Why I’m not a fan of staking / masternodes

This is a topic that’s come up a lot more regularly over the last few months it seems, and so I’m going to let you know why I’m not a fan of the idea of us using staking or masternodes for DigiByte.

(At least, not yet)

I’m aware many of these are relatively weak arguments, but I’m also aware that the opposing arguments are even weaker (usually with a selfish undertone), so here goes!

What purpose does PoW serve?

Well firstly, Proof-of-Work serves as a method for preventing double-spends. This is the most commonly talked about purpose of PoW. Provided you’ve got a dominance of global hashpower (say as BTC does with SHA256), or there are other things assisting PoW where that isn’t the case (Say with DigiByte’s MultiAlgo coupled tightly with MultiShield, though we do have global hashrate dominance in 3/5 of our algorithms) then PoW is arguably the best at doing this double-spend prevention in a trustless way.

If you’re a minority hashrate, say with Bitcoin Cash or Bitcoin SV and SHA256, you’re potentially in trouble because a larger entity with more mining hashrate than your entire network could effectively ‘permanently’ own your network, stop transactions by only mining empty blocks, double-spend at will etc… by my count there is currently 8 ‘entities’ that could do that to BCH / BSV.

Now there’s obviously a lot of “game theory” and the likes that goes into reasons why this hasn’t yet occurred, but the simple fact of the matter is it’s still definitely possible and entirely plausible.

However …

There’s more to PoW than just double-spend prevention.

You COULD launch a coin that is both 100% pre-mined AND also uses PoW with miners surviving just on tx-fees. Obviously the tx-fees would be minimal at the start of the projects life, unless there is a ton of on-chain activity from the get-go, but the theory is there, it’s doable.

In fact, this future where a coin is 100% mined is a future that most projects like Bitcoin, DigiByte etc are headed, and miners will survive purely off tx-fees.

The difference is who holds those coins in a little over a decades time for DigiByte. Here’s how:

Reason #2 for PoW: Asset distribution

Proof-of-Work is unique in it’s requirement of electricity, turning that electricity into security.

There’s basically low -> no ongoing cost to staking.

If you have a PC at home that you’re already running a node on, or even simply just keeping online, the ongoing cost to you is effectively nothing. Sure, people opt for running a virtual-machine / VPS in a datacenter, many of which cost as little as USD$10 a month. That’s basically your only on-going cost though.

Whereas if you are running a graphics card such as a GTX1060 (USD$7 per-month in power roughly) or an ASIC like the S17+ (USD$220 per-month in power roughly), the on-going power cost is not something that many miners can absorb.

Therefore, a significant chunk of the assets they mine with PoW get sold on the open market (Mostly, aside from a few miners / pools who sell to OTC brokers), so that the miners can pay their power bills.

Who buys those assets? Anybody can, with mostly equal opportunity! There is nobody who immediately outright controls a dominant share of the asset.

With PoW, having to consistently pay for power naturally pushes miners toward selling (at least some of the assets they mine), which distributes the asset. You don’t have that with staking.

I know a lot of buyers get mad “at miners dumping on them”, but it is this selling that allows for *the* most fair and equal opportunity of distribution of the asset.

How does that work?

Well, most people who are upset about “miners dumping on them”, are upset because they themselves went to a free and open market, and they market-bought (Or perhaps even OTC) a sum of a particular asset.

But where did these assets come from in the first-place?

These assets are originally being purchased from miners, or from somebody else who bought them from miners.

This distribution is usually at a very consistent rate, with different people from different parts of the world opting to sell at different locations, at whatever market-rate they can in order to pay for their power-bills. Not always, but usually.

The idea with Bitcoin mining being until the early -> mid 22nd century, or DigiByte being fully mined in the next decade, is that it also provides a significant opportunity to distribute the asset itself. Even then the distribution will remain through the tx-fees miners obtain instead of just block-rewards.

This incentive to sell doesn’t exist with staking

In fact, quite the opposite, you are incentivized *not* to sell.

You have an incentive to hold on to everything you can, and hoard it, longer-term. Now this is great for a short-term price-appreciation due to the reduced ‘circulating’ supply, but if you’re not able to get your hands on an asset to begin with then you’re less likely to be able to benefit from that price increase.

