Economy P2P Validator: looking back, looking forward

<p>2019 was a year chock full with meaningful events in staking space. It was marked by the launch of <a href="https://hub.cosmos.network/">Cosmos Hub</a>, <a href="https://terra.money/">Terra money</a>, <a href="https://www.irisnet.org/">IRIS network</a>, <a href="https://www.algorand.com/">Algorand</a>, <a href="https://kusama.network/">Kusama network</a>, <a href="https://www.kava.io/">Kava</a> and many other Proof-Of-Stake based blockchains on mainnet.</p><p>There are lots of ongoing activities across various systems, solid projects with high potential for finding market fit launched incentivized testnets. <a href="https://solana.com/">Solana</a>, <a href="https://www.oasislabs.com/">Oasis Labs</a> and <a href="https://celo.org/">Celo</a> are amongst them.</p><p>We joined <a href="https://chain.link/">Chainlink</a> as a node operator to improve decentralization of an oracle network and help solving the lack of real-world data for smart-contracts.</p><p>In <a href="https://tezos.com/">Tezos</a>, Cosmos Hub and IRIS network <strong><strong>we participated in every on-chain governance</strong></strong> and there was a great feeling of true collaboration between stakeholders who are really interested in the best possible future for the ecosystem.</p><p>In 2019 <a href="https://cosmonauts.world/">Cosmos ecosystem</a> grew to over 100 projects and <a href="https://tezosprojects.com/">Tezos ecosystem</a> attracted over 1000 developers to facilitate continuous building. The Proof-Of-Stake space is still highly experimental and we are excited to be at the front of the movement to a fair and efficient future.</p><h1 id="p2p-validator-vision"><strong>P2P Validator vision</strong></h1><p>Since January 1st of 2019, asset value locked in staking increased nine times over and <a href="https://www.stakingrewards.com/global-charts">reached $6,5B</a>.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/5g7NdjQ.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/5g7NdjQ.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/5g7NdjQ.png 1000w, https://economy.p2p.org/content/images/2020/09/5g7NdjQ.png 1559w" sizes="(min-width: 720px) 720px"></figure><p>[^Pic. 1]: Data from stakingrewards.com</p><p>We are absolutely confident that the <strong><strong>Proof-Of-Stake ecosystem will continue to grow</strong></strong>. With this in mind, P2P Validator will continue to extend communities of enthusiasts and developers. We will show the best ways of staking and the various opportunities offered by novel business models across the networks we support.</p><p>We will also <strong><strong>focus on making staking as simple, secure and attractive as possible</strong></strong>. For us being a reliable validator is a key business activity. Our focus here is on slashing risk minimization and active participation in governance of various platforms.</p><p><strong><strong>Non-custodial staking</strong></strong> allows every user to be in control of their assets eliminating risks associated with third parties and <strong><strong>represents the safest way of participating in the ecosystem, especially for big investors</strong></strong>. Our goal is to simplify interactions with hardware wallets by UI and be competitive in terms of various complementary services. Today, only at <a href="https://p2p.org/">p2p.org</a> you can delegate ATOM, KAVA and XTZ with ledger in one place using our simple delegation tool.</p><p>As of today, we provide validation services for 15 networks including testnets and <strong><strong>plan to support more groundbreaking projects</strong></strong> that have competitive advantages and a clear go-to market strategy. The process of making decisions about joining a network is complex as our resources and ability to add sufficient value are limited. As part of this, we are closely watching the development of <a href="https://dfinity.org/">Dfinity</a>, <a href="https://www.nucypher.com/">NuCypher</a>, <a href="https://test.ton.org/tblkch.pdf">Telegram Open Network</a>, <a href="https://polkadot.network/">Polkadot Network</a>, and projects emerging in the Cosmos ecosystem.</p><h1 id="our-achievements"><strong>Our achievements</strong></h1><p>We started as a small bakery in Tezos with only $2m value delegated with us, most of it our own funds. Today over $35m is locked in staking through our infrastructure across 15 blockchains and more than 700 delegators use our services trusting our expertise.</p><p><strong><strong>We paid out over $700k rewards</strong></strong> to our delegators making each transaction transparent and available in our multi-asset dashboard.</p><p>For our Tezos delegators we <strong><strong>insured all payouts</strong></strong> with <a href="https://baking-bad.org/">Baking Bad</a> and have shortened the time before the first payout by 40% eliminating the 5 cycle freeze for rewards. In addition, we achieved <strong><strong>stable AAA+ rating</strong></strong> on MyTezosBaker with <strong><strong>over 100% baking efficiency</strong></strong> according to <a href="https://www.tezos-nodes.com/">TezosNodes</a> reaching the <strong><strong>top 5 Tezos validators</strong></strong> by staking balance. We are proud to be such a robust staking partner and we will continue to do our best to remain so and improve further.</p><p>Overall, the uptime of our nodes across all networks is 99,98%. This is a good measurement of our availability and the robustness of our setup.</p><p><strong><strong>We haven't experienced any downtime or double-sign slashing</strong></strong> even in the case of a Google Cloud provider crash as we had set <strong><strong>best class monitoring and alert systems</strong></strong> working for the convenience of our delegators 24/7.</p><p>To contribute to building the community we conducted the first meetup related to Cosmos network in Moscow. We co-organized the First Tezos Moscow meetup supported by <a href="https://tezoscommons.org/">Tezos Commons</a>. If you missed it you can watch a <a href="https://www.youtube.com/channel/UC4O5M30Exrg1abhacOJKUVw">recording</a> with English subtitles.</p><p>We were one of the winners of Cosmos Game Of Stakes and participated in incentivized testnets of IRIS Network, Terra Money, DAO BET, Cyberway, Kava, Kusama Network since the beginning providing validation services <strong><strong>on mainnet since the first day</strong></strong>.</p><h1 id="7-reasons-to-add-p2p-validator-to-your-favorites-list"><strong>7 reasons to add P2P Validator to your favorites list</strong></h1><p>Here are some perks and useful components of our services:</p><ol><li>Simple Non-Custodial Staking with Ledger</li><li>We have been investing since 2014 and always put our own skin in the game</li><li>Secure infrastructure with 24/7 monitoring and alert systems</li><li>Special conditions starting from $500k</li><li>Multi-asset dashboard to track staking portfolio in one place</li><li>Community education and development</li><li>Friendly and expert support</li></ol><h1 id="final-words"><strong>Final words</strong></h1><p>We want to thank all the teams around the globe who have worked hard this year to build such outstanding innovative projects bringing a decentralized future one step closer. It's an honor to be a part of such an open-minded community of professional validators and active contributors. We will continue to act positively influencing the ecosystem by increasing decentralization across various networks, educating people around the world and providing reliable staking services accessible to everyone.</p><p>P2P Validator team wish everyone amazing holidays and a happy New Year. It was an eventful year but definitely a fundamental one for the further achievements.</p><hr><p><em><em>What do you think we should improve or implement in 2020? Leave us a comment. If you have any questions we are always at your service.</em></em></p><hr><p><strong><strong>P2P Validator</strong></strong> is a Secure Non-Custodial Staking. Stay tuned for updates and new blog posts.</p><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/?utm_source=P2P2019&amp;utm_medium=creds_link&amp;utm_campaign=blog"> https://p2p.org</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Economy, Cosmos, Kava Kava - The first decentralized lending platform in Cosmos

