Proof of stake rewards question

[ZCryt0Knight]

@jb455

That is exactly what you will see, the so called “return” is a mirage and smoke and mirrors game. That will fool many people under a false premise, because it is not what it gives out to be… When we do the math yeah there might be an actual return, if a large chunk doesn’t stake, but again, its not the headline number that will be thrown around - sure you can say this is the fault of the user then (though this excuse wouldn’t hold up in any court)

With all due respect, if you are looking for an investment with guaranteed return, you are either naive or have to go back to school to take Econ 101. Translation: No investment will guarantee any returns for you. If they do, it’s a scam (just like free transactions in crypto)!

When you invest in ADA your expected return is a function of:

1. Demand for ADA and, by extension, its price
2. Total stake

Everyone understands that we need treasury for the system to function in the long run. And even if we have the treasury, it is not guaranteed that it will cover the cost of future development as Cardano’s ability to pay for it depends on:

1. Whether the developer accepts Cardano
2. Price of ADA at the time

Again, it is not some scheme to significantly dilute stakeholder returns in favor of StakePools or Treasury. Everyone knows how it works and no one in their right mind would question the system’s motives, especially given the potential upside.

StakePools: I think everyone and their dog knows at this point that StakePools will cost to run. We will have 100 of them so it is safe to say a healthy market competition will keep the cost down for the community. I bet it will be cheaper and more transparent than ETH or BTC where you are practically a price-taker.

Cardano has been transparent about the design from day one and to suggest anything otherwise is just intellectually dishonest. Bear in mind that the guy who calls the shots in your head–Charles, wouldn’t want to ‘give away’ his stake to folks who don’t create value for the system. StakePools are essential in guaranteeing performance for the end users. It’s a service that is worth something to the community and it’s not determined by a formula, but by the free market.

Treasury: You seem to suggest that IOHK will just take that money from treasury whenever it’s needed. That’s far from being the case. When treasury and voting system are up and running, the projects will be posted for voting and scrutinized by all the stakeholders. Do you think they are all stupid just to throw money at IOHK whether or not it produces something of value? Your argument just doesn’t make sense.

The stake level will be dynamic and will depend on:

1. Price of ADA
2. Liquidity in Exchanges (Exchange ADA won’t count toward Total Stake)
3. Demand for ADA

In the beginning we are likely to have a high total stake, but as more exchanges add ADA and as more developers come onto the platform, we will have real demand for ADA. It will drive the price of ADA and force stakeholders to sell their ADA at some price point.

@jb455

Doing it through inflation is dishonest, there is just no way to argue it isn’t, none of your points argue against that either…

I never argued against inflation. Again, it is a very well-understood point and no one wants to argue with it. Whether and how it is distributed between StakePools and Treasury is such a minor point that it just doesn’t deserve a mention in the grand scheme of things. Especially if inflation is low to begin with.

I understand you are scrutinizing the system from your point of view, but what I am trying to say is that everyone knows about inflation. It is necessary to keep the system running and guarantee performance. The only real cost (as I think you, yourself, pointed out) are StakePool fees and they will come out of EVERYONE’s pocket. Treasury will be a net positive spending so I don’t think anyone in their right mind thinks of it as a true cost.

[rickymac]

Will the average normal person (non-crypto) pick 1 or 2 ?

[Eystein_Hansen]

@jb455

But the return will come from capital appreciation not from staking.

Most investors in dividend stocks (as an example) are looking both for capital appreciation from the dividends but also from stock gradually increasing in price. Stable industries with good outlooks usually have a lower dividend yield while stocks deemed more high risks tends to also require a higher dividend yield. I think to only approach this from a math point of view of finding a equilibrium of % staking vs stake reward would fail to find the psychological (and fundamental) point where many would be interested in purchasing ADA for its perceived risk vs reward. Game theory is for me one field of human behavior that fits well within the mathematical domain but I hope also one would consider other models as more economical models to understand better the typical investor perspective on staking. I think if there was high enough economical incentives the goal of more mass adoption and acceptance would be easier achieved as in my pragmatic view that is how much of behavior already is driven today (economical incentive based.)

