Staking and Incentives for the Fetch.AI Ledger
By: Jonathan Ward
Tags: Agents, Technology, Sharding, Staking, Blockchain

Since the release of our minimal agency consensus whitepaper, we’ve been hard at work on a range of new developments. This included benchmarking the ledger’s performance. We released our high-performance virtual machine that will enable advanced smart contracts. We also continued improving our sharded ledger and cryptographic source of randomness.

In this article, we outline the Fetch.AI staking model and a future roadmap for the staking program. This will be launched in the coming months to provide our community with enhanced access to our test network. Users’ contributions to staking will also allow them to earn rewards from early participation in the project. This will provide returns at an annualized rate of up to 20%. We will also be working with our industry and academic partners to make participation in the staking process open to everyone.

Before discussing the staking details, we re-cap on the design of the Fetch.AI ledger and the role of staking in its consensus.

The Role of Validators on the Fetch.AI Network

The Fetch.AI ledger uses notarisation of a transient Directed Acyclic Graph (DAG). The DAG enables nodes to collaboratively build and finalise blocks that are added to a linear blockchain. The transactions within these blocks are arranged into distinct state, execution and network shards. This feature enables the ledger’s capacity to expand in response to increased demand. Importantly, this architecture also allows the capacity, and the operating cost of the network, to decrease when demand is low. These are key design elements that will enable the ledger to support large populations of autonomous economic agents at a low cost.

The principal objective for the launch of the ledger is for it to achieve its performance and scalability targets. Features to reduce operating costs and increase participation are due later in its development. At the launch of the main network in Q4 2019, all of the validators that take part in the consensus will be so-called “master” nodes. (Validators are computers that replicate some or all the data stored in ledger and take part in consensus). These “master” nodes run all the shards within the blockchain. As a result, the ledger will be capable of extremely high transaction throughput from the outset. From a technology point-of-view, the ledger is capable of operating with a very large number of validators. But for economic reasons we are initially limiting their number to two hundred. We introduced this restriction to control the ledger’s operating costs. This is important as these costs must ultimately be funded by transaction fees.

We intend to relax the restriction when user and platform growth can support larger number of validators. Improvements to the protocol will also increase participation for a particular operating cost. A total of two hundred validators is also much greater than existing Proof-of-Stake blockchains. This is a reflection of the improved performance and efficiency of the Fetch.AI ledger compared with these earlier protocols. The development roadmap includes plans for “light” nodes that run a subset of the shards. These and other node types will be able to contribute towards consensus at a much lower cost. The greater speed and security of the ledger will also enable it to support a growing population of autonomous agents.

Key Features of the Fetch.AI Staking Program

We designed the Fetch.AI staking model with this technical backdrop in mind. The key features of staking are:

Staking rights for running a ledger node on our test network will put up for auction in the run-up to the launch of the main network. Stakes will be locked for a duration of approximately one month. The stakes will then be unlocked and returned with rewards after this period has expired.

A second auction will conclude upon termination of the first staking period. This will lead to a new and potentially different set of validators being elected for the second month. (Validators from the first staking period will have the option of bidding for the next period). This process of sequential auctions for electing validators, with coordinated stake locking and unlocking, will proceed until the launch of the main network.

The winners of the staking auction will receive approximately 7,500 FET. The minimal stake for taking part in the competition will be set at around 200,000 FET. This simulates the collateral that will be necessary for becoming a validator.

Two hundred validator slots will available at the auction. Each of these slots will pay an annual effective return of 55% if sold at the reserve price. Retail investors with lower holdings will be able to delegate their stake to node operators at an advertised interest rate.

The precise reserve price of each validator slot will be 0.075% of the circulating supply. The sale of all slots at the reserve price would thus lead to staking of 15% of the circulating supply. The rewards will be fixed at an effective annualised return of 55% of the reserve price.

During the first three years of operation, the rewards will increase linearly with the token circulation. This will maintain a constant ratio of staked-to-circulating supply.

The highest two hundred bids will be awarded staking slots. The winning bidders will only pay the price that was offered by the lowest winning bidder. This ensures that the staking values are uniform between all validators. The interest rate that the winning bidders receive will also be the same or better than the rate implied by their initial bid. This feature allows validators to fulfill their obligation to pay a specific return on stake that has been delegated to them by smaller stakeholders.

Block rewards will not be compounded over the duration of the staking period. These will instead be paid upon unlocking of the stake to maintain uniform staking values and to reduce the risk (or variance) in expected rewards.

In the coming weeks, we will be releasing Ethereum smart contract code that implements the staking auction for FET ERC-20 tokens. This will be followed by an Etch smart contract for native operation on the Fetch.AI ledger. We have also written an article that explains in more detail the thoughts behind the design of our staking model and, in a separate post, included a list of FAQs about our staking program.