The Birth of the Stake Model

In 2011, Quantum Mechanic first mentioned the PoS consensus mechanism on the Bitcointalk forum, creatively proposing the idea of using coin weight instead of hash power weight to elect validators. In this mechanism, holders participate by staking their coins in the system and validators are elected through a random algorithm. Block packaging is subsequently in place to verify transactions to form the latest height of the chain. As a newcomer, PoS borrows many aspects from PoW such as consensus, election, block packaging, and verification, and has gradually driven the development of blockchain in performance, scalability, and sustainability with the advancement of technology. The period from 2019 to 2020 witnessed the landing of the second-generation (1) PoS, where projects such as Cardano, Tezos, Cosmos, and Polkadot got launched on the mainnet and have become touchstones for this novel consensus mechanism in the new era.

The Stake model in the PoS consensus mechanism is a design that subverts the hash power weight. In the Stake model, the rights of coin holders and mining rights are combined, allowing coin holders to participate in network consensus through staking. Coin holders only need to run a server with a certain configuration or delegate their rights to validators who run the service (since 2015, mainstream PoS consensus projects have started to introduce delegation mechanisms to ensure the system’s stake rates and enhance system security). The random election solves the problem of energy consumption caused by mining machine competition, and the Stake model has created a new type of blockchain relationship, namely, the coin holders are also miners. Such a relationship has brought changes to the public chain world.

In terms of incentives, both PoW and PoS consensus mechanisms have designed incentive systems to encourage token holders to participate in the blockchain network as node operators. Before launching the PoS mainnet, the system usually increases incentives to ensure stake rates, incentivizing more initial distributed tokens to be staked to strengthen the security of the system. Arthur, the founder of Tezos, wrote in Tezos' white paper that the number of initial incentives must be high enough as it is of extreme importance for the secure launch of the mainnet. As stakers need to bear certain time and opportunity costs (2), the mainnet will confront serious security threats provided there are insufficient incentives for them. Cosmos even sets an initial floating annual percentage yield of up to 7% to 20% in the code to incentivize stake rates during the launch of the mainnet.

The lock-up period is an important feature that distinguishes PoS consensus from PoW consensus. In the Stake model, the system sets up stability requirements for the staked tokens to prevent long-range attacks and address fragmentation issues. During the staking process, the tokens are locked by the system for a certain period. They can initiate unlocking at any time but cannot trade tokens during the unlocking period, and token holders still need to undertake the risk of token value fluctuations during this time. This represents the contradiction between token stake security and Ttken liquidity in the Stake model.

Such contradiction can lead to a conflict where many people are afraid to stake to avoid risk and the system may not be secure enough due to insufficient stake rates. In the end, only a small number of people take most of the rewards while the system's security remains at risk. Currently, the stake rate of some PoS consensus projects that have already been launched is around 40%, and the projects receiving higher market attention generally own a stake rate of 50% to 60%, with the highest reaching 80%. In contrast, those with meager attention only possess a stake rate of around 20%. Theoretically, the most reasonable stake rate for security is 100%, but it tends to be unrealistic in reality. In addition, a stake rate reaching 100% means zero token liquidity. For projects that aim to create a blockchain-based operating system (OS), token liquidity exerts a crucial role in supporting the system's operation and value and the impact caused by zero liquidity is almost entirely negative. Currently, the industry still doesn’t reach a consensus on what a reasonable stake rate should be, or to put it this way, it is difficult to reach a consensus. It is challenging to simulate a distributed network in a testing environment.