A Superfluid Evolution of Stake

Proof-of-Stake (PoS) systems have come a long way since Sunny King and Scott Nadal outlined their alternative to Bitcoin’s energy-intensive security system. While Peercoin ultimately fizzled out, the idea that a public blockchain network could be secured by its own internal resources lived on. Sunny and Scott’s work sparked consensus designers around the world to experiment with different ways to build PoS systems, with acronyms for varieties of PoS now spanning almost the entire alphabet. As PoS smart contract platforms clustered around a few dominant implementations, attention is shifting towards addressing the second order effects that stem from consensus design choices.

One of the most notorious byproducts of PoS systems is the illiquid nature of the network’s staked assets. Broadly speaking, a PoS system has two subsystems: an economy and a security (staking) element. In the economy, native assets behave as resources used to transfer or create new value. In the staking subsystem, native assets signal commitment to the network’s rules. The staking subsystem doesn’t actually consume or transform native assets in the way the economic subsystem does, except when it needs to punish a bad actor. As a result, the marginal resource locked into the staking process strips the economy of liquid capital.

Over time, PoS systems have evolved to satisfy the demand for network security without compromising the network’s economic liquidity. The rollout of superfluid staking on the Osmosis Zone provides a novel solution to this dilemma, but the journey to understand just how unique and economically impactful this may be begins with the basic mechanics of PoS systems themselves.

Evolution of Stake

Normal ("Vanilla") Staking

To register into the network’s consensus process, validators are required to place a network’s native cryptoasset in escrow as a form of collateral. This process is referred to as ‘staking’ and is what provides the network with its security. Staked assets are used by validators to signal their promise to properly order and verify transactions in line with the network’s rules. If these rules are violated, usually in the form of double-signing or downtime, most networks will seize (‘slash’) a validator’s staked assets. Some protocols, such as Avalanche or Ouroboros (used in Cardano), rely on honesty assumptions and don’t require slashing punishment.

Regardless of how they deal with bad actors, all PoS networks incentivize secure validator sets with inflationary rewards, transaction fees, or a combination of both rewards. The share of these rewards is proportional to the size of each individual validator’s stake compared to the total validator pool. As such, individual validators compete to stake a greater proportion of the network’s native asset, thereby increasing the network’s overall security.