There’s also less likely to be a deeper liquidity if you do.

When you stake an asset, the more of the particular asset that you have, the more chances you get of finding the next block. Subsequently, finding a block also increases your chances of winning both the tx-fees as well as any block-rewards, because you’ll then have more of the circulating supply.

You’re incentivized *not* to sell.

So because there are no miners selling to pay for power, there’s far less downward sell-pressure as a result, but that also then negatively impacts any newcomers to the ecosystem.

As such the overall distribution of the asset is greatly hindered. The incentive is to hoard, not distribute.

Masternode tiering systems make this worse

You incentivize the rich to hold on even further.

If you can move from a “light” to a “pro” tier, simply by hoarding, you’re also then further pushing people to hoard your asset in the event that they might be able to get a better reward percentage for the amount that they hold.

This is literally the rich getting richer, further centralizing the balance of power.

Why is that a problem?

Well, all you have to do is look at the likes of Poloniex now holding approx 210 million DigiByte (<2% of current circulating supply). That, in and of itself, is not a large problem at present. However, over time, they could potentially try and use that to manipulate the price in certain ways.

How much of that is a result from trading-fees vs people not removing their DigiByte from Poloniex before they shut down trading, nobody but Poloniex knows.

We’ve seen Justin Sun buy up the STEEMIT project just recently, that hasn’t exactly been roses and dandelions for those involved with it.

Why would you want to hand further power over to them, no matter how limited?

So sure, DigiByte doesn’t have the same sort of integrity problems that other projects would run in to, if we were to mandate that every 5th block were to be a staked block for example(and the remaining 4x must be PoW), but that also further messes with MultiShield in a negative way.

Now if you were a malicious attacker, say you were wanting to perform a 51% attack, and your node is the only node that’s reachable on a private chain, you’ve effectively handed over a scenario where roughly 20% less hashpower an attacker would need to act maliciously.

That doesn’t seem all that wise either?

DigiByte doesn’t have to be all things to all people.

The thing to keep in mind is that DigiByte does not have to suit your personal circumstances for mining. It certainly doesn’t suit mine at the moment as somebody who only has a couple of graphics cards, but, that’s totally OK.

I have a TON of network-attached-storage (NAS), yet I’m not advocating the use of HDD-mining for DigiByte. DigiByte doesn’t *need* every single person in the world mining it.

Proof-of-Work is by no means perfect, but it’s the best we’ve got!

It’s a balancing act really…

So Proof-of-Work isn’t just about mining and keeping the network secure, it’s about the distribution of coins to people as well, ideally worldwide!

It is for this reason I am a BIG advocate of DigiByte implementing both ProgPoW and RandomX, replacing two of the existing ASIC-specific mined algorithms.

GPU and CPU mining will allow both casual home-users who would like to mine a small amount on their existing hardware, geographically diverse distribution, as well as allowing larger mining farms to participate in securing the network while selling some of their DigiByte to pay for power.

I see that more as a win / win situation.

I would rather we didn’t go down the staking path at present, just so that people can see some short-term price appreciation. I don’t personally believe that trade-off is worth it.

Let’s look at this another way

There’s currently 8 billion DigiByte remaining to be mined (We’ve mined 13 out of our 21 billion maximum supply) over the next decade and a bit.

Let’s say, hypothetically, we get staking implemented, done and dusted, and activated in ~10–12 months time (A conservatively realistic amount of time if we activate it after ProgPoW / RandomX etc). That leaves us with 1.4 billion “in the kitty” for staking (1/5th of the remaining 7 billion).

That means that if you’re currently sitting on a million DigiByte, and we’ve got 7.8 billion staked (60% of the *current* supply, not taking in to account newly minted coins between now and then), your 1 million is 1/7800th of the staked supply.

This means out of the remaining 1.4 billion, IF you staked the WHOLE entire time and never touched your DigiByte for over a decade, you would likely receive around 180k more DGB.

That’s 18% increase over the course of a decade.

You really want to go messing with things, just for a measely 18% over a decade? You can loan out your dirty fiat on P2P lending scenarios and get more than that in a single year, let alone over a decade.

When you look at it like that, IF you want more DigiByte, just go buy some…

My closing thoughts in one sentence

PoW isn’t perfect … But I’d still take it over staking right now.