Oh and regarding the staking as inflation issue. It is an issue if the currency does not increase in value faster than the increase in currency amount. Theoretically if treasure founds where not effective in increasing value over time the value of the whole system would then drop. It would also be a theoretical issue if the incentives for not staking where higher than the incentives for staking. For example to use the currency as some form of fuel/liquidity in another currency system would be more rewarding in some way than staking. Thus the reward mechanism needs to have a scale in case more and more users drop off that increases the rewards proportionally to the drop off compared with what one believes is an ideal equilibrium for stake participants. However this also causes a theoretical problem of creating incentives to try to block out as many users as possible to create big rewards for whoever is left staking. Thus security of network structure and ease of allowing new staking pools to form is important as well. (Well they are for other reasons as well but also for these reasons.)

[jb455]

@rickymac

Will the average normal person (non-crypto) pick 1 or 2 ?

If you package it the way you did then 1…

But again, that is a wrong way to put it, ADA wont have any “expected” return, because staking wont be a return… So… Do you suggest we should Lie to this person?

ADA as a project is more than fascinating in itself… There is no reason to bring in “Staking Rewards” because there are no staking rewards. This is a scheme to fill up the treasury and pay for mining pool, just packaged very nicely so people dont see that they pay for it.

If there are staking rewards, if people dont participate as much as I expected, the reward you get from inflation will be there, like maybe 1-2% but yeah that is not the a convincing point… and it shouldn’t be either.

The reward is ADA appreciation, I think that is compelling enough in itself, and if it is not, then let that be it… We cant be knowingly dishonest about things.

[jb455]

@ZCryt0Knight

You say a lot things in that piece, you are just spinning stuff to justify it… Its not about guaranteed returns, in fact there are probably no returns at all if you isolate “staking” and that exactly how it should be, it is supposed to be a loss, that is how it was designed for now… But the fact is, it is being packaged and sold as something else. You are contributing to this, as well as others here…

Telling someone they will get a staking return (not talking about overall return) and they act under this premise, while in reality they will be pickpocketed, and the return they get is just paying a fraction of something back what was stolen from them, and then justifying this that oh well the money that was taken to buy something we suppose this guy wants, so its all good… I dont accept this argument.

This is not my opinion this is math and how things work, this can be predicted beforehand.

https://antipalos.github.io/cardano-calculator/ (thanks to this great calculator by @vantuz-subhuman)

So with a 30% treasury tax and a 10% Mining pool fee, and 61% staking, there is the break-even for people who are staking. Anyone who doesn’t stake, will lose 2.23%/pear, people who stake will get 0% and Treasury and Mining pool will get whatever the non-stakers lose. Now 80% are staking, even the stakers will pay.

30% treasury tax and 5% inflation will give about 200.000.000 Mil ADA, at today prices that is 32M USD, and in 2020 this could be much lower, if that is what was in the treasury by then, that would be a absolute failure, no contract for that. So dont expect a small treasury tax rate, it could be higher.

[jb455]

I totally get the argument that the funds that goes into the treasury will generate ROI on the backend, I totally accept that, that is the goal at least. But even if this is true, it does not change the fact that this is a scheme and inflation is dishonest way of doing it… Because it is being packaged as something else… ´

If we paid for this directly, everyone would understand what it was and what it would cost - I do understand there would be logistical issues with this… But if we had done it this way, we would also have stood apart from everyone else.

[ZCryt0Knight]

@jb455

in fact there are probably no returns at all if you isolate “staking” and that exactly how it should be, it is supposed to be a loss, that is how it was designed for now…

Why would you isolate staking returns and completely ignore the capital appreciation? It’s like saying hey, growth stocks are worth zero because they pay no dividends. It just doesn’t make sense.

Now with regards to crypto: “capital” apreciation is the main driver of value, to the extent that any sensible person would completely ignore staking ADA distributions. They will have an impact only if ADA itself appreciates in the long run.

I think you miscategorize staking for pure dividends. You see, in PoS staking serves a purpose beyond just giving “returns” to investors.

1. Staking encourages network participation. It provides network security as stake pools need stakes authority to validate slots.

2. It provides avenues to fill up the treasury for projects past 2020. Just like your average HOA. If you ask me, this is very wise as it ensures continuity.

Regarding your numbers. I don’t think we will have a treasury tax of 30%, an inflation of 5% and stake pool fees of 10%.

