Staking Rewards published their comprehensive Staking Ecosystem Case Study earlier this month. 16 validator's interviews contributed to the initial study. Most of them were larger validator operations.
This is a trend I see a lot. Larger validator operations have more resources available to market themselves. Smaller validators many times don't.
In response and to help counter this trend, I asked Staking Rewards to consider interviewing smaller validators too. They agreed and posted the interview questions to the Decentralized Staking Defenders forum.
Here are my answers to the questions. If my answers connect with your values, please consider delegating to the Chainflow validators. You can learn more about and how to delegate to them here.
1. How do we ensure and incentivize further decentralization within the staking ecosystem? This is a tough question. It starts with defining decentralization, as there are many definitions. I'll assume we're talking about decentralizing stake, meaning preventing a small number of validators from controlling a network.
There's no easy answer. From talking to many staking networks, both live and in development, I've noticed that simply being conscious of the rich get richer problem is a beneficial starting point.
Then, making sure to dedicate resources to token and staking economic development is important. Many of the networks I've spoken to made certain token economic design choices by default. They haven't taken the time or dedicated the attention to completely think them through.
This often happens unintentionally, as protocol and the accompanying software development work takes precedent over the economic development. The intention is to go back and fix things after the fact.
Or the networks rely on human nature doing the right thing. This often takes the form of "Well this could happen, yet it probably won't." Experience with early staking networks illustrates that once real money starts flowing, human nature tends to revert back to putting the self first and everything else after that. This means the thing we hoped wouldn't happen, does happen.
This happened with Cosmos. Before launch, nobody wanted to believe a controlling stake would get controlled by a small number of validators. Then it happened almost immediately after launch.
More specifically, designing a reward system that rewards performance, not only total stake, is one way to level the playing field. For example, give equal opportunity to all validators who run at 95% uptime or better the same probability of proposing a block. This helps smaller validators who run validators well compete with the larger ones. By smaller here I'm referring to the size of the validator operation, not total delegated stake
Other ideas include truly incentivizing delegators to spread their stake among multiple validators and possibly incentivizing validators to delegate to at least a small number of validators they don't operate.
2. What are the biggest challenges for Proof of Stake and Staking, that we still have to overcome or may still face?
I feel the single biggest challenge is the "rich-get-richer" one. How can we design staking networks to prevent heavily capitalized validators from dominating a network starting at launch, then extending their dominance due to a reward system that rewards validators based solely on their total stake.
3. What do you consider to be the most important aspects to attract delegators to your staking service?
- Running a reliable, available and secure validator.
- Clear, consistent and transparent communication with delegators.
- Community contributions.
- The validator's motivations and values, i.e. Why are they in this in the first place?
- A fair and transparent fee structure, i.e. Why do validators charge the fee they charge?
4. Which upcoming protocol projects are you most excited about and why? Is there a protocol no-one is paying attention to but should?
This is a tough question since so many networks are launching. Here's a short list off the top of my head:
Cosmos - Because of the number of projects building on the Cosmos-SDK, which took me by surprise.
Althea - Because they're working to break the stranglehold on Internet connectivity large Telcos have, while also making the Internet accessible to those who don't yet have connectivity. Althea's building on the Cosmos-SDK.
Livepeer - Because the Streamflow release should increase adoption of Livepeer's decentralized, uncensorable streaming platform.
Harmony - Because their mission to bring Harmony to 10 billion people resonates with me and my bodhisattva aspiration.
5. How can smaller Staking-as-a-Service companies differentiate themselves from large players like exchanges providing staking services (e.g. Coinbase)? Is there a danger of centralization? Binance Staking in 2019, yes or no?
This is a topic I think about a lot. There is a significant danger of centralization. In fact, it's already happened. Without conscious action to undo it, before it becomes inextricably embedded in networks we care about, we'll simply recreate a financial system controlled by small number of very wealthy entities.
To me there are a few tiers to consider. The first is the big exchanges. They have the advantage of size and an embedded delegator base. They're followed by big well-capitalized staking companies, e.g. who have raised millions of $'s. Their advantage is size and access to capital. Then there are smaller staking operators like me. We are smaller, yet very dedicated and capable operations that are resource constrained.
Validators have to differentiate ourselves across tiers, especially those above us, as well as within our tier. Differentiating ourselves across the tiers above us is particularly difficult. For example, most of my resources are spent running my validator well. This doesn't leave much, if any, time for marketing.
For example, fortunately, I had a long flight home on a Sunday to write answers to this survey. Without this time on a plane on a weekend, it's unlikely I would have been able to make time to reply.
We can differentiate ourselves through community contributions and activism. I'm doing the latter with the Decentralized Staking Defenders.
This differentiation helps among those who are very familiar with the staking community and ecosystem. It doesn't help much with those that aren't. The latter tends to gravitate toward the bigger validators who are able to increase visibility through marketing and other business development activities.