<p>We live in a world of finance. Monetary incentives and market movements influence our daily decisions and define human lives in general. Under capitalism, the financial industry has become global expressing economic relations between people and institutions. Nowadays, existing wealth distribution mechanisms are inefficient and the economic environment is unstable. <em><em>A lack of trust become inevitable and we are moving into the new era of decentralized finance (DeFi).</em></em> Borderless, accessible and transparent interactions between participants without counterparties to transform old and inefficient financial instruments is the new paradigm of the trustless economy.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/T8DKKpE-1.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/T8DKKpE-1.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/T8DKKpE-1.png 1000w, https://economy.p2p.org/content/images/size/w1600/2020/09/T8DKKpE-1.png 1600w, https://economy.p2p.org/content/images/size/w2400/2020/09/T8DKKpE-1.png 2400w" sizes="(min-width: 720px) 720px"></figure><p>Kava is the first decentralized bank in the <a href="https://economy.p2p.org/introduction-to-cosmos-economy">Cosmos ecosystem</a> bridging broad digital assets to DeFi. With interoperability in mind and solid team cross-chain expertise Kava blockchain will bring new markets to the Cosmos ecosystem providing users with the liquidity and the necessary fundamentals for DeFi applications and services.</p><h1 id="4-de-s-of-kava"><strong>4 "De-s" of Kava</strong></h1><p><strong><strong>1) De-centralized lending solution.</strong></strong> Any person can take a loan in a stablecoin collateralized with crypto assets. There is no third party involved and each person is self-responsible for managing debt and lends to himself. This allows people to release a portion of stacked liquidity from passively held digital assets and spend it on whatever they want.</p><p><strong><strong>2) De-centralized margin trading.</strong></strong> When users put crypto collateral to take a loan they can use it for doubling-down their long position in a particular asset. In this case, if the collateral value of the asset increases the user may get a higher profit.</p><p><strong><strong>3) De-centralized stablecoin.</strong></strong> Kava platform provides a mechanism to issue a stable digital currency through collateralized debt position (CDP). Stable digital currency maintains <code>1:1 peg</code> to <code>USD</code> playing role of a hedge against a bear market or a true mean of exchange without explicit volatility. It allows decentralized stablecoin to take part in broader financial applications like decentralized exchanges and financial marketplaces, creating a wide space for DeFi development.</p><p><strong><strong>4) De-centralized governance and ownership.</strong></strong> The most exciting part is that everyone can participate in the project's evolution and own a share of the network. All participants who stake native token <code>KAVA</code> will be rewarded for effective governance depending on transaction fees, total supply emission and repaid loan fees.</p><p>Cosmos ecosystem is designed with existing assets like <code>BTC</code> or <code>XRP</code> in mind. If we assume that just <code>1%</code> of <code>BTC</code> will take part in DeFi it will result in more than <code>1,5 billion USD</code> value injection also adding to a scarcity of <code>BTC</code> positively influencing the cryptocurrency market in general.</p><hr><p><em><em>In the next chapters we will dive deeper into details of Kava platform and cover staking benefits, CDP, existing risks associated with staking and other important topics.</em></em></p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Economy, Cosmos Why we are against raising the number of validators

<p>Currently, 6 validators control more than <code>33%</code> of Cosmos Hub voting power with <strong><strong>over 62 000 000 ATOM</strong></strong> at stake <strong><strong>(&gt;313 000 000 USD)</strong></strong>. Their <a href="https://medium.com/@hector_89360/cosmos-hub-validators-rich-list-9ed69274e5e">monthly revenues</a> are sustainable and in most cases, are high enough to behave in interests of the Cosmos ecosystem even if they are technically able to collude. Their income is also sufficient to maintain reliable infrastructure, provide high level of security and upgrade their facilities. If we will look at validators from 80 to 100 we may notice that they have around <strong><strong>1 252 370 ATOM</strong></strong> at stake <strong><strong>(6 261 850 USD)</strong></strong>. Monthly revenues of a single validator in this group, in most cases, do not exceed <strong><strong>1000 USD</strong></strong>. Most likely, it is not enough to provide sustainable improvements, cover running costs, pay salaries to the employees and add value to the ecosystem. If we would broaden validators set and add 25 more, their revenues, probably, would be even less. Their ability to provide secure services in the long term is questionable as well as ability to compete and attract new delegators.</p><p>Situation with network decentralization will not change vastly, last 20 validators have total voting power less than <strong><strong>0,75%</strong></strong>. Taking that into consideration we suggest that additional 25 validators will not add more than <strong><strong>0,5%</strong></strong> creating state of the ecosystem where <strong><strong>36%</strong></strong> of validators have less than <strong><strong>1,25%</strong></strong> of voting power making power distribution even more irrational. This issue should be addressed before raising the threshold to establish fair distribution and define a bottom border of entering the validator's set.</p><p>These validators will have higher risk of slashing with lower cost increasing economic viability of such a harmful behavior. For example, the cost of double-sign for Polychain Labs is higher than <strong><strong>3 000 000 USD</strong></strong> while the average cost of double-sign for validators from 80-100 is close to <strong><strong>15 000 USD</strong></strong>. The cost for validator #100 is less than <strong><strong>10 000 USD</strong></strong>. This state of the ecosystem may undermine the overall trust of the Cosmos network affecting decentralization even more as delegators would not even consider to stake out of the top ten experiencing frequent slashing events.</p><h1 id="conclusion"><strong>Conclusion</strong></h1><p>To sum up everything written above, we suggest, that Cosmos Hub is still in the early stage and not mature enough to rise that number <em><em>as there does not exist strong necessity to do so and outcomes are not clear enough</em></em>. In our opinion, we should take more time to establish a healthier spirit of competition <em><em>inside the existing validator's set</em></em> and see if the smaller validators in the set are able to attract new delegators and provide sustainable services.</p><p>We understand that raising the threshold may bring new players in and final intentions are positive, but there may exist an opposite direction that has negative implications in the long run. In that case, our suggestion would be to collect more empirical data and increase the threshold based on the results of the first year as we do not need to rush forward. We already saw <a href="https://twitter.com/zmanian/status/1145072296723275776">double-sign slashing</a> and want to decrease the probability of such events being sure that the majority of validators are reliable and sustainable.</p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake ATOM with us:</strong></strong><a href="https://p2p.org/cosmos"> https://p2p.org/cosmos</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Konstantin Lomashuk

from p2p validator

Economy, Terra How Terra prints money without centralized authority

<p>It is not a secret that governments control the money printing press. It is a powerful tool that allows the filling of the economy with liquidity when it is needed. This process usually dilutes share of currency holders and causes an inflation surge, but also may boost spendings and ability of entrepreneurs to borrow cheaper and pay their employees thus resulting in higher employment rates leading to higher tax returns for the government. Wise usage of currency emission allows governments to accumulate rising tax gains and earn interest rate paid on issued money, which are in fact profit from money creation - seigniorage. These gains are used to stimulate fiscal spending and support economic growth.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/1-11.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/1-11.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/1-11.png 1000w, https://economy.p2p.org/content/images/2020/09/1-11.png 1190w" sizes="(min-width: 720px) 720px"></figure><p>One of the most common uses of money is as a convenient unit of exchange for buying goods and services. To earn some, people can produce goods or provide some useful services, but they do not have an opportunity to earn profit from the emission. This process is monopolized by centralized entities. But, imagine there is an option to participate in a novel currency emission and have rights to get a portion of seigniorage in an algorithmic and decentralized manner?</p><h1 id="terra-brief-overview"><strong>Terra brief overview</strong></h1><p>Terra project implemented the best practices of government fiscal policy and fulfilled them with solid additions that benefit e-commerce platforms (providers) and users as well. The concept combines features of cheap cross-border transactions in stablecoins and the ability for every user to participate in the growing e-commerce economy pretending on portions of transaction fees and seigniorage profit returning capital back to the people.