For one thing: stake pools will have fixed costs that will probably run in the region of $5K/ month. Let’s be generous and double that number to 10k. That gives us 120k per year. We have 31B of ADA in circulation. Let’s say 80% of it is staked =24.8B. A one percent stake will be ADS248M or 42.160M at $.17/ADA. If you divide 120k by 42.1M you get .28%.

This is what you are likely to pay as your pool fees in percentage terms. Your numbers miss this critical point. Actually, they misrepresent the whole picture because of it.

@jb455

So with a 30% treasury tax and a 10% Mining pool fee, and 61% staking, there is the break-even for people who are staking.

See, you generalize profitability, which is misleading. Your profitability depends on the number of ADA you hold. Depending on where ADA price sits at the time of your decision you might make money or lose money in USD terms.

@jb455

If we paid for this directly, everyone would understand what it was and what it would cost - I do understand there would be logistical issues with this…

But we are paying directly for system upgrades, it is straightforward actually. In the beginning treasury will be mostly financed through inflation, but as we move forward in time the weight of inflation will decrease while tx fees would step in to pick up the slack.

If anything this financing mechanism is very smart as it allows us to switch between funding sources dynamically as the market circumstances change. There is game theory involved in all this and I am sure when the papers come out these issues will make more sense to us.

I just understand their intuitive approach to designing this delicate system with enough balance to keep it at Nash equilibrium at widest market conditions.

I wonder how exactly would you designed the incentive/treasury system?

[jb455]

@ZCryt0Knight

@jb455

in fact there are probably no returns at all if you isolate “staking” and that exactly how it should be, it is supposed to be a loss, that is how it was designed for now…

I think you miscategorize staking for pure dividends. You see, in PoS staking serves a purpose beyond just giving “returns” to investors.

Regarding your numbers. I don’t think we will have a treasury tax of 30%, an inflation of 5% and stake pool fees of 10%.

I actually dont disagree much you said, except a few points, will just mention these two… Might get back on the others…

I am not the one miscategorizing, this is peoples perception, that staking is like a dividend… This is how it is packaged and shared, and that is where the dishonest part is…

If you tell a person what staking really is, it losses Its hype… Right the reason people are so hyped about staking is because they see it as a raw dividend…

The second point…

Well I did the calculation for 30% tax, and 5% inflation, and that would only generate 30M at current valuations if we start by 2019-2020, that is not enough, and there is volatility risk, this could be much less or more by 2020… so if you think inflation and tax is lower, the problem is even bigger… I might be very conservative with 30% and 5% inflation, chances are it will much much more… Filling the treasury with 50-400 M USD - I dont see a goal of less will cut it.

In terms of mining pools, we will see, I dont think it will be that low at all, also this will significantly increase over time… Mining pools giving back 99.80% of the the staking rewards, just seems silly to me. We will see, again its competition so the market will find the rate… and if the cost is as low as you say, yeah it will eventually be very low…

But there are other values a mining pool can have, like people know it and use it, that has value over a smaller mining pool because they generate rewards more often, so they can charge extra. So there is going to prem added in over just hardware and maintenance cost.

[ZCryt0Knight]

@jb455

this is peoples perception, that staking is like a dividend…

I haven’t seen any material that says staking is dividend or is packaged as dividend. If people think it’s dividend they are wrong, because crypto isn’t a stock. It’s not a currency in its pure form either. It’s a hybrid between the two… or maybe it’s a category of its own. Trying to measure it using old financial terms just sound like looking at the car and trying to figure out what kind of horse it is…

@jb455

Mining pools giving back 99.80% of the the staking rewards, just seems silly to me.

See, you have mentally anchored your assessment at 10%( I don’t know where you got that from) and are arguing that .28% is too low. I think $120k is more than plenty for leaving a computer online 24 x 7. Since Cardano network won’t require heavy computation it won’t cost you much in electricity either. Even if we triple that number to $360k at current low prices, mind you, we won’t pass the 1% threshold. This is how insignificant staking cost will be.

No one will be able to charge 10% as the market will undercut them and they won’t have any delegates. Worse they will get kicked out of the network.

