Fetch.AI’s Staking Model Explained
By: Jonathan Ward
Tags: Fetch Ai, Proof Of Stake, Technology, Staking, Blockchain

We’re delighted to be able to announce plans for staking in the run up to the launch of the Fetch.AI main network at the end of this year. In an earlier article, we provided the key information that our supporters will need to take part in the staking program. The purpose of this article is to provide some background on the role of staking on the Fetch.AI platform and the rationale for the design of the staking model. We’ll also discuss how staking will evolve as the Fetch.AI network grows over time.

Staking is a mechanism that is used in the Fetch.AI consensus to secure the operation of the blockchain. The operators of nodes, known as validators, stake FET tokens in exchange for the right to earn rewards from the production of blocks over a certain time period. This stake can be withheld if the validators do not follow the protocol correctly. Users can also delegate stake to a particular validator to earn a share of the rewards that they receive. In both cases, the locking of stake allows the network to operate securely by putting the principal at risk if validators misbehave in any way.

In the following sections, we use a question-and-answer format to explain other aspects of the staking program.

So what is Proof-of-Stake and why do we need it?

There is a common idea behind all Proof-of-X schemes where X could be “Work” or “Stake” or some other valuable resource. Nodes that maintain the blockchain need some mechanism to distinguish valid blocks from blocks that contain invalid transactions or some other defect. This is necessary as an attacker can easily write a program that outputs invalid blocks that contain plausible lists of transactions and other associated data. Without some type of penalty, an attacker would then be able to flood the network with these fake blocks to stop the blockchain from operating. Proof-of-X chains resist this type of attack by requiring that block producers provide evidence that is easy to verify (a proof) that a significant amount of resources have been expended in the block’s creation. This makes it expensive for an attacker to disrupt the blockchain with fake blocks. In Proof-of-Stake chains, the expense involves the node “locking-up’’ a significant amount of funds for a certain amount of time. The private key that locked these funds can then be used to append digital signatures to blocks that prove they came from the same individual. Blocks that arrive with invalid signatures are safe to ignore. In contrast, blocks that include valid signatures allow the allocation of rewards for good behaviour or the levying of penalties for misconduct via the withholding of stake.

Bitcoin uses Proof-of-Work. How does that differ from staking and why is staking better?

In Proof-of-Work, the solution of a difficult computational puzzle demonstrates the expense involved in creating a block. This proves that a substantial amount of energy has been burned at great financial cost. This is the cause of Bitcoin’s well-publicised environmental impact. The main benefit of Proof-of-Stake systems over Proof-of-Work is that that they are much more energy efficient. They can also support higher transaction throughput. Another important advantage is that staking is what economists would call a “homogeneous” cost. In simple terms, this means that it is the same for everyone. The specialised hardware that is available for Bitcoin mining leads to different costs. This is one of the reasons that mining has become centralised in China where the hardware is manufactured and energy is cheap. The homogeneous cost of staking means that it can deliver greater decentralisation.

A final advantage of Proof-of-Stake is that it is likely to provide greater security. This arises from the stakes being a resource that is intrinsic to the blockchain. Misbehavior can thus be discouraged through the withholding of stake. In contrast, the hashing power used in Proof-of-Work chains is an external physical resource that is independent of the ledger. This means that miners cannot be restrained by other participants in the protocol. This is one of the main causes of the bitter disputes that have taken place after forking of the Bitcoin blockchain.

You have a sharded blockchain. What is that exactly?

One of the main weaknesses of existing blockchains is that they have limited throughput. This is caused by bottlenecks on, for example, how fast the nodes can execute transactions or send large messages to each other. It’s possible to avoid these bottlenecks by breaking these tasks up into different groups or shards that run in parallel with each other. If sharding is implemented correctly, then the throughput of the ledger will increase linearly with the number of shards. This enables potentially unlimited throughput.

So are the validators running a single shard or many?

At the launch of the main network, all nodes will be running all of the shards. In blockchain terminology, these are known as “master” nodes. In later updates of the ledger, we’ll also introduce “light” nodes that run a subset of the shards and have a lower operating cost. These nodes will also be able to take part in consensus and earn fees and rewards despite being unable to create blocks by themselves. Additionally, they will be able to host instances of the Open Economic Framework (OEF). This supports deployment of multi-agent systems. Nodes will also be able to earn revenue from providing services to agents.

