

There is nothing wrong with this - it is working and planned exactly as intentional - this is a way to fund the treasury without fees at the moment being enough and make everyone happy doing it in the process - since Its done through an inflation scheme, instead of a direct-tax which would be much more transparent.


#38

That makes sense.

We’ll just have to wait and see I guess, what the adoption is like in the future and what the amount in fees are.

I don’t think holders would see a net loss in the value of their ADA over a long term if we achieve enough adoption. I think the capital increase in value will greatly outrun inflation.


#39

Yes but the point is that you still paid for that inflation, regardless if you see a capital appreciation and overall increase, the capital appreciation would just have been that % you lost higher had it not been for the inflation. So while you be net positive overall, I do not dispute this at all, but you still paid for it, it still wasn’t a reward and the net positive was not created by the staking but by capital appreciation.

But I think we both agree.


#40

here comes ADA_fan

You are probably going to make the argument that the ADA that goes to the treasury increases the overall project value and hence makes up for the inflation and trading in for equal or greater net value that comes out of usage and investment of these funds.

A back-end reward masked as a front-end reward

Which I wont dispute either - it is a valid point - and a expected outcome.

But still doesn’t change anything of what I said.


#41

Right, I think I’m missing the point you were trying to make.

Obviously staking is necessary to secure the network, otherwise ADA would be worth nothing. And paying slot leaders is necessary to help incentivise them to show up and mint the blocks, which is preferable even with a small amount of inflation.