@jb455

Well I did the calculation for 30% tax, and 5% inflation, and that would only generate 30M at current valuations if we start by 2019-2020,

Is your concern we won’t have enough money in treasury? If so, by 2019 we should have a pretty good understanding of where we stand and adjust the tax rate if need be. It’s all up for debate among the members of the community.

One thing you certainly can’t do is to assume the price will stay the same. It most certainly won’t. So the equivalent of $30M in ADA could be worth $120M in a years time. Given crypto’s volatility a 3x change in price is a monthly movement in price. So there is that…

If anything it will only go up, looking at the pipeline we have for 2018.

[jb455]

@ZCryt0Knight

I haven’t seen any material that says staking is dividend or is packaged as dividend.

Amazing.

@ZCryt0Knight

See, you have mentally anchored your assessment at 10%( I don’t know where you got that from) and are arguing that .28% is too low. I think $120k is more than plenty for leaving a computer online 24 x 7. Since Cardano network won’t require heavy computation it won’t cost you much in electricity either. Even if we triple that number to $360k at current low prices, mind you, we won’t pass the 1% threshold. This is how insignificant staking cost will be.

No one will be able to charge 10% as the market will undercut them and they won’t have any delegates. Worse they will get kicked out of the network.

You will be very wrong about this, eventually when the inflation damphens down and it is fee based, the mining pool fee will be very high, the mining pool fee and treasury tax combined will be higher than whatever the stakeholders get, the stakeholders are the least on that list. Even right now, was the mining pools going to be funded by fees, it would be 100%… So the mining fee will grow each year and eventually consume the majority of that portion… That is the whole point, we pay for mining pools and treasury through fees, the stakeholders are doing the least of that portion, they will eventually receive least… This is how it will go down, eventually it will be much higher than 10% (if the project is successful) that I can guarantee you.

Even if you are right, that it will start out as low… but we will see if they return 99.5% of stake…We will see what the trend will be, specially because right now It is a limited group first…

IOHK prob collected 30K ada in fees, since the start of the network.

@ZCryt0Knight

One thing you certainly can’t do is to assume the price will stay the same. It most certainly won’t. So the equivalent of $30M in ADA could be worth $120M in a years time. Given crypto’s volatility a 3x change in price is a monthly movement in price. So there is that…

I mentioned that, it could be higher but it could also be 5M or 15M, but we cant afford to just speculate on things, we need to make sure that there is more than enough in that treasury.

[ZCryt0Knight]

@jb455

Even right now, was the mining pools going to be funded by fees, it would be 100%… So the mining fee will grow each year and eventually consume the majority of that portion… That is the whole point, we pay for mining pools and treasury through fees, the stakeholders are doing the least of that portion, they will eventually receive least… This is how it will go down, eventually it will be much higher than 10% (if the project is successful) that I can guarantee you.

I respectfully disagree. Mining in PoS is so cheap it would be laughable to compare it to PoW. You may be doing that, which is a mistake. In PoW networks mining gets expensive and miners have to fork out serious cash to be able to mine coins. This problem just doesn’t exist in Cardano. As I mentioned, stake pools will be just computers you leave on 24 x7. That’s it! There is no other cost to it to justify crazy 10% fees. It just won’t happen. Even if they hire a system admin full time, his salary won’t be a third of a percent at current prices which are, as you know, quite low.

I won’t write on this any longer as we seem to have irreconcilable differences. I made myself clear and I rest my case

[jb455]

@ZCryt0Knight

@jb455

Even right now, was the mining pools going to be funded by fees, it would be 100%… So the mining fee will grow each year and eventually consume the majority of that portion… That is the whole point, we pay for mining pools and treasury through fees, the stakeholders are doing the least of that portion, they will eventually receive least… This is how it will go down, eventually it will be much higher than 10% (if the project is successful) that I can guarantee you.

I respectfully disagree. Mining in PoS is so cheap it would be laughable to compare it to PoW. You may be doing that, which is a mistake. In PoW networks mining gets expensive and miners have to fork serious cash to be able to mine coins. This problem just doesn’t exist in Cardano. As I mentioned, stake pools will be just computers you leave on 24 x7. That’s it! There is no other cost to it to justify crazy 10% fees. It just won’t happen. Even if they hire a system admin full time, his salary won’t be a third of a percent at current prices which are, as you know, quite low.

