Cartesi and The Mechanism of Staking Rights

The Proof-of-stake consensus mechanism is the alternative to proof of work which consumes a lot of computing power to function. Proof of stake uses validators instead of miners like in proof of work. Validators allow users to mint new blocks. To become a validator, a node has to deposit a number of coins to the network as a stake.

The size of the stake determines the chances of a node to be chosen as a validator to forge the next block. The node receives the fees that are associated with the transaction inside the block. In order to ensure the authenticity of the validations, validators lose a portion of their stake if they validate a fraudulent transaction. As long as the stake is higher than the reward, the validators are trusted to do the job correctly if they will lose more than gain. If a stake stops being a validator, the rewards will be released after a certain period of time.

Proof of stake is more decentralized and less expensive. Moreover, most PoS algorithms are only guaranteed to work under the assumption that no malicious user holds more than 50% (or 33%) of the total amount of tokens available. In other words, it is crucial that tokens are well distributed among the members of the community who participate in the consensus. Proof of stake encourages people to set up a node.

The challenges with Proof of stake

Choosing a validator cannot be completely random, the size of the stake has to be factored into the selection. Size of stake is not enough criteria in selecting a validator because it will favor the rich more. Proof of stake has risks that need to be mitigated in order to maintain the security of the blockchain.

As PoS needs user engagement to work, projects have the need to carefully plan rewards systems to achieve a target participation rate. From the perspective of the user, staking is a problem of opportunity cost: “does the benefit of staking outweigh the risks and covers the time-value of my money?”
A popular solution to reward users for staking is to mint new tokens and distribute them among stakers. Besides the obvious incentive to gain extra tokens, the inflation created penalizes those who choose not to participate. The challenge is how to measure the opportunity costs of users and how to choose the appropriate minting amount to achieve a target participation rate while avoiding exceedingly high inflation rates.

Staking rights: The Cartesi solution to the staking issues

Rights are transitory: At the end of each staking cycle, a set of rights expires and ceases to exist. Conversely, new rights are created and made available for purchase through an auction.

The final value of staking rights: Staking rights always have a final value of 1 CTSI, which is delivered to the account that purchased it at the precise time of their expiry. When users buy staking right for a price of less than 1 CTSI, the difference between the price paid and the unit value is proportional to their perceived opportunity of the staking right. In that case, the difference is minted and locked in staking together with the price paid, with a total of 1 CTSI staked per right sold.

With this system, the user knows exactly how much mining income they will get for their staked tokens, independent of how many rights are sold or how many other stakers exist.

There are also no assumptions about risk preferences, buyers will state them through bidding. This method also allows for bigger differentiation between users: instead of asking for a binary decision (stake or not to stake), Cartesi allows users to signal at what price they would be willing to stake.

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