</p><p>The core idea of Terra project is to bring on the market a stable family of cryptocurrencies without the necessity to store fiat collateral in the centralized bank and allow parties to transact not worrying about high volatility. This is very important for the crypto community and worldwide adoption. To achieve that goal, Terra developed a complex algorithm of price stabilization, which I will try to explain later.</p><p>There are three types of stablecoin implementations:</p><ul><li><em><em>Collateralized</em></em> (fiat or crypto or mixed) each coin is backed by a defined currency at some ratio which covers spikes in demand. This type is the most common one and include such prominent projects as Maker (DAI), TrueUSD or <a href="https://economy.p2p.org/kava-the-first-decentralized-lending-platform-in-cosmos">Kava (USDX)</a></li><li><em><em>Algorithmic</em></em> (utilizes various mechanisms to follow the peg)</li><li><em><em>Hybrid</em></em> (use both features)</li></ul><p>Family of Terra stablecoins represent the second type and include various coins maintaining the peg to different currencies, like USD, KRW, and EUR. The less volatile stablecoin in that group is pegged to a basket of currencies <a href="https://www.imf.org/external/np/fin/data/rms_sdrv.aspx">SDR IMF</a>. To provide conversions between currencies, the protocol supports atomic swaps at the fair fiat exchange rate. This allows Terra to offer foreign exchanges efficiently and simplify cross-border payments.</p><h1 id="how-terra-achieves-price-stability-and-benefit-e-commerce-providers-maintaining-stable-reward-growth-for-stakeholders"><strong>How Terra achieves price stability and benefit e-commerce providers maintaining stable reward growth for stakeholders</strong></h1><p>Another important part of Terra project is a staking token LUNA. <strong><strong>LUNA may be considered as a decentralized collateral, representing a buffer absorbing volatility. It captures the value of the transaction flow and redistributes it among stakeholders</strong></strong> (everyone who stake) creating incentives for them to care about low volatility of stablecoin family. Terra protocol utilizes Tendermint consensus mechanism and another important purpose of staking token is securing the network creating incentives for validators, who play roles of price oracles for inner currency exchanges and broadcast transactions in the network to behave in the interests of the ecosystem and properly provide their services.</p><p>Without fiat collateral and centralized control over the “printing press” it is not easy to provide price stability and control the total supply as well as inner economics in general. To create the market for the own currency, Terra united an <em><em>alliance of e-commerce providers in Asia</em></em> who are interested in using stablecoins as a payment method offering it to their customers. Terra money is issued in a decentralized manner depending on the demand and total market size.</p><p>For example, if existing supply is not high enough, when transaction volumes grow significantly, demand for stablecoins may also increase. The price of a single unit may rise creating an arbitraging opportunity for the payment network participants who stake LUNA. They can exchange one to another with the inner price, and benefit from its deviations out of the peg. In response, to provide the exchange protocol mints requested amount of currency that can be used to release risk-free profit on the open market returning the peg.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/2-14.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/2-14.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/2-14.png 1000w, https://economy.p2p.org/content/images/2020/09/2-14.png 1062w" sizes="(min-width: 720px) 720px"></figure><p>When protocol gets tokens in exchange for minting it distribute a part of that provisions to the treasury burning the rest with a <code>burn rate</code> which is defined by the protocol and depends on changes in the macroeconomic variables. This module is playing the role of <em><em>decentral algorithmic bank</em></em> regulating a transaction fee rate and weight of seigniorage that goes to stakers.</p><p>When the economy is in the growth stage, spendings are high. People purchase more goods and services. That results in rising inflation. When inflation surges people cut spendings, slowing them down. It leads to lower profits for companies resulting in the inability to pay their debts or make investments. The economy slows down. To fix it, according to a Keynesian approach, when the economy is rising and families spend a lot, Central Banks should do the opposite to control inflation and be able to step in when the economic cycle is moving closer to a recession. That is exactly the way how the economy is functioning today.</p><p>Treasury module is doing exactly the same for Terra economy. In periods of growth and rising transaction volumes it increases accumulation of LUNA earned in exchange for minting Terra by decreasing the <code>burn rate</code>. When the economy begins to contract in the cycle of lower transaction volumes Terra protocol facilitates spendings using accumulated funds in the treasury, bootstrapping stable demand and economic growth. Another purpose of these provisions is to provide discounts for usage of Terra stablecoin as a payment. If people prefer to pay that way, it obviously creates additional incentives for e-commerce providers to join the Terra network.</p><p>The core priority for the success of such a system is to create strong incentives for LUNA staking even in periods of instability. This mechanism works like programmatically determined equalizer, managing LUNA <code>burn rate</code> and <code>transaction fee rate</code> which together represent staking rewards. To provide stable staking reward growth, protocol measure and balance these components depending on the economic variables.</p><ul><li>When the LUNA <code>burn rate</code> is high it rewards holders as staking power of their assets is rising. To smooth that growth, protocol decreases the <code>transaction fee rate</code>.</li><li>When the LUNA <code>burn rate</code> is low it dilutes holders and staking power is falling. To compensate that, protocol increases the <code>transaction fee rate</code>.</li></ul><h1 id="decentralized-resource-allocation"><strong>Decentralized resource allocation</strong></h1><p>Terra may be applied to various sectors with different decentralized applications (dApps) built on top creating multiple token economies managed by the single programmable module. Treasury funds will be filling from various sources. Growth cycles and inflow changes from one sector will cover a decline in another.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/3-13.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/3-13.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/3-13.png 1000w, https://economy.p2p.org/content/images/2020/09/3-13.png 1049w" sizes="(min-width: 720px) 720px"></figure><p>Capital allocations for dApps development would be managed by the network participants in a decentralized manner via governance. Every LUNA holder may cast a vote taking into consideration actual results of a particular dApp measuring potential benefit. This model creates motivation for dApp providers to investigate new incentive models and offers a unique value proposition competing with others for capital allocation.</p><p>In existing centralized decision making on fiscal spending, a small group of people decide how resources should be allocated. There is a high probability of corruption schemes or lobbying interested parties. In those cases, resources may not be spent efficiently. Future economic outcomes may suffer, undermining the entire ecosystem.</p><p>Terra is aimed to become a convenient medium of exchanging programmable money that enables easy foreign currency swaps and cross-border payments bridging traditional economies with advantages of decentralization.</p><p>An optimal economic resources distribution, a sophisticated stability mechanism, strong network effects and an ability to provide incentives for users is a big step towards mass adoption for digital currency. Now the community can participate in the economy that distributes wealth back to society without the need to trust a limited group of individuals, that may be accumulating lots of money and power, fighting their desire to put some in their own pockets.</p><hr><p><em><em>I am not an economist or financial adviser, all opinions expressed in this article are my own thoughts on that topic. Special thanks to Do Kwon and Nicholas Platias for their answers and assistance. For deeper dive into the protocol concepts you may visit <a href="https://agora.terra.money/">Agora, Terra research forum</a>.</em></em></p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><hr><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake LUNA with us:</strong></strong><a href="https://p2p.org/terra"> https://p2p.org/terra</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Economy, Cosmos What is your best atom staking strategy?

