Tokenomics
Prefix: The Tokenomics of StaFiHub resembles that of StaFi Chain (check the full version here), hence, the focus of this article highlights the key points of StaFiHub and its differences compared to the StaFi Chain.
Background
StaFi Protocol is a multi-chain Staking Derivatives Protocol that encompasses two modules: StaFi Chain and StaFiHub. Both are independent chains with their own consensus, but each has its own unique functions. StaFi Chain is based on the Substrate framework and is oriented towards being integrated on all PoS consensus chains. StaFiHub, is custom-built with Cosmos SDK project chains in mind, and is being developed based on the Cosmos SDK framework. We are also in the process of developing other fundamental modules such as the StaFi Parachain, StaFi Subnet, StaFi Paratime and more.
During the process of designing StaFiHub, we had to determine the fundamental framework on which the chain is built upon such as the Native Token of the chain, design of the economic model, determining safe chain launching procedures, etc. The above mentioned are referred to as the Tokenomics of StaFiHub. After hours upon hours of research, we have concluded that we will be utilizing an unprecedented and highly unique design to solve the issue of integrating single-chain Tokenomics along with Multi-Chain Tokenomics without hurting the reproducibility of Staking Derivatives currently on StaFi.
We have highlighted the main design framework of StaFiHub below which incorporates the solution to the issues mentioned above. We do hope that the community understands the Tokenomics of StaFiHub as well inspires the entire industry with our unique design model.
Introduction
There are two premises on which our design is based on:
1.All Multi-chain Utility Tokens are FIS
2.All forms of Multi-chain Utility Token value captured follows the same principle as StaFiChain
All modules of StaFi Protocol have an independent consensus, however, they share the same Utility Token, which is FIS. This follows the design framework of the StaFi Chain Tokenomics. Consecutively, there are small tweaks being made within each model to suit its individual requirements. The decision to use FIS as the main primary Utility token serves a purpose, which is to obtain value by unlocking the liquidity of staked assets in the target chain, which in return transfers the value back to FIS holders, following the design scheme of StaFi Chain.
We have designed the distribution, circulation, security and the value capture of FIS for different modules based on the premises mentioned. We will explain our solutions to specific problems below.
Motivation
StaFiHub is developed based on the Cosmos SDK. Validators are engaged in the consensus by running nodes, which guarantees the security of the chain. The consensus provides incentives for validators, hence, it is designed to attract more validators into the system in order to achieve a higher degree of decentralization. Most of the Cosmos SDK based chains issue new tokens and set the inflation rate to reward validators--this is not applicable to StaFiHub, due to FIS not being a new Token. Moreover, we would not want to issue additional FIS to achieve StaFiHub's incentive demands. Therefore, we face the challenge of exploring an effective and unique way to reward StaFiHub users.
Reward
StaFiHub Chain operates by implementing the conventional block reward method to provide incentives for validators. Validators obtain incentives by producing blocks. Rewards from each block is variable or fixed, which is derived from network inflation. For example, the incentive for validators on StaFi Chain comes from its inflation mechanism. Read this article to learn about the inflation mechanism of the StaFi Chain.
The annual inflation rate of StaFi Chain is fixed at 10%. Based on the Staking Rate and Reward Rate observed, the Reward Rate of StaFi Chain is about 4% - 5% (2021 average), and the remaining 5% - 6% of the inflation rewards are collected by the Treasury of StaFi Chain.
A Simulated Calculation
As of 2AM (UTC), June 6, 2022
Total Issuance: 118.2900 MFIS
Staking Rate: 22.1%
Set Inflation: 10%
Actual Inflation Rate: 4.7%
ExpectedFIS Collected by Treasury Per Year = Total Issuance * (10% - 4.7%) = 6.2693 MFIS
In fact, the actual Inflation is changing constantly due to the dynamic Staking Rate mechanism implemented. The Treasury Pool currently has 10.3104 MFIS allocated in total. The address if the Treasury account can be found here:
33DgUpArHKJgYMepNaqkXFEzYipuD8UYfZsXDmG8ZbHStWAw
There is no destruction mechanism (burning) implemented for the Treasury and it is not open for use by the community at the current moment. StaFiHub can be incentivized without increasing the inflation rate of FIS by awarding StaFi Chain inflation rewards from the Treasury to StaFiHub validators as a motivation to keep validating the network. There are two ways to obtain FIS from StaFi Chain:
1.Transfer from Treasury
Considering that the amount of FIS in Treasury is ever-changing and is directly related to Staking Rate and Inflation Rate, we are uncertain of the reward scale of StaFiHub. According to theStaFi Chain Tokenomics, the amount of FIS held in the StaFi Treasury depends on the following:
Through this equation, the amount of FIS awarded to StaFiHub in a cycle can be calculated. Unidentical from the floating exchange rate set by Cosmos Hub, StaFiHub will adopt the fixed block reward method to ensure effective distribution of incentives after determination of the rewards amount, block time and other parameters. The distribution of rewards needs to effectively motivate validators in order to secure the StaFiHub network. Low incentivizations will not be attractive to validators.However, if incentives provided are too large, a rapid dilution of FIS would occur. N is a system parameter, which is set to ensure the balance of incentives through on-chain voting.
