Creating blockchain governance models is no easy feat and many of the brightest minds with Ph.D.’s research the models extensively before formulating something that can work. In this post, we will contrast Proof-of-Stake (PoS) with Proof-of-Work (PoW), seek to understand why ICON’s Delegated Proof-of-Contribution (DPoC) model is an effective, incentive-based system, recap staking, and lastly discuss inflation.
Proof-of-Stake as contrasted with Proof-of-Work
Proof-of-Stake (PoS) has often been dubbed more “energy efficient” than Proof-of-Work (PoW). On the opposing side of this, is the argument that PoS systems are not as secure as PoW based systems. The two opposing beliefs create a dilemma in interests and a split in ideologies that can dissuade people from exploring both systems and “stick to one side”.
The argument for PoW being “more secure” than PoS, stems from this idea that miners are utilizing real resources, such as power and energy consumption to secure and maintain the network. However, when it comes to the security of the network, it is much more strenuous in PoW based systems to flush out bad actors wishing to damage the network. A clear example of this is a “51% attack“.
When a 51% attack occurs in a PoW based protocol, the entire hashing algorithm must be changed to flush the bad actors out, also affecting some of the people of “good faith” in the process. For a large mining operation, this can be quite expensive as all the expensive hardware that is set up to mine and secure the network is rendered useless.
On the other side, when a 51% attack occurs within a PoS based protocol, the aftermath of the attack is highly minimized as opposed to what occurs in a PoW based protocol. Essentially, in the instance of a 51% attack on a PoS based protocol, the people of “good faith” can actually fork the chain and delete the bad actor’s coins. So, when the argument arises over PoW being “more secure” than PoS, to the intelligent observer, it’s clear to see that PoS has a much more effective security model in the instance of a 51% attack ex post facto.
Additionally, a further inducement which makes PoS even more attractive is a powerful social dynamic that is not existent within PoW based systems. There’s almost a unison that is formed with all the people who are producing/validating blocks on the network and the token holders themselves. In this sense, everyone is much more engaged in governance and decision making on the network as the token holders actually have a say in what changes should happen on a PoS based protocol.
Furthermore, through staking one can actually reinvest their rewards back into their staking operation, as opposed to with PoW based systems, one has to take numerous steps to improve a mining operation such as:
- Send mining rewards to an exchange
- Sell for USD
- Purchase new equipment
- Wait on shipping
- Setup new equipment
Within PoS there lies a value in efficiency both in terms of scaling and also energy consumption.
Delegated Proof-of-Contribution (DPoC)
ICON utilizes a Delegated Proof-of-Contribution (DPoC) consensus, a variant of Delegated Proof-of-Stake (DPoS) which the protocol is based on. DPoC’s beauty lies in its ability to quantitatively assess one’s level of contribution to the network, represented by I-Score. Through this model, it prevents apathy or people who have misaligned interests by rewarding those who contribute to the network as the model is quite literally based on one’s contribution.
In an interview I did with Bong An Ha and Changju Lee of the ICON Foundation, both were able to extrapolate the underlying nature behind DPoC and ascertain why an effective mechanism like this is needed to expedite the growth and ultimate success of a decentralized ecosystem.
Bong An Ha:
“DPoC is not consensus protocol. ICON is based on the DPoS consensus protocol. Delegated Proof-of-Contribution (DPoC) is a decentralized and democratized incentive and governance protocol whereby token holders (ICONists) exercise their right to governance through delegating their stake to those that contribute directly to network growth. By delegating their stake, ICONists elect proven contributors to receive rewards from the network, while at the same time reaping rewards themselves by contributing through stake delegation”.
“An effective incentive mechanism can greatly expedite the growth and ultimate success of a decentralized ecosystem. The ICON Network utilizes the Delegated Proof-of-Contribution protocol to quantify ecosystem contributions, which allows for a more precise and decentralized distribution of economic incentives. Without an effective system like Delegated Proof-of-Contribution, valuable network resources could be allocated to entities with misaligned or apathetic interests, thus hindering the growth of the network and diluting the token holdings of ICONists that have made valuable contributions to the network. For this reason, the ICON Network focuses on selecting proven contributors through a delegation process”.