It's an uphill battle to say the least. Yet I feel hopeful the true believers and supporters of decentralization have strong representation within the community. My hope is they will continue supporting validators whose values are consistent with theirs.
6. What do you consider sustainable incentives models for proof-of-stake blockchains? At which point gets a high inflation harmful for the blockchain ecosystem? What is the best trade-off to reward blockchain keepers sufficient, but don’t dilute holders too much? Is there a magic formula to this?
I feel this starts with validators being transparent with their fee structure. Validators need to be incentivized to invest in running our systems securely and well. Then the question becomes what is a fair profit for validators to earn?
Delegators have to take responsibility here too. Although human nature illustrates that delegators will probably chase the lowest fees.
So this is a tough question. My sense is once delegators start to get burned, by either a validator getting slashed and/or hacked, it's only then they'll pay attention to factors other than fees, such as a validator's architecture, operations and performance history.
I think getting real traffic flowing on networks, that may feel the impact of network performance degradation, will help bring attention to this too.
7. Do you believe decentralized finance implications will replace traditional finance and it’s products within the next 10 years?
Yes. I feel the real question is how much will they replace or present a viable alternative to them. DeFi applications have already started gaining traction on Ethereum.
I think many will view DeFi as a viable alternative to legacy/traditional financial products within 10 years. In addition to providing alternatives for existing users, they will attract new users.
Maybe DeFi's market cap will be somewhere between at least 10-20% of legacy/traditional finance's within 10 years. I don't feel that's much of a stretch right now.
8. Which value-added services or products are the main focus for you at the moment? (e.g. insurance, governance dashboards, staking mobile wallet, custodial services, open source contributions, community meetups etc)?
I'm working on education through the Decentralized Staking Defenders. The Defenders' mission is to keep stake decentralized. I'm also working to open-source validator alerting and monitoring tools.
My belief is that if high-quality and effective tools are available to smaller validator operations, the network will be more performant and secure. Validators will also then have time to spend on other activities, like community and governance participation, increasing visibility among the delegator base. This is particularly important to smaller, resource constrained, validator operations.
9. Do you see the necessity to educate Delegators on Protocol Governance? Grassroots Democracy or parliamentary democracy?
That's a great question. In addition to staking governance, the 7 months I spent leading Aragon's product team provided me with additional perspective on this.
Some delegators may want to be involved in governance. Others may prefer the validators participate on their behalf.
Either way, delegators should consider validator governance participation when choosing a validator. They should choose validators who vote consistent with their own values. Validators should be transparent about why they vote the way they do.
10. Currently around $6 billion is locked in Staking. Can you ballpark this value for in one year? Currently around $0.5 billion is locked in DEFI. Can you ballpark this value for in one year?
Modeling this would require resources I don't have. Even if I did have them, there are too many variables at play, with wildly unpredictable value ranges, to do this well. As a result, I'll pass on this question 😊
11. What do you suggest will increase awareness amongst people about staking and earning interest on crypto assets?
This question relates to the larger "Where are the crypto users?" question. Crypto needs more real users using applications built on blockchains, to realize decentralization's true potential. This goes for staking networks too.
Most users won't care enough to understand the lower layers of the applications they use. They will understand when network performance is affected by these lower layers. But even then, most won't care enough to understand the operational details.
So we need to focus on the users who do care enough to understand. Then, we need to make it as easy as possible to put their stake to work.
Stabilizing token prices, to make staking returns attractive, will help here too. We need to do all this with an eye toward keeping stake decentralized in the process.
12. Do you believe Staking will play a role in enabling traditional governance decision apart from protocol governance? And if yes how?
Possibly, for example if voting apps are built on top of staking networks. For voting apps to be effective though, the gap must be bridged between placing a vote and executing the action the vote impacts.
13. Do you see staking as a basis for governance being applied in the traditional world (nation states, political decisions, etc.)?"
Again, coming back to my time at Aragon, if this does happen, it will take a long time. One path toward this happening is establishing DAOs on top of staking networks. DAO user adoption is a tough road too.
I think it will happen eventually. Yet the extent to which it does, meaning what decisions and institutions are either replaced or at least shown to have alternative implementations, is an unknown right now.
14. How do you explain Proof of Stake and Staking to a 7-year-old?
I'm not sure about a 7 year old, yet I can describe how I explain it to someone unfamiliar with crypto 😊 I tell them I run systems that prove certain things happen on these networks. In exchange I receive rewards for operating the systems securely and reliably, while not manipulating the network.
Then, others place their trust in me to do the same. They do this by depositing their money with me, in a way that actually never gives me access to the money. I then share my rewards with them, to repay their trust.
This is the simplest explanation I've been able to come up with so far 😉
P.S. - Remember, if my answers connect with your values, please consider delegating to the Chainflow validators. You can learn more about and how to delegate to them here.