Vitalik Buterin has put forth a proposal to increase the staking reward for Ethereum in the upcoming implementation of Proof of Stake (PoS).
In a post to GitHub published on April 20, the Ethereum co-founder shared his opinion on the amount of ETH that should be paid out in staking once the currency switches to PoS. According to Buterin, that amount should be higher than what has previously be proposed.
Ethereum, like Bitcoin and Litecoin, operates on a Proof of Work algorithm that requires computing power in the form of miners to validate transactions. Users pay a fee to miners to initiate coin transactions, while miners also participate in the minting of new coins at regular intervals. However, PoW has its drawbacks. For one, it incentivizes massive mining pools that are able to achieve profitability by generating a disproportionate amount of the network’s hasing power. Large mining pools also increases the competition for mined coin rewards and transaction fees, leading to an overall increase in the computing power contributing to the network. The end result is a massive investment of resources, in the form of both electricity and processors.
Proof of Stake is one method for improving upon the efficiency of cryptocurrency-based blockchain networks, and the algorithm that Ethereum developers have to decided to transition the currency to over the next 16 months. Compared to mining, Proof of Stake employs an incentive system based around users “staking” coins in their wallet. The more coins a user has staked–in this case ETH–the more they contribute to the network functionality, and are rewarded with a payout. Similar to the dividends paid out to investors by certain stocks, staking is a regular compensation in proportion to the number of coins staked.
However, as Ethereum moves through the process of transitioning to a PoS algorithm, the currency must contend with decisions such as the percentage of coins that should be awarded for staking. Buterin’s proposal will see the creation of 2,097,152 ether per year when 134,217,728 ETH is staked and serving to validate transactions. The result would be an annual dividend of 1.56% for investors–a small amount by some currency standards, but a reward that also avoids introducing over-inflation to existing ETH.
Buterin also gives a breakdown of various payouts based on the Ether being staked. Compared to the former value, which represents a theoretical maximum staking for Ethereum (the circulating supply of ETH is only 105 million), 1 million staked Ether would result in a return of 18.10%, while 10 million would net stakers 5.72%. The value of staked Ethereum will likely fall far short of the proposed maximum, as many investors will choose to forgo tying up their coins in wallets and therefore making them unavailable for trading.
Justin Drake, an Ethereum researcher, replied in the GitHub comments with his approval of Buterin’s algorithm. Targeting 32 million staked Ether, which Drake calls an ideal figure for maintaining network security, investors can expect a base return of 3.2%, with yearly inflation to Ethereum being around 1%–far less than the average U.S. dollar inflation rate of 3.22%.