<p>Previously <a href="https://economy.p2p.org/5-reasons-to-stake-your-atoms">we discussed</a> why staking is important for the ecosystem and how people interested in the network potential can benefit increasing their overall share without suffering from inflation implications. In this short blog post I want to cover some strategies which participants could utilize with their outcomes and possible risks.</p><p>There are three key options for stakers in existing conditions:</p><ul><li>Stake and forget</li><li>Stake and use the power of compounding in order to increase a total share of the network</li><li>Stake and save the current network share while withdrawing gains diluted by inflation from other participants who do not stake.</li></ul><p>In fact each of these options could be supplemented with the idea of diversification amongst various validators to decrease <a href="https://economy.p2p.org/slashing-overview-in-cosmos-network">slashing risk</a>.</p><p>For simplicity let’s assume that we have two delegators, the first is staking the second one is not. Initial total supply is <code>100 atoms</code> inflation is <code>7%</code>, staking ratio is equal to the target value of <code>67%</code> and considered period of observation is <code>5 years</code>.</p><h1 id="1-stake-and-forget"><strong>1) Stake and forget</strong></h1><p>This strategy may look convenient at a first glance but such behavior has many disadvantages. Inactive delegator can miss the moment when a node of a validator he bonded to goes offline for a long period resulting in slashing of a stake. Community may decide to change initial network parameters via governance. It may influence overall staking performance and an inactive delegator can miss that. In this case, accumulated rewards do not secure the cosmos hub.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/1-13.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/1-13.png 600w, https://economy.p2p.org/content/images/2020/09/1-13.png 758w" sizes="(min-width: 720px) 720px"></figure><p>Network share growth is slowing down as rewards become diluted by inflation and in following years it will become negative. Slashing will affect the whole holdings including rewards.</p><h1 id="2-stake-and-compound"><strong>2) Stake and compound</strong></h1><p>This strategy is especially effective when inflation is rising and there exists a strong belief in future ability of atom to capture transaction fees flow from validating on different chains, issuing assets and so on. In this case, additional gains from people who do not stake are re-delegated on an annual basis.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/2-16.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/2-16.png 600w, https://economy.p2p.org/content/images/2020/09/2-16.png 679w"></figure><p>Staking ratio stays constant so return on staking (RoS) is not changing and network share growth is stable in this example. Obviously rewards of this delegator outperformed the previous one. This strategy also has trade-offs. If a big fish bonded to a single validator or validator itself has a big stake or delegated amount, implementing this approach may lead to high network centralization and power concentration. This will not benefit network participants and would undermine security of the cosmos hub.</p><p>This scenario is also subject to slashing risk the most. To increase safety of the funds it is highly recommended to diversify stake amongst various validators even if slashing sounds like something unrealistic.</p><h1 id="3-stake-and-maintain-the-same-share-slightly-releasing-profit-exceeding-standard-inflation"><strong>3) Stake and maintain the same share slightly releasing profit exceeding standard inflation</strong></h1><p>If <code>100%</code> of total atom supply is locked in staking every holder will have equal provisions. In fact, there would be no difference in their network ownership and no one would be diluted. In this case we cannot gain extra atoms and total yield would be zero. Inflation should be considered as a <strong><strong>feature that protects ownership of the network from dilution and as a punishment for every holder who does not contribute to the cosmos hub security</strong></strong>. Profit from inflation accrues only from those who do not stake. Their network share is redistributed among others and there is always an option to withdraw this addition without ownership reduction.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/3-15.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/3-15.png 600w, https://economy.p2p.org/content/images/2020/09/3-15.png 758w" sizes="(min-width: 720px) 720px"></figure><p>This approach is also good as a hedge against slashing in the long run. The more frequently you withdraw and sell rewards the less atoms will be affected. This way of staking is especially effective if inflation and annual RoS are falling and network ownership growth is slowing down. Selling portions of atom provisions may be considered as a hedge against price fluctuations. If atom price is expected to decrease in a particular period released profits could be used to buy back with a better price. If price is expected to rise and future dynamic is uncertain then it could be a great cure against greed and a good way to release profit without taking away the ability to generate revenue in future from assets and losing network ownership.</p><h1 id="comparison-in-dynamics"><strong>Comparison in dynamics</strong></h1><p>Let’s take <code>15 year</code> period and look at the performance of these strategies in dynamics. Initial atom supply in this example is <code>100 atoms</code>. In the beginning, four delegators have <code>10 atoms</code> each:</p><ul><li>D1 stake &amp; forget</li><li>D2 stake and compound</li><li>D3 stake and maintain the network ownership selling the rest</li><li>D4 just hold not staking at all Inflation is <code>7%</code> staking ratio constantly rises from <code>57%</code> to <code>77%</code> with a five year stop at <code>67%</code></li></ul><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/4-10.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/4-10.png 600w, https://economy.p2p.org/content/images/2020/09/4-10.png 938w" sizes="(min-width: 720px) 720px"></figure><p>For that period of time D1 ended with <code>34,82 atoms</code> accumulating <code>24,82 atoms</code> pending withdrawal, D2 ended with <code>98,88 atoms</code>, D3 earned <code>65,07 atoms</code> selling <code>17,32</code> of them during that time maintaining stake of <code>47,75 atoms</code> and D4 left with <code>10 atoms</code> like in the beginning. Overall holdings could be visualized in the following graph.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/5-10.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/5-10.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/5-10.png 1000w, https://economy.p2p.org/content/images/2020/09/5-10.png 1190w" sizes="(min-width: 720px) 720px"></figure><p>On that graph we do not count sold atoms of D3, even so, after some time a delegator who was selling the surplus of atoms would have more holding than one who had just passively staked. If we look at a network ownership dynamics we notice that at the finish D3 maintains higher share even without increasing it. If at the end of the experiment total holdings of each delegator are affected by double-sign slashing (except D4) we see that D2 will lose twice as many as D3.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/6-6.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/6-6.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/6-6.png 1000w, https://economy.p2p.org/content/images/2020/09/6-6.png 1190w" sizes="(min-width: 720px) 720px"></figure><p>In the first half of the period D1 had more atoms than D3 but It is possible to be higher on the graph for this period if D3 will release less profit and re-delegate more atoms in order to slightly increase his share but not as much as D2. For the first year you can re-delegate all provisions and slightly decrease re-delegation percentage for the following years but not breaking the initial ownership. In fact you can mix the option of compounding and partial selling in any variation that suits your expectations.</p><p>Network share changes differently for delegators. At the end of a period when inflation is decreasing because staking ratio is <code>&gt;67%</code>, D2 experiences the highest decrease in the network share growth while others experience a decrease in their network ownership losses.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/7-4.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/7-4.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/7-4.png 1000w, https://economy.p2p.org/content/images/2020/09/7-4.png 1190w" sizes="(min-width: 720px) 720px"></figure><p>Simply speaking, it becomes more reasonable to implement the strategy of D3 when annual RoS is decreasing. If RoS is rising, network share growth rate is also rising boosting total holdings.</p><h1 id="conclusion"><strong>Conclusion</strong></h1><p>We discussed various options of managing staking balance mostly for educational purposes and deeper understanding of staking process economic variables. Inflation mechanism may drastically change in the near future as it would not be necessary to hold such a high rate of dilution if there were enough economic incentives to stake for participants, and revenues from transaction fees and other options would exceed inflationary rewards providing a stable source of income for validators to maintain their infrastructure and fund operational costs.</p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><hr><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake ATOMs with us:</strong></strong><a href="https://p2p.org/cosmos"> https://p2p.org/cosmos</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Economy, Cosmos Slashing overview in cosmos network

