- The number of genuinely economically independent stakers (hereafter the ‘# nodes’) is a critical measure of the security and utility of virtually all decentralized networks. The modular services hosted on Threshold Network are no exception – tBTCv2 above all (requiring > 1,000 nodes). However, the # nodes network statistic is only discernible anecdotally/trustfully (i.e. not currently verifiable via consensus). Moreover, attempting to maximize the # nodes directly via the protocol remains an ill-advised strategy, lest the mechanism fall prey to Sybil-style manipulation.
- An often overlooked and measurable network statistic is the break-even stake size – the minimum sum of tokens a staker must lock to avoid operating a loss at a given timestep. The volatility of the break-even stake size, and how close it stays to the min. stake invariant (parametrized at genesis), are major determinants of the theoretical number of stakers that are capable of surviving and thriving as the backbone of a decentralized service.
- Many protocols target a staking rate (% circulating supply locked) as a proxy for optimizing the # nodes, dividing a fixed reward ‘budget’ amongst a fluctuating array of active stakers. Some go further by engineering a second-order variance via the nominal inflation rate (Cosmos, Livepeer, ETH2). Both these designs foster conditions that may actually further centralization trends over the medium/long-term. Elevated staking rates and correspondingly low yields do little to persuade deeper-pocketed stakers to scale back capacity, but do (a) debilitate independent (smaller) staker balance sheets and (b) increase the ‘stake hoarding’ payoff for those who can afford it. The combination of dynamics (a) & (b) can engender detrimental feedback loops and widen the gap in fractional token share between large and small. This wealth concentration trend eventually diminishes the # nodes. See the <Subsidization & Participation Bivariate Analysis notebook> for a deep-dive on this issue, and the driving empirical evidence behind this proposal.
- The proposed mechanism minimizes + stabilizes the break-even stake size by programmatically adjusting the nominal inflation rate – thereby targeting a minimum effective yield to all stakers and stake sizes, independent of fluctuations in the staking rate or number of active nodes from timestep-to-timestep.
- The mechanism confers economic sustainability by being greater than or equal to a minimum target rate, and encourages longer-term financial planning via lower variance in said rate.
- The Stable Yield is set to a provisional target rate of 10% APY. This, along with other parameters, can and should be modified by the Threshold DAO to accommodate complementary reward models (e.g. buyback-and-distribute – see note below), or to tune the (now more variable) dilution burden placed on passive token-holders.
- Since independent stakers are adversely affected when staking rates are elevated – i.e. when yields are unsustainably low – the proposed mechanism only stabilizes the yield when participation is above a DAO-selected threshold. Below this threshold, the yield is inversely proportional to the staking rate, as is typical in prevailing reward mechanisms. This participation parameter is provisionally set to 50% of the circulating supply.
[Note that the design presented here is compatible with various other reward models. For example, combining a Stable Yield with dynamic incentives, such as a fee-driven buyback-and-distribute model – see Placeholder’s high-level <design> as an example – would provide a safety net for independent stakers AND align all stakeholder interests towards maximizing fee generation. Indeed, this combination shifts the ‘bet’ made by stakers/hodlers alike towards service traction and away from subsidy hoarding. A buyback mechanism also supports the price+liquidity of the native token, further stabilizing and minimizing the break-even stake size. Separately, this proposal is also compatible with delegation-driven node diversification such as Solana’s Yield Throttle + DelegationBot <ideas>.]
Provisional method to compute annual issuance for Stable Yield mechanism (SY_Issuance):
Base_Issuance = Target_Yield * Supply
Example: Target_Yield = 10% & Supply = 1bn tokens → Base_Issuance = 100m tokens
Scenario A (Staking_Rate >= 50%)
SY_Issuance = Base_Issuance * Staking_Rate
Base_Issuance = 100m tokens & Staking_Rate = 75% → SY_Issuance = 75m tokens
Scenario B (Staking_Rate < 50%)
SY_Issuance = Base_Issuance * Constant
Base_Issuance = 100m tokens & Staking_Rate = 25% & Constant = 0.5 → SY_Issuance = 50m tokens
Inflation_Rate = SY_Issuance / Supply
Scenario A: SY_Issuance = 75m tokens & Supply = 1bn → Inflation_Rate = 7.5%
Scenario B: SY_Issuance = 50m tokens & Supply = 1bn → Inflation_Rate = 5%
Yield = Inflation_Rate / Staking_Rate
Scenario A: Inflation_Rate = 7.5% & Staking_Rate = 75% → Yield = 10%
Scenario B: Inflation_Rate = 5% & Staking_Rate = 25% → Yield = 20%
Hence the minimum target yield is 10%, regardless of the staking rate. Plotting this with simulated inputs:
The outputs of proposed Stable Yield reward mechanism: (1) Nominal inflation rate & (2) Yield (APY). Note that the staking rates are simulated (rand[0.15, 0.99]). This allows the incorporation of realistic (time-dependent & monotonic) supply growth and subsequent issuance adjustment to fulfill the correct rates.