The Tokenomics of Staking
67 Pages Posted: 6 Apr 2022 Last revised: 29 Nov 2023
Date Written: March 16, 2022
The rise of blockchain-based platforms and decentralized finance prominently features ``staking'': Besides offering a convenience yield for transactions as digital media of exchange, tokens are frequently staked for base-layer consensus generation or for incentivizing economic activities and network development, and consequently earn stakers rewards. To understand the economics of staking, token pricing, and network evolution, we build a continuous-time model of a token-based economy where agents heterogeneous in wealth and preference for a digital platform dynamically allocate their wealth among consumption, onchain transaction, and staking. We cast the interactions as a mean-field game with individual stochastic control and systematic shocks, which underscores aggregate staking ratio as a key variable linking staking to equilibrium reward rate and token pricing. We further characterize using a master equation the expected steady state of wealth distribution, the drivers for tradeoff between welfare and inequality, and redistribution due to staking and aggregate shocks. From a comprehensive dataset covering all major stable tokens, we derive empirical findings corroborating the model predictions. In particular, staking ratio is positively correlated with reward rates in the cross-section and negatively correlated in the time series. Higher reward rates and wealth concentration attract greater future staking, increasing the aggregate staking ratio, which in turn positively predicts token excess returns. Finally, consumption and transaction conveniences help rationalize violations of the uncovered interest rate parity and crypto carry premia (e.g., a long-short portfolio with OOS Sharpe ratio of 1.6) in the data.
Keywords: Carry, Cryptocurrencies, DeFi, Inequality, Proof-of-Stake, Redistribution, UIP.
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