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1/ In early 2019, @idexio went live with the first iteration of its staking network. Today stakers earn 25% of the trade fees from IDEX (in ETH) for their role in helping run the platform. Over 1,600 ETH has been paid out with a market value of ~$320k USD at the time of payment.
2/ Staking was a big narrative in 2019 as users seek yield on their crypto, a way to compound and grow their holdings by participating in cryptonetworks. However, it’s important for stakers to understand the incentives of the network they are supporting.
3/ The vast majority of cryptonetworks are funded via inflation. Users stake their holdings to earn more of the staking token. These tokens are issued by the protocol itself, increasing the total supply to compensate stakers. This process has a few implications:
4/ If everyone stakes, no one gains. Stakers earn a proportional payout of the new tokens. If everyone participates, then the overall proportions of network ownership stay the same.
5/ Staking is a tax on non-stakers. Even in the most active protocols, a percentage of the supply inevitably goes unstaked. Those who don’t stake will see their share decline when compared to those who do.
6/ Note: Inflation is not inherently bad. Double/triple digit yields garner positive attention. Bitcoin block rewards increase the supply to compensate miners (and spawn many debates about whether the block rewards are actually inflation or if all 21M bitcoin already exist).
7/ But in order to be sustainable, there must be a future in which inflation drops to zero/low levels and transaction fees take over as the primary form of compensation for network participants.
8/ A second consideration is the rewards currency. In most systems, stakers earn more of the staking token. In order to grow beyond the bootstrap phase, there must be additional use cases and demand for the underlying token outside of just staking collateral.
9/ E.g. when Ethereum transitions to POS, ETH rewards will still be in demand for use as gas and as collateral for DeFi. For the vast majority of POS networks, it’s unclear what (if any) demand exists outside of use as a tool for earning more of the same token.
10/ This is important because some earnings are sold to cover infrastructure costs and taxes ( @bendavenport did a great writeup on the tax implications https://medium.com/@bendavenport/a-stake-to-the-heart-57fcd8ec323b). Markets can absorb this somewhat, but without alternative demand it cannot be sustained.
11/ @cburniske has also discussed the implications of payouts in the network token vs another asset (in this case DAI) with respect to Aragon ( https://www.placeholder.vc/blog/2020/3/6/aragon-ant-economics). Stakers will likely demand a higher yield in protocol assets than an exogenous, more stable asset.
12/ If the protocol usage grows such that there is demand for the token for the payment of fees, these effects can be counteracted. However, this again necessitates that the protocol is sustained by tx fees and that the token also becomes a form of money, no small feat.
13/ IDEX staking has already overcome many of these challenges. Firstly, staking rewards are entirely funded via transaction fees. There is no risk of dilution as the network is already sustaining ~10% APY based entirely on usage.
14/ Secondly, IDEX converts all token fees and pays out stakers in ETH (arguably the “second best” cryptocurrency). IDEX and its token remains unaffected when stakers choose to cash out to cover infrastructure or tax costs.
15/ The concept of staking cash flow brings up an interesting point around the potential of buy and burn. Initially we thought buy and burn was just a sleight of hand, a way for projects to make token holders feel like they are getting returns without actually giving anything.
16/ In practice it does seem that burns, if sustained indefinitely, would have a continuous positive impact on token price. As an added bonus, they are a much more tax efficient method of providing returns to token holders (nothing is taxable until they go to sell).
17/ We’ve heard from multiple funds that they actually prefer this method due to both tax efficiencies and the fact that there is no revenue stream to deal with (income producing assets can require a different legal structure). Something for us to consider in the future!
18/ IDEX staking is about to get a major upgrade with the launch of IDEX 2.0, with stakers taking home 50% of the total fees. Learn more about IDEX 2.0 here! https://comingsoon.idex.io/
19/ Thanks to @cburniske, @delitzer, @GavinMcDermott, @iam__vance and others for some of the ideas in this thread.
