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Competitive equilibria between staking and on-chain lending

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  • Tarun Chitra

Abstract

Proof of Stake (PoS) is a burgeoning Sybil resistance mechanism that aims to have a digital asset ("token") serve as security collateral in crypto networks. However, PoS has so far eluded a comprehensive threat model that encompasses both Byzantine attacks from distributed systems and financial attacks that arise from the dual usage of the token as a means of payment and a Sybil resistance mechanism. In particular, the existence of derivatives markets makes malicious coordination among validators easier to execute than in Proof of Work systems. We demonstrate that it is also possible for on-chain lending smart contracts to cannibalize network security in PoS systems. When the yield provided by these contracts is more attractive than the inflation rate provided from staking, stakers will tend to remove their staked tokens and lend them out, thus reducing network security. In this paper, we provide a simple stochastic model that describes how rational validators with varying risk preferences react to changes in staking and lending returns. For a particular configuration of this model, we provide a formal proof of a phase transition between equilibria in which tokens are predominantly staked and those in which they are predominantly lent. We further validate this emergent adversarial behavior (e.g. reduced staked token supply) with agent-based simulations that sample transitions under more realistic conditions. Our results illustrate that rational, non-adversarial actors can dramatically reduce PoS network security if block rewards are not calibrated appropriately above the expected yields of on-chain lending.

Suggested Citation

  • Tarun Chitra, 2019. "Competitive equilibria between staking and on-chain lending," Papers 2001.00919, arXiv.org, revised Feb 2020.
  • Handle: RePEc:arx:papers:2001.00919
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    References listed on IDEAS

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    Cited by:

    1. Tarun Chitra & Alex Evans, 2020. "Why Stake When You Can Borrow?," Papers 2006.11156, arXiv.org.
    2. Yulin Liu & Yuxuan Lu & Kartik Nayak & Fan Zhang & Luyao Zhang & Yinhong Zhao, 2022. "Empirical Analysis of EIP-1559: Transaction Fees, Waiting Time, and Consensus Security," Papers 2201.05574, arXiv.org, revised Apr 2023.
    3. Ariah Klages-Mundt & Andreea Minca, 2020. "While Stability Lasts: A Stochastic Model of Non-Custodial Stablecoins," Papers 2004.01304, arXiv.org, revised Jul 2022.

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