Hive Staking Incentives in a New Token Distribution Scheme

Since my first days on this blockchain, HIVE is almost always in the negative when it comes to powering down and exchange transfers. More HIVE is moving out of vesting than in and more HIVE is moving out to exchanges than moving in from exchanges.

The incentive to hold HIVE as HIVE Power is not enough to keep people invested in the rewards and staking system. Combined with the general lack of interest and investment into the Hive blockchain, it seems that we are simply not connecting with market participants regarding either our social rewards scheme or our general return on investment. I have recently advocated moving away from social rewards on Hive’s base layer and opening Hive up as a more general-purpose chain.

But even if we do that, there still seems to be a problem with staking and incentives. The current incentive to stake tokens has a few potential payoffs for users.

1. Influence on post reward distribution and personal return from post curation
2. Interest rewards
3. Influence on witness voting and development funds
4. Resource credits for use of the blockchain

In terms of personal ROI, only #1 and #2 are relevant. You can directly earn ROI from curation rewards and from the interest paid on the amount you have staked – both coming from the inflation pool. The inflation is key, since the newly-created tokens are continually being devalued, all other things being equal. The interest paid on staking is meant to cover some of those losses from inflation and the curation rewards are designed in a way that you can potentially outpace losses from inflation devaluation.

I think the math is a bit screwy and actual ROI depends mostly on new buyers coming in and driving prices up for capital appreciation. We’ve seen that happen in short bursts here and there, but the gradual decline in prices over longer periods of time completely wipes out any of the short-term gains. This makes long-term holding of the token a lot more risky and a lot less profitable for most users. Factor in the relatively long power down period and it makes short-term gains that much harder to realize for stakeholders.

So we have a multifaceted problem with our current design and the interest in the chain that we’ve observed for the past 4.5 years. I just want to put an idea out there for further discussion, specifically regarding the inflation and staking incentives.

The Idea

We can remove the social rewards off of the base layer of Hive, or reduce them low enough to make them fairly insignificant, assuming that we already have an application-layer solution for our social content needs. Once we have that option, here is what we can do with the remaining inflated tokens and distribution.

Current distribution is as follows:

Social rewards – 65%
Staking rewards – 15%
Witness rewards – 10%
Development fund – 10%

The potential plan could be:

1. Reduce post and curation rewards from the current 65% of the pool to 5%
2. Direct 15% of the remaining inflation from the previous total to increase the share of staking rewards to 30% of the previous total
3. Inflation reduced to eliminate the remaining balances

These actions will reduce overall inflation by nearly half – 55% of current totals – and give us the following token distribution:

Staking rewards – 55%
Witness rewards – 18%
Development fund – 18%
Social rewards – 9%

^{(Note that these numbers can be adjusted, such as changing social rewards to 5% and witness/development rewards to 20% each, or social rewards to 10% and staking rewards to 54%, etc.)}

With staking rewards taking predominance over social rewards and current overall inflation being reduced to under 4.5% per year, there would be greater incentive to stake HIVE or to at least not power it down. This is not a guarantee to flip the current trend, but it does push in the right direction regarding staking incentives alone.

But let’s consider a couple more options to entice investment.

Blockchains such as Tezos and Dash offer annual yields of around 5-6% for staking their tokens. Cosmos rewards over 8% for delegates and validators. The requirements for earning these rewards range from delegating to validators, running “masternodes,” or locking up your tokens for a specific period of time.

Delegating to witnesses on Hive isn’t necessary and it actually runs counter to the premise of validators being “elected” to their positions based on community trust. We also already have staking rewards being constantly distributed. Running a witness node isn’t a prerequisite to earn the rewards either, but that could be an option worth considering.

We do currently have a vesting period of 13 weeks, in that it takes 13 weeks to fully divest your staked tokens, distributed as liquid tokens on an equal per-week basis. We can improve this vesting function on Hive to compete with other platforms.

To keep it simple, let’s look at our current staking distribution. We’ll start with an easy number of 10,000 tokens in the total reward pool to keep the calculations simple.

10,000 (current daily inflation tokens) x 15% (staking share of daily tokens) = 1500 daily tokens for staking distribution
10,000 (daily inflation tokens) x 55% (total pool after reductions) = 5500 total daily tokens for distribution
5500 x 55% (staking share of daily tokens) = 3025 tokens for staking distribution

Going from 1500 to 3025 is almost a 102% increase in staking distribution. Current staking yields on Hive are around 3%. All other things being equal, this would bring the yield to around 6%. That’s a very competitive number.

However, we can further boost the yields for stakeholders by changing a few things:

1. Limiting distribution based on minimum vests
2. Offering different tiers of staking rewards based on duration/amount of vested tokens
3. Adjusting other rewards
4. Adjusting inflation

Number 4 is the least desirable option. Having annual inflation is still fairly taboo, even if it’s necessary or prudent for a given period of time. By reducing it to below 5% and keeping the same rate of annual reduction, we will have already lessened token expansion by hundreds of millions over a couple of decades.

Numbers 1 – 3 would each be fine on their own, but a combination of them could maximize the benefits of staking and create the highest degree of incentives that would both mitigate large outflows and likely increase inflows.

Going off of our new potential distribution scheme, an example adjustment could be:

Staking rewards – 70%
Witness rewards – 15%
Development fund – 10%
Social rewards – 5%

This change alone would bring the potential yields for staking around 7 – 8% per year, making Hive one of the top chains for staking yield. While witness token distribution would be reduced, the rewards are paid out in the form of vests/HP anyway, so witnesses would still benefit from being staked.

Adding a minimum to vested tokens in order to earn staking rewards could further increase yields for those who remain or become staked at the minimum threshold. For example, setting a minimum of 10 vests (roughly 5000 HIVE Power today) in order to earn staking rewards would eliminate the distribution of tokens to accounts under the threshold and could entice users to purchase more HIVE to meet that threshold – consequently adding upward pressure on demand and prices.

Having tiered distribution is an option as well. An account that stakes 1000 vests could earn a higher yield than one that stakes 10 vests. Accounts that have staked for a period of 90 or 180 days could earn a higher yield than those staked for only 10 or 30 days.

Part of the change in vesting/staking would be to reduce the general lock-up period from 13 weeks to possibly 8 or 4 weeks. As powering down is initiated, the amount of vests being powered down per week would not be counted for rewards distribution. If you have 100 vests and initiate a full power down over a 4-week period, then your vested stake for distribution purposes would immediately be reduced to 75 vests for the first week, then drop to ~50 for the second, and so on.

These are points of discussion and debate that should be had and the decisions should be based on the success of existing platforms that have adopted the concepts. I encourage everyone to leave their input on the chain and have an open discussion about it.

Important things to ponder...

Is it too risky to invest in a staking platform where the rewards solely come from an inflation pool?
Could we implement fees for new Hive functions and services that would be distributed to stakeholders?
What kind of second-layer functions and services could take advantage of and reward staking on Hive?
We still need better documentation, APIs, and developer tools and should get this funded and done ASAP.

^{Note: Any mathematical errors in this post are not my fault. Quoted yields are based on latest searchable information at the time of this post.}