Let’s assume a simple model (not considering changes in Voting Power, Actual Inflation changes, changes in Staking Rate, etc.):
Supposedly, the amount of rewards totals to 2Mil FIS,with the inflation rate of StaFiHub being 2%, the initial validator count is 20, and the voting power of each person is equal. Taking into account the variables above, the amount of FIS that a validator can obtain in one day is:
Rewards for StaFi Chain validators:
The current inflation rate is 4.8%. According to the real-time inflation rate, the number of validators is 160, and the number of rewards obtained by each validator is consistent in a fixed period. The number of FIS rewarded is calculated below:
Using this simple model, you may understand the differences of rewards between StaFi Chain and StaFiHub. In actuality, the increase or decrease in the number of validators and the change in the amount of FIS awarded will both affect the incentives of validators.
This table demonstrates the FIS rewarded to validators at different prices for different N settings.
The above model is based on the premise that there are enough rewards in the Treasury. In special cases, a fallback needs to be considered. When the amount of FIS added to the Treasury is very small or even 0, StaFiHub will have no assets to reward validators. The size of the Treasury is affected by the Staking Rate of the StaFi Chain. Although the current Staking Rate of the StaFi Chain is yet to reach 75% (the ideal staking rate), we will need to consider this situation to avoid future shortcomings.
We have found that there are two possible solutions to this problem. Firstly, we would set the inflation rate of the modules separately while keeping the overall inflation rate unchanged. Secondly,a new Token is to be introduced together with a relationship between FIS and the new token. Both of these solutions are more complicated than the previous solution of directly transferring rewards from the StaFi Treasury. The second solution will be mentioned in the Future Work section. As for right now,, we will be discussing the first solution below.
2.Set the Inflation value of each module
Assuming that the inflation rate of StaFiHub is set to 5% and the inflation rate of StaFi Chain is reduced to 5%, a sustainable development of the StaFi Chain and StaFiHub ecosystem can be realized under the condition that the total inflation rate stays under 10%. There are two problems brought by implementing this method. The first one is the consensus security problem. The StaFi Chain validator rewards will be reduced with a lower inflation rate, hence, Stakers may be less willing to Stake. The second problem lies in the community. When the rewards generated by the protocol is lower than the inflation rate, participants may be discouraged by the diminishing rewards.
Secondly, the inflation module must be modified alongside an alteration of the consensus which is a difficult task and not as simple as changing a parameter. The entire network is affected greatly whenever the inflation module is modified. At the same time, we must consider the security challenges posed when reducing the current inflation rate and Staking rate on the StaFi Chain.
There is no doubt that setting the inflation rate of each module can ensure the sustainable development of StaFi Chain, StaFiHub and subsequent sub-chains such as StaFi Parachain. However, considering the complexity of this solution, we have not conducted further research regarding this at the time of writing. Likewise, in the Future Work section, we will further explore the possibilities of this solution. It is worth noting that scheme 2 can be extended on the basis of scheme 1.
Among other schemes, we have explored some other interesting concepts. In addition to supplementing the StaFiHub's rewards from the Treasury's rewards, the Liquidity Fee generated from the protocol may also be awarded to validators. For the definition of Liquidity, please check here. Liquidity Fee is the service fee charged by StaFi Protocol. According to StaFi Protocol's whitepaper, when the Liquidity Fee is greater than the system inflation, the protocol will make a profit. These profits may be used to develop the protocol itself. Anyhow, in the early stage of the protocol development, the product is not mature. Hence, inflation rewards need to be set to maintain the network operation, and the inflation rate can be gradually reduced until the adoption rate increases.
Considering the current Liquidity Fees obtained by StaFi Chain , it is not realistic to adopt this method at this stage due to the Fees being too low to maintain the operation of StaFiHub. Before adopting this method, we will need to evaluate the actual operating conditions.
Validator
On the StaFi Chain, we have set various parameters for Validators, but have not changed too many settings affecting Validators in the Cosmos SDK such as elections, reward methods, Slash rules, etc., please refer to the explanation given by the Cosmos SDK.