What is the reason for having two hundred master nodes at the launch of your main network?

The design of our consensus protocol and our sharded blockchain make it technically feasible for there to be a larger number. Though, it’s important to remember that running a node involves quite a significant operating cost. Ultimately, this cost must met by people using the platform. To put it another way, there is a trade-off between the number of nodes (and the protocol’s degree of decentralisation) and low transaction fees. A total of two hundred nodes is a major improvement over many other Proof-of-Stake chains. This reflects the high efficiency and performance of our ledger. A restriction on the number of nodes also allows control of transaction fees in the future.

Will there always be two hundred validator nodes or are you planning on increasing the number at some point?

The two hundred nodes will maintain the ledger for a specific tenure, which will have a duration of around a month. At the end of their term, another auction will conclude. Stakes will be returned or reallocated, and the validators will be replaced by a new and potentially different set of individuals.

The ledger is a work in progress and will continue to develop after launch of the main network. Our roadmap lays out a development plan to improve the ledger’s performance, decentralisation and security. These improvements will also enable us to increase the number of nodes that can take part in consensus. It is also likely that other types of nodes will be available for supporting deployment of autonomous economic agents. These nodes do not need to be directly involved in consensus.

Why is there a reserve price of 200,000 FET for becoming a validator?

An important aspect of the incentive design is that it needs to provide cryptoeconomic security. If a single entity controlled a majority of the staked tokens (say, 51%) then they would have effective control of the blockchain. We need to set the reserve price at a sufficiently high level that this would be difficult for anyone to achieve. If the number of staked coins is high enough, then the increased demand for tokens will cause the price to rise significantly. This will make the attack progressively more expensive. The reserve price is set in the expectation that at least 15% of the circulating supply will be staked in the first three years of operation.

I have less than 200,000 FET but would still like to earn rewards for staking. How do I get involved?

We will be inviting our partners in industry and academia to operate ledger nodes. In exchange for locking your stake and delegating it to them, they will serve as validators on your behalf and pay a defined reward for your contribution. This is likely to be a competitive process. Thus, we anticipate that the margins of these operators will be low and that they will offer very good reward to retail investors.

How does the staking program benefit the Fetch.AI ecosystem before launch of main-net?

We’re testing the economic mechanism that will determine which parties are responsible for operating the blockchain before main-net so that we gain insight into the number of bidders that we can expect and the quantity of tokens that will be staked. This gives us an indication of the number of nodes that must be supported by block rewards and transaction fees and the level of security that we will attain. There are also the secondary questions on the duration of the bidding phase and lock-up periods, and the overall user experience. It’s an experimental process and we’re offering rewards to compensate people for the effort of understanding the auction design and the user-interface, for locking tokens and for the risk associated with staking tokens in a novel smart contract.

What are the benefits of participating in the staking program?

We’re using an auction to allocate staking rights to two hundred validators. The auction will be implemented in a smart contract. The winners will be entitled to an initial annual reward of approximately 50,000 FET for acting as a validator. Sale of all stakes at the reserve price will correspond to an annual gross return of around 20% on the principal if the nodes follow the protocol correctly. This reward must cover the cost for operating a node, and also provide an additional incentive to provide security to the protocol by locking a large quantity of tokens. If you are a smaller FET holder, the smart contract will allow you to delegate your stake to a validator at a specific rate of return. This will compensate you for the effort of choosing a responsible validator who will operate a node on your behalf, the risk of making an erroneous choice, and for the opportunity cost of locking your tokens for a defined period of time.

Are the rewards going to decrease similarly to Bitcoin or Ethereum halving?

For those of you not familiar with halving, an explainer can be found here. Unlike Bitcoin or Ethereum halving, Fetch.AI staking rewards will increase with token supply. This will reward our supporters for holding tokens as the supply and adoption of the token increase. During the first three years of operation, rewards will increase. The goal is to maintain at least 15% of the circulating supply allocated to staking. After this period, we’ll be transitioning to a fee-based incentive model as FET is a non-inflationary token that will preserve its users’ value.

How do I find out more?

Additional aspects of the staking program are discussed in these FAQs.

I’m also happy to answer questions on Twitter (@jonathan6620 or @Fetch_AI). Alternatively, you’re welcome to post questions on our Telegram channel.