Based on Bong’s responses we can ascertain that the token holders (ICONists) play a significant role in shaping the future of the protocol. Through voting on P-Reps of their choice, they are exercising their right in governance and conversely, contributing directly to network growth.
Furthermore, DPoC incentivizes key players in four different ways, highlighted by Hyun Oh of Deblock.
- Representative: Creation and verification of blocks.
- DApp: Services utilizing the blockchain platform.
- Ecosystem Expansion Project: Online/Offline services supporting the ecosystem without utilizing blockchain technologies.
- Holders: Ordinary users supporting and evaluating the other three players by delegating ICX.
Starting on August 26th, ICONists will be able to begin exercising their power in governance by voting for P-Reps of their choice during the pre-voting period. During this time, it’s important to vote for quality P-Reps as they will be the primary bodies that shape the future of the protocol moving forward.
The following diagram below shows the relation between the percentage of the network staked and the reward rate, which represents an inverse relationship.
A few key points for ICONists:
- As % of network staked increases, the reward rate decreases.
- As % of network staked decreases, the reward rate increases.
- The reward rate per category ranges between 2% and 12% per year. Staking to all three categories results in a rate that ranges between 6% and 36%.
- Once % of network staked crosses above the 70% mark, the reward rate becomes fixed at 2% per category.
Additionally, the diagram below shows the relationship between the percentage of the network staked and the un-staking period, which also represents an inverse relationship.
A few key points for ICONists:
- As % of network staked increases, the un-staking period decreases.
- As % of network staked decreases, the un-staking period increases.
- The un-staking period ranges between 5 and 20 days.
- Once % of network staked crosses above the 70% mark, the un-staking period becomes fixed at 5 days.
Lastly, official documentation has been released for “how to stake” and participate in the pre-voting period. If you are still curious as to how this process works, head over to the pre-voting portal within icon.community.
Does this Model just Create Massive Inflation?
A commonly asked question I see within ICON social channels, is regarding inflation – especially post-election of P-Reps for the ICON protocol. Since P-Reps will be rewarded graciously, there seems to be a lot of negative sentiment stemming around the increase in the total token supply (inflation) of ICX.
The short answer is no, as inflation is needed to maintain network health.
It’s important to realize that not all inflation is “bad”. In fact, inflation can actually incentivize people to perform certain tasks. Furthermore, inflation is necessary within PoS protocols to maintain the health of the network.
Taken from my past post on “Dissension and Insight on Inflation in ICON and Other Protocols“, the following quotation still stands true.
“Inflation is needed to sustain network health. It incentivizes people to stake and is the whole basis of securing the network. Furthermore, as long as the staking reward rate is higher than the inflation rate, ICX tokens are not being “devalued”. It’s in this sense inflation is not “bad”, rather a crucial necessity needed to sustain network health within ICON and other PoS networks”.
When looking at ICON’s DPoC model, there needs to be incentivization for network participants, and within this model, these incentives are aligned in such a way that encourages contribution to the network while punishing actors with misaligned interests.
According to Changju Lee of ICON, ICON’s inflation and delegation rewards, represented by i_rep:
“Was determined between 30,000 ICX to 60,000 ICX for most of the time and delegation rate was around 20% of the total supply. In most of the cases, the delegation rate is higher than inflation rate“.
Based on this model for i_rep figures, 30,000 – 60,000 ICX represent a baseline and “middle ground” for i_rep rewards. Were a P-Rep to propose an amount higher than this baseline, an ICONist can exercise their right in governance by removing their ICX from a delegation of said P-Rep as this would result in a higher rate of inflation. The model for i_rep rewards is structured to keep inflation relatively low, while still providing an incentive for P-Reps to contribute to the network.
This leads to another point of when considering voting for a P-Rep, it’s important to consider their submission for i_rep as if it’s too high, it can show misaligned interests.
After exploring why Proof-of-Stake based models are more secure than Proof-of-Work, as well as how ICON’s unique DPoC model provides an incentive-based system focused on contribution – one can ascertain that ICON’s DPoC model was carefully crafted to allow for a more precise and decentralized distribution of economic incentives.
Furthermore, as a necessary component of PoS protocols, inflation within ICON is necessary to sustain and maintain network health.