To determine the parameter settings being used, please refer to the subsequent Genesis documents. Validators on StaFiHub need to obtain block rights through Staking FIS. Every one of them may participate. Validators may also accept use delegations to increase their Voting Power as well as the probability of producing a block to gain more incentives.
Tokens
There are two Tokens in StaFiHub, FIS and rToken. Both these tokens are ICS20 compatible and may be transferred to other Cosmos ecosystems through the IBC. FIS is the Native Token of StaFi Protocol and the native Token of StaFiHub. Its main function is staking, preventing system abuse, on-chain governance and value capture. rToken is a general term for a series of Staking Derivatives. The existing rTokens in StaFi Chain include rETH, rATOM, rSOL, etc., which are mainly used to provide Staking Derivatives for their respective target chains. rTokens are an important way to capture value for FIS.
FIS
FIS is the native token for StaFi Protocol and its models, including StaFi Chain, StaFiHub and other StaFi subchains. FIS to StaFi is similar to ATOM to Cosmos, preventing system abuse and value capture. On StaFiHub, FIS fulfills the following roles and functions:
1.Staking Validators on StaFiHub need to be staking FIS to join the consensus and obtain rewards.
2.Tx Fee In order to avoid system abuse, the initiator of a transaction has to pay FIS to obtain computing resources. In this way, invalid transactions will be eradicated.
3.On-chain Governance FIS holders can participate in the tinkering of StaFiHub parameters, vote for Protocol upgrades and determine development courses. Anyone may submit proposals to StaFiHub, but only holders of FIS can vote for or against a proposal. 1 FIS accounts for 1 ballot.
4.Value Capture The Fee obtained by StaFi Protocol by providing the liquidity of Staking assets will give value to FIS Holder through online governance.
rToken(reward-Token)
rToken - Staking Derivative Tokens, such as rATOM, is a representation of your staked token obtained by a staker through a staking contract. If you stake ATOM, you will obtain rATOM.
rToken is the main product of StaFiHub. Anyone who accesses the StaFiHub SDK may generate Staking Derivatives for their respective chains. Every Cosmos SDK based project may generate its own rToken to create rToken application scenarios.
Onchain Rate between rToken and Staked Token will be dynamic due to the staking rewards generated. Holding rTokens will allow you to receive native token rewards earned from staking.. At the same time, rTokens can be traded in the market instead of Token. After a transaction takes place, the Staking contract will modify the rewards and redemption rights of the respective rToken accordingly.
For more information about rToken, please refer to the Tokenomics of StaFi Chain. Check here for details.
Fee
Like StaFi Chain, there are two types of Fees in StaFiHub, one is Tx Fee which is mainly used to prevent the system from being abused, and the other is the Liquidity Fee, which is charged to provide Staking Derivative services for the target chain. The settings of these two fees are similar to those of StaFi Chain, however, the liquidity fee will differ.
To increase the adoption of rTokens, we have introduced incentives for rToken developers in line with the open architecture of StaFiHub. Target chain developers will receive a share of Liquidity Fee collected. The parameter used, Delta, which is a percentage parameter determines the share of the fee collected..
The Liquidity Fee of StaFi Chain currently consists of two parts:
The current parameters of StaFichain for Alpha is 10% and Beta is 0.2%. After the parameter, Delta, is introduced, developers will be rewarded with a share of the Liquidity Fee. The amount awarded is calculated this way:
Considering the allocation of Income in the StaFi Whitepaper , the Delta parameter setting needs to be decided in the subsequent DAO. The developer's income will be proportional to the generated Staking Reward, which will motivate developers to develop, maintain, and promote the adoption of related rTokens.
Risk
Safety
We have categorized the security challenges faced by StaFi Protocol into two categories. The first one relates to attacks on the Staking contract, and the other is the attacks on the chain. Code security vulnerabilities aside, we will only be discussing the impact of the staking rate on security in PoS consensus in this section.
As of 2 AM UTC on June 6, 2022, the total amount of FIS in total supply is 118.29 million FIS. The higher the Staking rate, the more secure the chain will be. In theory, a staking rate close to 100% guarantees an extremely high degree of security. Since FIS is a Native Token shared by StaFi Chain, StaFiHub and other sub-chains, the number of FIS allocated to different modules and the staking rate of different modules complicate security calculations.
Under the simplified model (only StaFi Chain and StaFiHub), let’s assume that StaFi Chain and StaFiHub jointly owns 50% of the total FIS.
Tips: The conversion of FIS is linked through the built-in cross-chain bridge from StaFi Chain. Bridging 1 FIS to StaFiHub will result in the FIS circulation on StaFi Chain decreasing by 1, while the total number/circulation of FIS on StaFiHub increases by 1.