<p>We can define a cosmos network as a <em><em>social galaxy</em></em> with various entities and different types of participants who are fully self-responsible for decisions they make. To make such system as healthy as possible, minimize cheating and other fraudulent behavior that cause loss of confidence, it should contain a set of rules, instruments and other incentives which will determine the right direction together with moral ethics.</p><p>Slashing is an event, which results in a loss of stake percentage, depending on the type of network violation and jeopardizing the safety of other participants. It represents not only a financial incentive to act properly but also is a measure to prevent nothing at stake problem.</p><p>Cosmos is a complex ecosystem where atom act not only as an economic incentive but also represent a governance unit playing a crucial role in ecosystem security. In that way, slashing becomes a tool that influences voting power distribution.</p><p>Besides, it affects the authority of caught fraudlent participant, motivates validators to improve their infrastructure and in case of delegators, to provide a deeper due-diligence and diversification amongst validators. Slashing also act as a decentralization mechanism motivating re-delegate atoms to more reliable or even smaller validators with equal level of security and infrastructure set up.</p><p>For now this motivation can be not so obvious but after enabling Inter Blockchain Communication (IBC) and feature of shared security when validators will be slashable on multiple validated chains slashing risk will be different for all validators depending on conditions and number of chains they operate.</p><h1 id="slashing-events"><strong>Slashing events</strong></h1><p>There are two types of events when stake liquidation happens:</p><ul><li><strong><strong>Downtime</strong></strong> occurs when validator is offline and do not participate in block commitment signing less than <code>5%</code> of the blocks in a row of <code>10 000</code>. This situation leads to loss of <code>0,01%</code> stake not only for validator but for bonded to him delegators as well. In addition, validator drops out of the consensus and do not earn block rewards for at least <code>10 minutes</code>. After fixing the issues validator can re-join validators set by sending un-jail transaction.</li></ul><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/1-14.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/1-14.png 600w, https://economy.p2p.org/content/images/2020/09/1-14.png 647w"></figure><ul><li><strong><strong>Double-sign</strong></strong> can lead to more harmful consequences than the previous one. It can cause double-spend or chain fork. The wrong setup of the validator’s infrastructure or key compromise are the most common occasions that cause this type of slashing. In this case, stake penalizes by <code>5%</code> and validator loses the right to propose blocks and earn rewards without an ability to un-jail. All delegators of this validator enter the unbonding period, which lasts <code>21 days</code>.    </li></ul><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/2-17.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/2-17.png 600w, https://economy.p2p.org/content/images/2020/09/2-17.png 652w"></figure><p><strong><strong>Slashing also affect atoms, which were in unbonding phase</strong></strong> at the moment when one of these events happened. If a validator have low self-bonded ratio (low self-delegated amount) and large amount bonded then, in theory, it could have economic incentive to double-sign. This behaviour will lead to a loss of confidence in this validator and as a consequence inability to earn transaction fees and atom provisions in future missing opportunity of the long term ecosystem adoption and development.</p><p>Validators with low self-delegated amount should be able or will have to find the way to maintain resilent infrastructure with low costs in order to increase self-delegation and/or commision rate while bonded atoms to them are increasing.</p><p>If self-bonded ratio is decreasing or low in some cases (for instance, validator bonded to other validators in order to diversify holdings or increase network decentralization), if validator charges fair commission long term incentives should overcome short term gains. Commission rate should be reasonable and cover existing expences. If a validator with high stake is not earning to maintain infrastructure and operations (by self-bonded amount that generate rewards and/or commission rate) it is at least concerning.</p><h1 id="how-slashing-works-in-theory"><strong>How slashing works in theory</strong></h1><p>Assume that we have three validators:</p><ul><li><code>V1</code> with a commission of <code>5%</code></li><li><code>V2</code> with a commission of <code>8%</code></li><li><code>V3</code> with a commission of <code>9%</code></li></ul><p>If delegator bond to <code>V1</code> with an annual return on staking (RoS) around <code>10,2%</code> for <strong><strong>5 years</strong></strong> and <em><em>without taking advantage of compounding</em></em>, then his cumulative interest for five years nominated in atoms will be <code>48,5%</code>. Let’s have a look at how <em><em>monthly compounding</em></em> with slashing will affect this number. To simplify calculation we assume that: <strong><strong>In the case of downtime</strong></strong>, it happened <em><em>three times</em></em> and delegators stake passively without re-delegating after the first event:</p><ol><li>End of the 2<sup>nd</sup> month and <code>2 days</code> passed before un-jail</li><li>End of the 7<sup>th</sup> month and <code>1 day</code> passed before un-jail</li><li>End of the 11<sup>th</sup> month and <code>1 day</code> passed before un-jail</li></ol><p><strong><strong>In the case of double-sign</strong></strong>, slashing and unbonding period occurred once at the end of the 12<sup>th</sup> month. After <code>21 day</code> of unbonding delegator bonded to another validator with the same commission rate. I will use the same conditions for other comparisons in this article. Overall result for delegator will look like:</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/3-16.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/3-16.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/3-16.png 1000w, https://economy.p2p.org/content/images/2020/09/3-16.png 1062w" sizes="(min-width: 720px) 720px"></figure><p>We can notice that:</p><ul><li>Delegator who took advantage of monthly compounding even with a double-sign event outperformed another one who just delegated once and forgot. The magic of this feature I will cover in the next article.</li><li>Downtime has not much influence on the result for delegator even if it happens quite often and validator re-join validator set much later than current jail time for downtime (10 minutes). It has a bigger influence on the validator in the long term. His delegators will lose confidence and will immediately re-delegate their holdings to others. Until validator un-jail, the staked ratio will be lowered by the number of atoms delegated to him. This will increase voting power of other validators resulting in higher probability of proposing a block and may lead to higher transaction fee gais in comparison with validators who often go offline.</li><li>Double-sign has the most harmful event on RoS and the difference is about <code>9%</code> in comparison with delegator who have chosen an honest and secure validator</li></ul><p>If we will compare the performance of delegators who bonded to different validators with a various commission rate, we will see that RoS for <code>V3</code> is higher than RoS for <code>V1</code> and <code>V2</code> if double-sign occurred. For a taken period of 5 years this will be correct even if the commission of <code>V3</code> will be <code>16%</code> that is more than three times higher than the <code>5%</code> commission of <code>V1</code>.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/4-11.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/4-11.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/4-11.png 1000w, https://economy.p2p.org/content/images/2020/09/4-11.png 1062w" sizes="(min-width: 720px) 720px"></figure><p>You can notice that in the longer term (in our example &gt;5 years) current double-sign slashing do not cause huge effect on the performance and there still exist high incentive for delegators to choose validators basing predominantly on the commission rate. In theory, this may cause weaker decentralization level of the network.</p><p>Downtime slashing has even less voting and economic influence. Current slashing conditions should be considered as a starting point for further discussion on that topic and may be changed in future via governance mechanism.</p><p>For example, every repeating downtime event over the period of <code>X</code> could cause atom slashing equivalent to <code>prev_slashing_percentage * 2</code>. If a validator constantly goes offline this will cost more for him and his delegators thus increasing incentive to properly maintain the state of own infrastructure and for delegators to re-delegate to others. One of concerns about changing initial parameters is a lack of empirical data so as the network evolve we will see more experiments in this field.</p><h1 id="smart-ideas-for-delegators-to-protect-from-slashing-consequences"><strong>Smart ideas for delegators to protect from slashing consequences</strong></h1><p>No one can predict the future and <strong><strong>one of the best ways for delegators to protect themselves from misbehavior is diversification</strong></strong>. Suppose that delegator bonded all his atoms to <code>V1</code> with the lowest commission possible, <code>5%</code> in our case. Another delegator diversified amongst all three validators equally - <code>33%</code> for each. If <code>V1</code> will be caught on double-sign, the second delegator will get <code>2,5%</code> higher RoS than the first one who put all atoms in one basket even if <code>V2</code> &amp; <code>V3</code> went offline for some reason.