I won’t wrote on this any longer as we seem to have irreconcilable differences. I made myself clear I think and rest my case

I can absolutely with a 100% guarantee that the mining pool fee will be much much higher than 10% if Cardano is to become a successful project… With no doubt at all… And we are not talking of the market cap, but of the stake rewards… You are missing a part of how this works… rest as your case as you wish. The only reason it can stay low is because of inflation-scheme, but as that becomes lower and lower each year the fee from the mining pools will go up…

As of right now IOHK probably collected around 30K ADA in fees, since the launch of ADA, try dividing that up haha… 1% would be 300 ADA for the pools…

Even if Cardano was a large project (and need lots of computing power and would require serious mining pools) and we could run mining pools for 1% of fee cost, then that means the fee for transactions are too high and needs to be reduced dramatically, then bringing the mining pool fee up that way… Again, you might be right it will be low out of the gates, but it will have to rise, and it will, eventually even above 10%, guranteed.

There are very few things in life you can be certain of, other than death and mining pool fees.

[rickymac]

@jb455

So… Do you suggest we should Lie to this person?

No way! Why would you say that? Just because people view things through a different lens does not make it lying, or smoke and mirrors. Just a different way of looking at it. You have been a little grumpy on this thread.

[jb455]

@rickymac

@jb455

So… Do you suggest we should Lie to this person?

No way! Why would you say that? Just because people view things through a different lens does not make it lying. Just a different way of looking at it. You have been a little grumpy on this thread.

I was just asking you a question, what do we do about this not incinerating you wanted to lie… It was a question… What we do we do about that.

[rickymac]

Okey dokey

[anon20038177]

This is the link for the count I mentioned on how many ADA will be burned (little more than 20K maybe I can find some time to bring a count up to date.

All centralized fees to be burnt (currently upward of 91,754 ADA). Fun Fact

Just ran across this as I was looking into transaction fees for Smart Contract’s, thought it was interesting: According to https://adatracker.com/charts there have been 91,754 ADA spent on transaction fees, currently in epoch 43. And According to https://cardanodocs.com/cardano/transaction-fees/ “TRANSACTION FEES DISTRIBUTION All transaction fees of a given epoch are collected in a virtual pool, and the idea is to then redistribute the money from that pool amongst people who were elected…

[jb455]

@anon20038177

Aha, yeah that is a little more. Thanks for linking.

I guess someone could make like a live-counter. That would be cool, I could actually get one setup… Perhaps with a bunch of other “live” fun facts.

[Eystein_Hansen]

Why is this any different from say a stock company giving stocks as as payments to shareholders? If it creates value for the shareholders per share more than the dilution effect of an increased number of total shares than it is a net profit. Also isn’t it the case that as number of transactions increase the fees collected should be more and more able to support these payments without having to resort to dilution of adding more currency? Finally inflation as a word is not really precise I think in this discussion. Are there goods being purchased with ADA that have risen in price? Not at the moment for sure. Is ADA even going to be used to buy goods or is this not the case for the side chains more so? I have a feeling ADA is more going to be about making the transaction processes smooth and provide liquidity - sort of the fuel of the whole ecosystem hopefully getting built around ADA with sidechains. So while increased number of ADA in circulation in reality drives down transaction costs it also encourages more transaction and more smart contracts to use ada transcations as fuel thus should it not drive demand thus create more value? In any case for me it is definitively not as clear cut that staking is causing real inflation.

[Razvan]

I tried my best to read through everyone’s comments. Don’t really see the issue, @jb455. You seem to be saying staking doesn’t provide any value to the stakeholder.
If you start off with 1000 ADA in 2018 with ADA at 17 cents and then in a few years you have 1300 ADA as a result of staking and ADA at $1 – well there you have it. You’ve made more money than would have otherwise by simple coin appreciation, i.e. the extra 300 coins.
And yes, I work on the premise ADA will appreciate, we all do, otherwise we wouldn’t be here.

[RobJF]

I can see how using inflation like this could be considered a little dishonest, but I think most people don’t care, or if they understood it wouldn’t care, because it’s on such a tiny scale relative to the level of dishonesty that is absolutely standard across business, politics and the media.