The 50% setting will result in:
1.The Staking Rate of StaFi Chain will not be able to reach the Ideal Staking Rate of 75%, which means that the actual inflation of StaFi Chain may reach up to 7.5%
Assuming that the inflation rate is finally determined to be 7.5%, a part of the inflation will be allocated to the StaFiHub as a reward no matter the reward amount set, which will directly affect the security of the StaFiHub.
2.The security of StaFi Chain and StaFiHub will depend on the minimum staking rate of the two chains. The current staking rate of StaFi Chain is 22.5%, which means that 77.5% of FIS circulating and not staked will affect chain security.
Theoretically, if the staking rate on both sides reaches 50%, the StaFi Protocol can achieve absolute security, and the lowest-staking-rate module follows the barrel principle. Assuming that the staking rate of StaFi Chain is 22.5%, and the staking rate of StaFiHub is 25%, an attacker would need to have more than 22.5% of the FIS to launch an attack.
So when:
The protocol has a sufficient degree of security. Although the two modules are safe and independent, attacking the chain with lower security in the module will also affect the chain with higher security. In fact, when the staking rates of StaFi Chain and StaFiHub reach 35% respectively, the amount of FIS in circulation will not be enough to attack any one module. When both staking rates drop to 25%, the attacker needs to own half of the circulating supply to launch an attack. When both the staking rates drop to 20%, the attacker needs to have 1/3 of the circulation to launch an attack.
In theory, multi-chain staking will increase the staking rate and increase the economic impossibility of attacks, however, considering the security and independence of the modules, the chain with the lowest security type in the module will become the target of the attack. Compared to the current staking rate of StaFi Chain, multi-chain staking will increase the economic impossibility of attackers to some extent, which means that in the previous situation described, StaFiHub will improve the security of StaFi Protocol.
In fact, the circulation of FIS is changing all the time, and the affected aspects includes but are not limited to the Vesting Schedule of FIS, the degree of FIS adoption in a multi-chain ecosystem, Tendermint's security definition for Voting Power, market factors, etc., which will eventually reflect on Staking Rate. We will not be able to accurately guarantee the staking rate of each module. However, the attack cost can be simply calculated, so as to provide us an early warning in the situation an attack were to arise.
An attacker may feel more motivated to attack a network especially when the TVL on the chain is much larger than the market value of the Staking FIS. Taking control of the chain through the Staking Rate will allow an attacker to create fake transactions and tamper with the transaction data. The attacker will not have to worry about the value of FIS falling after the attack. The associated risks brought about by obtaining other Tokens in TVL to gain profits. In response to such attacks, we have to always be paying attention to changes in the staking rate. Moreover, StaFi Protocol can create an on-chain mechanism to identify similar attack events, lock the corresponding assets in the cycle of unlocking Staked Assets, and prevent the occurrence of a crisis.
Cold Boot
The difference between a cold boot from StaFiHub and the Genesis of other chains lies in the initial distribution of Tokens and the difficulty of operation caused by various tools that need to be attached to staking tokens on the chain. When StaFiHub is launched, the following demand must be met in order to ensure sufficient security:
1.Staking rate as close to 50% as possible.
2.Block reward APY as close to 5% as possible.
The higher the staking rate, the higher the security. A higher APY may also help increase the staking rate, so as Foundation delegation. Deviations from the ideal value may cause security problems. Alternatively, using a centralized method (such as trusted nodes) and gradually transitioning to decentralization is also a safe start-up solution.
Protocol Treasury
The Treasury design of StaFiHub resembles that of the StaFi Chain, but operates independently from the StaFi Chain. The specific design can be found here.
Future Works
Besides the source of rewards and sustainable development, we have also studied the idea of StaFiHub having its own Token. This subject is also very interesting. There is no doubt that Bootstrapping a project with a new token will definitely attract more users,however, many people tend to ignore the issues that a new Token will bring such as the positioning of StaFiHub, StaFi Chain and future sub-chains such as StaFi Parachain, the relationship between StaFiHub Token and FIS, the exchange relationship between the two tokens, including how to guarantee its value, etc.
We will not be discussing the details here for now. In the future, we will continue to do research on the subject which may turn out to be a valuable direction to head towards.
In addition to new Tokens being added, our future focus will also be on monitoring of the Staking Rate as mentioned above, the development of an attack response mechanism, and the establishment of community security awareness. The research on other sub-chains is also currently underway. The addition of sub-chains will bring complexity to StaFi and help to expand services of StaFi to more protocols. We will keep you updated on our implementation of future sub chains in the days ahead.
NOTICE AND DISCLAIMER
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