Block.one recently commissioned an analysis of the effects of a staking rewards model on the EOS Public Blockchain. The analysis was conducted by leading consultanting firm Prysm Group. The details of their findings can be found in their Stake-Based Voting and Rewards Mechanism White Paper. It should be stressed that the model considered by Prysm Group is not a plan. Rather, it is a proposal for the EOS community to consider.
One of the big ideas in this analysis involves inflation. Right now, EOS inflates at a rate of 1%, which is used to pay Block Producers for their role in maintaining and securing the network. By increasing this rate of inflation to between 1.2% and 3.8%, financial incentives could be provided to voters as well as Block Producers. The new proposal also suggests that Block Producers who fail to perform in a satisfactory manner could trigger a penalty effect, whereby rewards from inflation are reduced.
While much of Prysm Group's analysis focused on the 3.8% figure, further study may reveal that a smaller increase in the inflation rate would be sufficient to meet the objective of better aligning stakeholder interests. There are good arguments for and against increasing inflation to this degree, and these arguments will doubtlessly be playing out across the EOS community in the days to come.
From the overall system inflation rate of 1.2% to 3.8%, Block Producers would receive at least 32% of total inflationary rewards, depending on rate of overall inflation. Specifically, this share should represent 1.2% of EOS total supply annually. Stakers would receive at most 68% of total inflationary rewards, depending on rate of overall inflation. Voters would be required to cast a minimum of 21 votes and up to 30 votes for Block Producers.
Withdrawal limits were also considered, but only if the EOS community deems limitations on withdrawals beneficial. The model suggested a withdrawal cadence of once every 7 days, with a per-withdrawal limit of 67% of staked funds. As an alternative to this, it proposed a withdrawal cadence of once per day with no limit.
Importantly, these numbers are just a starting point for network operators, token holders, and developers.
The Penalty Effect
The proposed model presents both positive incentives for good behavior and negative incentives for behavior that compromises the network.
Here's what Block.one has to say about the penalty effect:
"This means that if Block Producer A fails to produce then the rewards for all Block Producers and token-holders who are voting/staking also drops for a period of time. When all network participants are affected then we are more likely to see a rapid response from voters to adjust their votes (who now participate in inflationary rewards directly) and fellow block producers to be available to cooperatively diagnose any issues that may be present. To help aid in increasing the efficiency of handoffs between block producers within the schedule, we are proposing that schedule ordering be modified from alphabetical order to declared location order. In this way we incrementally reduce handoff difficulty and decrease the likelihood that blocks are missed and inflationary penalties are enforced."
Personally, after reviewing the new model, I think an inflation rate of 3.8% seems a bit high. Even though it might mean that staked EOS could yield returns in the neighborhood of 4.3%-5.9% annually, these returns might come at the expense of an overall reduction in the EOS token's market value. I would be very happy with staking yields of 3% and an inflation rate somewhat below the 3.8% figure.
The crucial piece of the proposed model is that it would reward voters as well as Block Producers, bringing the interests of all network participants into closer alignment. This wouldn't impact the new PowerUp resource model in any way. And it would theoretically make the total EOS network more robust, in part by changing the way rewards are allocated to Block Producers.
Podcast Episode: Between The Blocks
Chaney Moore sat down with Rick Schlesinger to learn more about the proposal. Check out the podcast below, and let us know in the comments if you think the proposed model is a good idea?