Equilibrium Staking Levels in a Proof-of-Stake Blockchain
33 Pages Posted: 18 Nov 2021 Last revised: 17 Sep 2023
Date Written: November 17, 2021
We study the equilibrium level of staking in a Proof-of-Stake blockchain when investors have different trading horizons. We find that, contrary to conventional wisdom, staking levels do not always increase in block rewards. Rather, block rewards serve as an inflationary transfer from short-horizon cryptocurrency investors to long-horizon cryptocurrency investors. Thus, increasing block rewards reduces short-horizon cryptocurrency investment which, under certain conditions, reduces the overall transfer to long-horizon cryptocurrency investors and therefore reduces long-horizon investment as well. When this is the case, increasing block rewards decreases total cryptocurrency investment which leads to a reduction in the equilibrium value of staked cryptocurrency.
Keywords: Blockchain, Proof-of-Stake, Staking, Block Rewards
JEL Classification: G00, O30
Suggested Citation: Suggested Citation