</p><p>Another idea is responsible behavior. Bonding to a validator is not a blind step and simple way to earn passive income. To be up to date delegators should continue to monitor validator uptime. Frequent downtimes may indicate unreliable infrastructure.</p><ul><li>What actions validator take in order to prevent slashing conditions?</li><li>Does valiadator disclose an infrastructure setup?</li><li>Is it secure?</li><li>What upgrades and improvements are in the roadmap?</li><li>Is the commission rate sufficient to support validator activities and maintain reliable infrastructure?</li><li>What is the responsibility level of a validator and how valuable is it's contribution to the ecosystem development?</li></ul><p>Answers to these questions can help delegators to diversify amongst the most remarkable validators.</p><p>The most prominent validators who set up well-protected infrastructure and have a high level of confidence can offer refunds for their delegators in case of slashing event. In this case reserve funds or the idea of developing slashing insurance for delegators make sense. For some delegators who have no ability to follow up with the state of their atom performance this could be a reasonable solution.</p><blockquote><em><em>The first rule – do not lose your money, the second rule – remember of the first one.</em></em><br><em><em>"Warren Buffet"</em></em></blockquote><p>In the cosmos ecosystem, your atoms are your assets, which can generate additional income for you. Take care of your holdings and be responsible for the decisions you make.</p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><hr><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake ATOMs with us:</strong></strong><a href="https://p2p.org/cosmos"> https://p2p.org/cosmos</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Economy, Cosmos Introduction to Cosmos economy

<p>To understand economical structure of Cosmos we should look closely at the key principles of the ecosystem, basic incentives for all different participants and possible influence of these principles on their behavior. Overall network purpose (mission) is <em><em>satisfying the needs of ecosystem users by giving them an opportunity to provide their services in a decentralized manner with the ability to interoperate without centralized entities.</em></em></p><p>Cosmos network consists of application-specific blockchains (Zones) which can be designed differently depending on the utility purpose. All blockchains are interoperable within a single ecosystem connected through intermediary blockchains (hubs) that in fact replace centralized organizations by set of validators. As a separate blockchain each zone can have its own token to govern the private or public network and have its own set of validators but governance can decide that validators of the Cosmos hub will be required to validate additional zones.</p><p>Cosmos ecosystem utilizes Tendermint - practical byzantine fault tolerance (PBFT) consensus mechanism. It means that finalizing blocks depends on 2/3 plus one quorum of all validators agreed on the current state of the network in order to reach the consensus. There are three key groups of participants in Cosmos ecosystem. Each group has its own incentives and impact on the state of ecosystem.</p><h3 id="validators"><strong>Validators</strong></h3><p>For Cosmos hub there are <code>100</code> possible validators, who are responsible for proposing new blocks and validating transactions. This number will rise by <code>13%</code> a year until it reaches three hundred maximum possible validators. For other hubs and zones this number is not mandatory and will depend on the particular use case and required level of security. If there are more validators then the right to participate in consensus will have participants with the higher amount of ATOMs bonded.<br></p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/1-15.png" class="kg-image" alt></figure><p>Cosmos hub validators has the highest impact on network security and provide intercommunication between zones. They must actively participate in governance and are required to vote on every proposal otherwise their ATOMs are at the risk of being slashed (currently this feature is not active).</p><blockquote><em><em>Tell me who are the validators and I will tell you if the network is safe</em></em></blockquote><p>This group have enough knowledge and resources to maintain infrastructure and are interested in generating maximum long-term gains from ATOM inflation and transaction fees (about this later). That is why validators care about healthy and sustainable ecosystem development. They should act in interests of their delegators if they want to keep them loyal and increase the voting power in the long term.</p><h3 id="delegators"><strong>Delegators</strong></h3><p>This group consists of ATOM token holders who have not enough skills or resources to run and maintain the infrastructure but still want to increase the network security and earn a share of the transaction fees and inflationary reward by bonding tokens to the validators. It boosts the voting power of validator and frequency of being chosen as block proposer. In fact, <em><em>by bonding ATOM to validator delegators choose one of the pillars of the ecosystem so their choice is very important and affects the level of decentralization.</em></em><br>Delegators are eligible for transaction fees and inflation reward as well but they have to pay commission, which vary within existing validators. There is no way for validators to steal bonded tokens but there are still other risks related with choosing the validator, which we will discuss later. Decisions based solely on a low commission rate is not always the best decision for delegators.</p><h3 id="users"><strong>Users</strong></h3><p>If we compare Cosmos network with the market, users are consumers and service providers. Developers, entrepreneurs and buyers who want to utilize the advantages of Cosmos ecosystem. Many different hubs can co-exist. To go further we can compare the network with a nation where there is a national hub with cities and zones each acting as smaller hubs within it and the possibility to join with the secure hub (Cosmos) if needed. Activity of this group measures the overall value of the network and can have a significant impact on demand for the token, transaction fees, workload and so on.</p><h1 id="cosmos-hub-economy-and-reward-distribution"><strong>Cosmos hub economy and reward distribution</strong></h1><p>Cosmos hub economy relies on the inflationary approach. The target annual inflation rate represents the percentage from total supply that is changing each block. If the total bonded stake is less than <code>66%</code> of the total ATOM supply, the inflation rate will slightly increase until it reaches a maximum of <code>20%</code> or the total bonded stake climbs higher than <code>66%</code>. In this case, the annual inflation will decrease to <code>7%</code> depending on ATOMs participating in bonding. New tokens incentivize participants to secure the network. The more tokens locked via staking the higher the threshold for initiating a successful attack.</p><p>There are two fundamental streams of revenue for validators:</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/2-18.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/2-18.png 600w, https://economy.p2p.org/content/images/2020/09/2-18.png 705w"></figure><ul><li><strong><strong>Block reward</strong></strong>, which distributing amongst all validators proportionally to their voting power. This reward is paid in ATOMs and depends on the current annual inflation rate, which varies each block with the frequency of average block time. In the future, this reward can be split between ATOMs and Photons that will play the role of a secondary token with the purpose of transaction fee payment only, decreasing the velocity and liquidity of ATOMS and making a 1/3 attack more expensive. Inflation of Photons is expected to be fixed and equivalent to <code>500</code> tokens per hour. <em><em>Currently Photons are not available but could be activated with specific implementation and distribution method by the community via governance.</em></em></li><li><strong><strong>Transaction fees</strong></strong> form in each block and proposer gets <code>1%</code> or <code>5%</code> depending on the number of precommits included. The frequency of proposing blocks is proportional to the voting power of a validator. Before fees distribution, <code>2%</code> goes to a reserve pool. These funds can be spent on network development or other activities by voting.<br>Currently transaction fees are close to zero as the network is still in an early stage of adoption. In the future, it will be possible to receive fees in other whitelisted tokens than ATOMs in Cosmos ecosystem. The amount of fees will depend on gas prices and usage of the network.</li><li>Validator’s <strong><strong>commission rate</strong></strong> represents a percentage from both streams of revenue that delegators pay to a validator. Delegators reward streams are the same as for validators less the commission percentage.</li></ul><h1 id="penalties"><strong>Penalties</strong></h1><p>In some circumstances occurs slashing of bonded ATOMs. Penalties should increase the responsibility level of participants who are directly involved in decisions associated with network security. Validators have no control over delegator’s stake but if such an event happens both parties lose a percentage of their tokens. This is in order to prevent misbehavior and negligence from validators and bring incentives to delegators to diversify amongst them, perform proper due diligence and choose wisely.