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Review Summary: Competitive Equilibria Between Staking and On-chain Lending

Published onMar 01, 2020
Review Summary: Competitive Equilibria Between Staking and On-chain Lending

Review Summary
‡ Competitive Equilibria Between Staking and On-chain Lending. [PDF]
Tarun Chitra (Gauntlet)
(‡ accepted for both conference and journal)

Paper summaries from the reviewers:
“It is shown that PoW consensus can become insecure in the presence of on-chain lending smart contracts. If the yield provided by these contracts is higher than the inflation rate earned from staking, staker will remove staked tokens and lend them out. As a result network security is reduced and attacks become easier. Situations when such a phase transition is likely are studied using a classical model based on Markowitz portfolio optimization and agent based simulation.”

“The author proposes a two and also a three states model to describe the behaviour of agents in a crypto network with PoS used as a consensus (with slashing). These agents can choose between staking, on-chain lending and borrowing. A lot of assumptions are made among which the number of agents is constant and agents are rational, so that they optimize their portfolios according to Markowitz theory. The author obtains theoretical results and has also run Monte-Carlo simulations. It is shown that a deflationary PoS network is particularly vulnerable. Staking should always be more profitable than lending.”

Comments on the strength of the paper:
“A nice economical treatment of the problem has been done with the help of rigorous mathematics. It is nice to see a Burkholder inequality in a article dealing with PoS network security.”

“This is a very good paper. The authors have a thorough understanding of both the technology and the economics of blockchains. They argue based on formal models with a strong theoretical foundation and investigate an important practical problem.”

“I see this as a very important paper, as it provides some concreteness to risks posed by DeFi in proof of stake systems. This is one that those designing cryptoeconomic systems and any DeFi products, as well as potential investors, financiers, and regulators and policy makers evaluating the space, need to factor in to their analyses.”

“Nice article which could lay the foundations of general probabilistic studies for PoS systems.”

“The paper proves that "The money market protocol" as proposed by Leshner and Hayes (2019)  (Equations (1) and (2) in Chitra's paper) is not well suited with PoS system especially for deflationary systems. But we could imagine other interest rate models.”

A reduced staked token supply can harm network security.”


Other discussions of this work:
https://twitter.com/tarunchitra/status/1224897727093510145

https://medium.com/dragonfly-research/how-defi-cannibalizes-pos-security-84b146f00697

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