Research Area: Blockchain Technology
The security of Proof-of-Stake (PoS) blockchains rests on the assumption that a large number of contributors have incentives to maintain copies of the underlying distributed ledger. However, excessive block rewards may inflate the value of each unique PoS coin. In this paper, we evaluate the tradeoff between the degree of decentralization and coin inflation in a simulation exercise in which we model the competition between actively staking nodes and their decision to contribute to the network. First, we provide empirical evidence on coin concentration in common PoS networks to guide our simulations and model assumptions. Second, we simulate the evolution of coin concentration among contributors to PoS blockchains with respect to several crypteconomic designs such as coin supply with constant or dynamic inflation, different node selection criteria, and initial coin distributions. Our results based on simulated paths of the dynamics of nodes coins at stake suggest that decentralization of PoS blockchains can be largely maintained with moderate constant or dynamically adjusted coin inflation while decreasing inflation yields a large loss in active staking nodes over time when coin prices are static. Target node participation rates are not only fairer in terms of coin distribution but also yield higher value-weighted returns for participants.
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Author(s) Name: Felix Irresberger
Journal name: Leeds University Business School Working Paper No. 19-04
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Publisher name: Elsevier
DOI: 10.2139/ssrn.3293694
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