</p><ul><li>The first reason a stake can be slashed is double-signing a block. This means that a malicious node is broadcasting two blocks with different content for the same height. The penalty for that is currently set at <code>5%</code> and the validator who is responsible for that drops out of validators set. All ATOMs enter an unbonding (process of undelegating ATOMs from validator) period that lasts for <code>21 days</code> and <em><em>within this period the stake will not earn provisions and transaction fees.</em></em></li><li>If a validator fails to sign more than <code>95%</code> blocks in a row of <code>10000</code> due to inactivity, <code>0.01%</code> of the bonded ATOMs will be lost and the validator will be <em><em>jailed for <code>10 minutes</code> without allowance to participate in consensus and be eligible for rewards.</em></em></li></ul><p>If slashing happens, it decreases stake and leads to fewer ATOMs paid as a reward.</p><h3 id="example"><strong>Example</strong></h3><p>Let’s compare three imaginary validators. Assume that delegator bonded equal amount of ATOM to each. Slashing decreases the amount of stake thus meaning a proportional decrease in ATOM provisions since the event has taken place.</p><p>For example, <em><em>validator 1</em></em> <code>V1</code> was caught on a double sign and slashing occurred on the 60<sup>th</sup> day. After unbonding, the rest was staked with the same conditions to another one. <em><em>Validator 2</em></em> <code>V2</code> had three liveness slashes on the 30<sup>th</sup> day with a 2-day recovery period and an inability to fix the issue, on the 60<sup>th </sup>and 180<sup>th</sup> days being offline for one day each. <em><em>Validator 3</em></em> <code>V3</code> had no such events in place.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/3-17.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/3-17.png 600w, https://economy.p2p.org/content/images/2020/09/3-17.png 779w" sizes="(min-width: 720px) 720px"></figure><p><strong><strong>Overall results show that validator with a higher commission and honest behavior performed better than validators with stated slashing events.</strong></strong> In this example we have not taken compounding into consideration. Every slashing event may decrease the confidence of delegators and may lead to immediate re-delegation to another validator. That will cause fewer commission rewards in ATOM for validator and can lead to inability to maintain secure infrastructure in future.</p><h1 id="recommendations-for-delegators"><strong>Recommendations for delegators</strong></h1><p>Every delegator is self-responsible for the financial decisions made. To choose the proper validator and understand misbehavior risks it is important to read the full conditions of the delegator agreement and find out the validator’s policy on this topic.</p><ul><li><strong><strong>Security audit</strong></strong> that proves the stated level of security that should decrease the probability of a key compromise that may lead to double-sign.</li><li>Check for an <strong><strong>available roadmap</strong></strong> of future steps to increase the security or transparency of annual expenses on upgrades and improvements.</li><li><strong><strong>Skin in the game</strong></strong> proves that the validator puts their own funds at risk as well. The higher the percentage of their stake the more responsible the validator should be and if slashing does occur he will lose his own ATOMs and .</li><li><strong><strong>Compensation policy.</strong></strong> Are there any payouts or bonuses from the validator’s side in case of a slashing event?</li><li><strong><strong>Diversification amongst 3-7 validators</strong></strong> who operate in different countries and utilize different hardware. It sounds like a good idea, as it decreases amount of stake in case of slashing, increases overall network security and brings voting power diversification as well.</li></ul><p>Do not forget to <strong><strong>re-delegate your ATOM rewards</strong></strong> in order to maximize profits and take advantage of the compounding.</p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake ATOMs with us:</strong></strong><a href="https://p2p.org/cosmos"> https://p2p.org/cosmos</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong> <a href="https://t.me/p2pvalidator">https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator

Cosmos, Economy 5 reasons to stake your atoms

<p>On the date of publishing <code>~69%</code> of current total atom supply is locked in staking meaning that for the rest, their holdings are considered more as speculative rather than potentially revenue generating assets. Most of Proof-of-stake (PoS) networks sometimes offer attractive yield nominated in native tokens. An effective and reasonable relation between risk and reward assists in achieving the implied level of network security and create economic incentive for delegators to lock their holdings if they believe in the value proposition of the token in the long term. Staking yield provides a reliable revenue stream for validators operating the network.</p><p>If short term expectations about token price are bearish and speculators see a possibility to repurchase more tokens in future and this amount exceeds the expected return on staking (RoS) nominated in USD for a particular period of time then the reason to lock-up holdings in staking can be less attractive than just to hold and be ready to sell when emotions are high. It can be true for even long-term believers who consider such speculation as an opportunity to increase the overall network share as well.</p><h1 id="1-not-staking-missing-opportunity"><strong>1. Not staking = missing opportunity</strong></h1><p>Not staking today may be considered as a missed opportunity to earn rewards tomorrow. The higher the belief in the long-term value growth the less speculation happens in the short term and more people agree to get higher benefits in the future. <strong><strong>Atoms are not speculative assets and can be defined as units subject to inflation, generating revenue from transaction fees thus providing an incentive to actively participate in staking, securing the cosmos hub.</strong></strong> Validators of cosmos hub will earn fees by validating on other chains in cosmos ecosystem and sharing security with them. Until Inter Blockchain Communication (IBC) and shared security features are not active, transaction fees are close to zero, short term ATOM value may fluctuate.</p><p>However, from pure speculators tokens will go over to the long-term participants and their attempts to sell high and buy low may fail. Volatility expectations may become less interesting than staking or even erroneous, which will lead to a missed opportunity to jump into the leaving train. Unbounding also makes funds illiquid for three weeks and decreases the speculative attractiveness of ATOM.</p><p>Some short-term traders prefer to store their tokens on exchanges. Even if exchange offer staking opportunities it is not secure because the person has no control over the holdings. Sometimes exchanges suffer from hacking attacks. The recent accident with Binance confirms that that exchanges are not the best option to store funds.</p><p>If you believe in the ability of ATOM to gradually increase earnings in the long run, then buying low, adding on deeps and immediate staking with reinvesting rewards in order to increase overall share in the network can be a more reliable strategy, which can provide higher gains from transaction fees in future.</p><h1 id="2-inflation"><strong>2. Inflation</strong></h1><p>To get rid of confusion, annual inflation is not the same as annual RoS. Inflation is a mechanism, minting rewards that go to stakers as a percentage of total ATOM supply. As a result, it dilutes a share of the network of speculators and passive holders.</p><p>Annual ATOM provisions and annual RoS depend on initial parameters determined in genesis. lnflation percentage was set at <code>7%</code> from total supply. This number is slowly increasing and can go up a maximum <code>13%</code> and reach <code>20%</code> to incentivize staking until <code>67%</code> of ATOM supply will be bonded.</p><p>If staking ratio is <code>&lt;67%</code> then annual inflation change in the moment can be defined with a following calculation: <code>7% + 13% * (67% - staking ratio)</code>. If staking ratio exceeds <code>67%</code> then inflation will gradually decrease.</p><p>Validator ATOM provisions occur every first block of a new hour. These provisions are based on the estimated number of blocks in a year. When cosmos network first launched mainnet this number was calculated with the assumption, that average block time will be <code>5 sec</code>.</p><p>By dividing the quantity of seconds in a year by average block time, we get the estimated number of blocks in a year. Calculated yearly ATOM provisions are evenly distributed to the blocks. After launch, it became clear that actual average block time is higher and stakers will get fewer amount of ATOMs than it planned. That is why the first proposal was about adjusting the number of blocks in a year with <code>6,75 sec</code> which is much closer to the actual block time.</p><p>After we have figured out ATOM provisions per block we can find overall annual RoS. <strong><strong>These rewards go only to participants who are involved in staking.</strong></strong> If all ATOMs are locked in staking then everyone gets an equivalent amount of tokens and there will be no additional benefit relative to each other. In this case, annual inflation will be the same as annual RoS and no one will be diluted or rewarded.