Working Paper: CEPR ID: DP17580
Authors: Hans Gersbach; Akaki Mamageishvili; Manvir Schneider
Abstract: On several proof-of-stake blockchains, agents engaged in validating transactions can open a pool to which others can delegate their stake in order to earn higher returns. We develop a model of staking pool formation in the presence of malicious agents and establish existence and uniqueness of equilibria. We then identify potential and risk of staking pools. First, allowing for staking pools lowers blockchain security. Yet, honest stake holders obtain higher returns. Second, by choosing welfare optimal distribution rewards, staking pools prevent malicious agents from receiving large rewards. Third, when pool owners can freely distribute the returns from validation to delegators, staking pools disrupt blockchain operations, since malicious agents attract most delegators by offering generous returns.
Keywords: delegation; blockchain; governance
JEL Codes: C72; D02; D60; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| allowing for staking pools (P13) | lowers blockchain security (K24) |
| malicious agents can disrupt transaction validation (E42) | lowers blockchain security (K24) |
| welfare-optimal distribution of rewards (D63) | prevents malicious agents from receiving large rewards (D82) |
| reward distribution (J33) | control of malicious agents (K24) |
| pool owners can freely distribute returns to delegators (G35) | leads to disruptions in blockchain operations (E42) |
| malicious agents attract most delegators (D72) | lowers blockchain security (K24) |