Is the staking reward actually an invisible cost of blockchain?

Original Author: Franklin Templeton Digital Assets

Original Compilation: Alex Liu, Foresight News

Are staking rewards a cost to the blockchain?

In the cryptocurrency community, there has been ongoing debate about whether staking rewards should be considered a network cost, as these token incentives increase the total supply of tokens (thus diluting passive holders). This debate is further complicated by the lack of a unified definition of "cost," leading to different interpretations of the term. The purpose of this research article is to define from our perspective whether staking rewards are a cost of a distributed network.

What are staking rewards?

Staking rewards are provided to token holders who choose to stake their tokens on a proof-of-stake (PoS) network. This process involves locking up digital assets to help verify transactions and secure the blockchain network. These staked tokens serve as collateral for validators, who commit to acting honestly. If fraudulent transactions are validated, this collateral may be subject to slashing. These collaterals are valued in the blockchain's native assets (Ethereum uses ETH, Solana uses SOL).

Staking rewards lead to inflation in the token supply, as rewards are distributed to honest validators through newly minted tokens, with validators staking their capital to secure the network. For example, as of September 18, 2024, the annual inflation rates for ETH and SOL are approximately 0.8% and 5.0%, respectively, entirely generated by staking rewards.

Debate:

From one perspective, the value of the network is influenced by the number of tokens, and staking rewards introduce new supply, distributing the same value across more tokens, thereby lowering the token price. Conversely, another viewpoint holds that network value is defined by market capitalization, so staking rewards are not a cost to the network, as they are purely a transfer of value from non-stakers to stakers. Our view is that both perspectives are correct, just seen from different angles. Staking rewards are a cost to the token price because the supply is increasing; however, they are not a cost to the network value, as the token supply affects the total number of tokens, not the total value. The table below illustrates the hypothetical dynamics of supply changes on token value from period t to t+1:

We believe the key point is that, while the overall network value remains unchanged, the increase in token supply leads to a decrease in the value of each token. We do not believe that an increase in supply will change the network value. To think that token value will not be affected by an increase in supply is akin to believing that money will fall from the sky.

From the perspective that staking rewards are merely a transfer of value from non-stakers to stakers, we further elaborate on this in the following diagram. The diagram shows the process of token price and value transfer from period t to t+1 in a PoS network. We assume that 60% of the token supply is staked, with an inflation rate of 10% (through staking rewards). It can be seen that the network value remains unchanged, as the only important variable between these two periods is the token supply.

As shown in the table, the token value is diluted by approximately 9%, further proving our belief that staking does not affect network value but does dilute the value of tokens. The change in network value for non-stakers is the same percentage as the change in overall token value. For stakers, the initial principal is diluted just like that of non-stakers; however, the gains from staking rewards exceed the losses caused by dilution. Investors can monitor the staking yield of these rewards through on-chain data or third-party staking indices (such as the CESR index ------ Comprehensive Ethereum Staking Yield), which tracks such yields on the Ethereum chain.

So, are staking rewards a cost to the network? We believe that staking rewards are not a cost to the overall value of the network. However, staking rewards do represent an expenditure for token holders at the current moment.