</p><p>Otherwise, we need to include staking ratio in our calculation. <code>Annual RoS = annual inflation / staking ratio</code>, where <code>staking ratio = staked ATOMs / total ATOMs</code>. In fact, additional rewards that go to delegators from inflation are ATOMs intended for those who do not stake. In that way, <strong><strong>net earnings are the difference between annual RoS and annual inflation rate.</strong></strong> Passive holders are penalized by inflation and their share of the network is diluted and redistributed amongst delegators.</p><h3 id="example"><strong>Example</strong></h3><p>Let's make it clear and simple to sum up the information written above. Imagine that we have total ATOM supply equal of <code>100</code>, annual inflation is <code>7%</code> (assume it is not changing), staking ratio is <code>20%</code>. Four participants have <code>20</code> <code>20</code> <code>20</code> <code>40</code>. Annual ATOM provisions from inflation equal <code>7</code> and total supply at the end of the first year will be <code>107</code> ATOMs.</p><p>Only one participant with holdings of <code>20</code>ATOMs bonded. For these conditions, we observe the following parameters.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/1-12.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/1-12.png 600w, https://economy.p2p.org/content/images/2020/09/1-12.png 698w"></figure><p>The first participant <code>P1</code> increased his network share by <code>5%</code> but also he decreased the distance from <code>P4</code> by <code>8%</code>. If we change staking ratio from <code>20%</code> to <code>60%</code> we will see the following results.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/2-15.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/2-15.png 600w, https://economy.p2p.org/content/images/2020/09/2-15.png 698w"></figure><p>You can notice that gains in network share of staking participants are equal to the loss of passive holders.</p><h1 id="voting-power-and-network-decentralization"><strong>Voting power and network decentralization</strong></h1><p>Cosmos network is a community driven project where all important solutions are accepting or declining via on-chain governance process. These decisions can have an enormous impact on token holders and other players. Participation is mandatory for validators but not for token holders. By staking, delegators transfer the voting rights to a validator. The higher the voting power the higher the influence on the results of the governance process. If a delegator does not agree with the decision of a validator he delegated to, then he is still able to cast his own vote subtracting voting power in this particular proposal from the validator.</p><p>If a delegator has no intention to participate in governance then his stake will increase the voting influence of validators he bonded. If such power is distributed unfairly and a small number of validators control too much, it can lead to centralization of the voting process. Situations like <a href="https://www.evanvanness.com/post/184616403861/aragon-vote-shows-the-perils-of-onchain-governance">Aragon experienced</a> undermine believef in the healthy decentralization and fairness of on-chain governance.</p><p>Currently there are <code>100 validators</code> in the cosmos hub participating in consensus and the top 6 of them control <code>~36%</code> meaning they can possibly collude and cast a veto, declining any healthy proposal. To avoid that cosmos hub delegators are able to transfer their voting rights in order to support the sustainability of the network increasing voting power distribution amongst validators.</p><p>Delegating to various validators is much better for the network than not delegating. In addition, it helps to decrease <a href="https://economy.p2p.org/slashing-overview-in-cosmos-network">slashing risk</a> for the stakers. The cosmos network is still in the early stages and new active participants may come as the project evolves so power distribution can change drastically in the future.</p><h1 id="4-compounding"><strong>4. Compounding</strong></h1><p>Compound interest may serve as an effective tool for increasing the share of the network in the long-term. Walter Schloss, a famous notable disciple of the Benjamin Graham school of investing said:</p><blockquote><em><em>Remember the power of compounding. You don’t need to stretch for returns to grow your capital over the course of your life. Even small gains matter. By re-delegating your rewards you increase the overall return from year to year. The longer the period, the bigger the difference.</em></em></blockquote><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/3-14.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/3-14.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/3-14.png 1000w, https://economy.p2p.org/content/images/2020/09/3-14.png 1180w" sizes="(min-width: 720px) 720px"></figure><p>RoS depends also on the frequency of re-delegating. The most common re-investment frequencies are <code>year</code>, <code>quarter</code>, <code>month</code> and <code>day</code>. We know, that in theory, <a href="https://www.investopedia.com/terms/c/continuouscompounding.asp">continuous compounding</a> can offer the highest return and the higher the frequency the higher the percentage in the end.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/4-9.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/4-9.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/4-9.png 1000w, https://economy.p2p.org/content/images/2020/09/4-9.png 1180w" sizes="(min-width: 720px) 720px"></figure><p>However, in some cases in crypto networks it could be incorrect. <strong><strong>To re-delegate ATOM rewards you need first to withdraw them manually.</strong></strong> To conduct this operation you need to pay a transaction fee. After withdrawal another fee occurs when you stake your rewards. So if you are not a big fish and don't have a big stake then withdrawing too frequently can lead to a situation where small fractions of pending rewards may be less than the transaction fees or the difference may be too small and not make sense.</p><figure class="kg-card kg-image-card"><img src="https://economy.p2p.org/content/images/2020/09/5-9.png" class="kg-image" alt srcset="https://economy.p2p.org/content/images/size/w600/2020/09/5-9.png 600w, https://economy.p2p.org/content/images/size/w1000/2020/09/5-9.png 1000w, https://economy.p2p.org/content/images/2020/09/5-9.png 1180w" sizes="(min-width: 720px) 720px"></figure><p>Monthly compounding looks like the most optimal frequency to re-delegate ATOM rewards. However if the stake is higher than <code>3000 atoms</code> re-investing on a daily or weekly basis becomes more reasonable with stated RoS of <code>~12,2%</code>.</p><blockquote><em><em>"Compounding matters and does so far more than people expect. The human brain thinks in a linear way which means that if we were asked to estimate what <code>10.22%</code> (<em><em>close to current annual yield of cosmos network</em></em>) compounded over <code>100 years</code> would be then our answer is likely to be closer to <code>1,022%</code> than <code>1,679,600%</code>, something economists call exponential growth bias. This means that compounding is often underestimated and should be at the heart of long-term investing" <em><em>Marathon Asset Management</em></em></em></em></blockquote><h1 id="increase-of-stability-and-network-security"><strong>Increase of stability and network security</strong></h1><p>As pointed in the <a href="https://economy.p2p.org/introduction-to-cosmos-economy">previous article</a>, cosmos ecosystem utilizes tendermint consensus. It achieves absolute finality and any block that receives <code>&gt;2/3</code> pre-votes and pre-commits are considered as valid. If <code>&gt;1/3</code> malicious validators collude they can cause a fork. Off-chain coordination will allow honest validators to make a reorganization proposal as it would not be possible to perform on-chain as the malicious group will be able to veto every proposal.</p><p>The resiliency and overall network protection depend on the staked tokens. In theory, bad actors should accumulate enough voting power and the cost of such an attack is higher when more ATOMs are bonded. Currently to accumulate <code>&gt;1/3</code> of voting power and execute a successful censorship attack, bad actors need <code>~56 000 000 atoms</code>. That is equivalent to <code>~300 000 000 USD</code>.</p><h3 id="to-sum-up-everything-written-above-we-can-conclude-that-"><strong>To sum up everything written above we can conclude that:</strong></h3><ul><li>Staking saves you from inflationary dilution of the network share</li><li>Staking early increases your ability to earn higher rewards in future</li><li>Smart staking helps the network to achieve higher decentralization of voting power</li><li>Compound interest on staking rewards work for you and increase your network share</li><li>By delegating, you increase the network security and support reliable project evolution in the long-term.</li></ul><p><em><em>Special thanks to <a href="https://twitter.com/Asmodat">@asmodat</a> for bringing clarity to the inflation part of this article</em></em></p><hr><p><strong><strong>P2P Validator</strong></strong> offers high-quality staking facilities and provides up to date information for educational purposes. Stay tuned for updates and new blog posts.</p><hr><p><strong><strong>Web:</strong></strong><a href="https://p2p.org/"> https://p2p.org</a></p><p><strong><strong>Stake ATOMs with us:</strong></strong><a href="https://p2p.org/cosmos"> https://p2p.org/cosmos</a></p><p><strong><strong>Twitter:</strong></strong><a href="https://twitter.com/p2pvalidator"> @p2pvalidator</a></p><p><strong><strong>Telegram:</strong></strong><a href="https://t.me/p2pvalidator"> https://t.me/p2pvalidator</a></p>

Alex Bond

from p2p validator