Staking, the original concept.
Staking in the blockchain realm means that you vote on the transaction’s validity with your (locked) coin stack. In return, you receive a reward e.g. in form of fees that users have spent on their transactions. This has two major pitfalls:
- Staking makes the rich richer. Stakers with the biggest stake get to vote more often, getting even richer through rewards leading to an imbalance that also affects decentralization of the network consensus.
- Staking requires a fee to be paid from the users to the stakers. In general, fees are bad, as they prohibit adoption increasing the risk for stakers to stake on a dead network.
Why is staking still so popular among coiners?
In short: People want to see their holdings increase — at least in terms of quantity. Coins and exchanges jumped on the bandwagon, now offering hundreds of shady staking products.
IOTA doesn’t have any of the above-mentioned pitfalls(it is feeless and whales don’t get automatically richer), but still, some investors want to see their holdings increase. Thus questions about IOTA and staking are one of the most commonly asked.
Adoption-driven staking, a better concept.
Well, let me tell you, staking can be possible in IOTA with a little variation of the original concept. I call it adoption-driven staking.
One remark regarding this topic before we dive in: In general, any point of acceptance wants the means of payment it receives not to drop in value while holding it. In fact, this is one of three functions of money: to be stable and thus a store of value.
Image the scenario that IOTA gets some kind of more serious adoption. Services like shops, DAOs, DEXs, marketplaces, or data providers would offer goods and services in exchange for IOTA. These points of acceptance have an incentive to stabilize or increase the value of IOTA, at least as long as they hold IOTA on their balance sheet. Unfortunately, most cryptocurrencies are the opposite of stable, they are volatile. For this very reason, most services that accept crypto today, use crypto payment converters like BitPay to receive only fiat money despite the acceptance of crypto.
Of course, BitPay conversions come at a cost and they do not offer IOTA currently. Additionally, a real IoT(A) economy can not be based on in-time fiat-to-crypto conversations for every transaction.
But how? An example.
Since acceptance points like shops have an incentive to not let IOTA drop but rather increase in value, this leads to the question of how it can be achieved.
Adoption alone won’t do it.
IOTA investors want nothing more than seeing IOTA getting some real use cases. If this happens, an IOTA price increase is very likely. But this would happen rather abruptly and still means a lot of volatility in both ways. Imagine a service that would gather enormous amounts of IOTA, simply because it offers something valuable to IOTA users. That service would need to spend their IOTAs, e.g. convert them to fiat to cover costs or expand their business and so on. This means, that the price increase would rather result from speculators celebrating the adoption creating speculative demand. Supply-wise, adoption doesn’t bind as much as IOTA as one might hope, simply, because successful services would hold IOTA only temporarily.
However, what if those services extend their influence by letting IOTA users earn IOTA through referrals or affiliate links? Say, I offer a service that sells stock data on a pay-per-stock basis via IOTA. For marketing purposes, I introduce an affiliate system. If a client gets referred successfully, a percentage of the sale is paid directly to the referrals’ IOTA address. The trick here: the more IOTA on the referral’s address, the higher the percentage they receive from my service. E.g.: 1 Gi would result in a 10% provision, 10 Gi could get you a 20% provision of the sale and so on.
If services stick to that modus operandi, IOTA investors would have several ways to stake their IOTA. Not only would they earn through their holdings, but they would also have a financial incentive to bring in new people to purchase and spend IOTA driving the IOTA economy.
Compared to other PoS-DLTs, the IOTA network will stay feeless. However, the negative impact of staking on wealth concentration and capital accumulation aka „The Rich get richer“ applies here as well, without affecting decentralization(this might change with the introduction of MANA). Do note that the largest stakers in this paradigm also contribute the most to stabilizing the value of IOTA, as well as have to burden the highest financial risk or exposure to IOTA’s price volatility.
In conclusion, „adoption-driven“ staking could offer various ways to let investors(who like the risk) stake their IOTA, while helping to stabilize and increase the value of IOTA and bring in more economic activity.
Why isn’t this done with fiat money? Or in other words: „Monetary policy made by the private sector, not by central banks“
In fiat economies, central banks, try and thus act to offer a stable currency. The ECB, for example, aims for stable inflation of 2% per year. If corporations decided to hold on to their fiat to increase its value, central banks would counteract(by printing more or lowering interest rates) until the inflation target is met. Thus companies rather reinvest their profits, which is preferred from an economic point of view.
In crypto, there is no central bank counteracting a deflationary trend. With this new form of staking the IOTA economy could create a massive form of deflation. While this is preferred by token holders, it could also harm the IOTA economy - one might think. But, then again, this kind of staking only works when users spend the token and thus increasing adoption due to the fact that staking/affiliate rewards are only paid if someone uses IOTA e.g. to make a purchase.
Doesn’t it introduce a new fee for merchants?
Affiliates advising consumers to use their links because it comes at no cost is misleading. Affiliate marketing does cost money for the merchant as commissions have to be paid for every successful referral. These costs are ultimately passed on to the consumer. Still, it is an optional marketing expense, not an enforced network fee. Additionally, I rate traditional advertising to a broad audience highly ineffective as long as IOTA hodlers are a minority, so why not spend the marketing budget on a highly effective affiliate scheme instead? And, finally, the overall net effect of adoption-driven staking leading to extreme price increases for the IOTA token outweighs the marketing costs by far.
Well, this is cool, but how do I know I don’t get screwed by the merchant?
All IOTA transactions are public and affiliate/staking transactions could be marked as such. With Smart Contracts, the last doubts could be erased. Plus, with IOTA transactions being non-reversible, commissions could be paid out in real-time.
I hope you liked the idea about bringing staking to IOTA. I plan to add it to my service. Do you have at least 50 Gi? Get ready to stake, drive adoption and earn tons of commissions!
Last post: https://multifolio.medium.com/how-iota-creates-the-ultimate-lock-in-effect-983378d34056
