Reward mechanisms and network security in Proof of Stake: The case of Gridcoin
In this article we will investigate how different reward mechanisms affect user participation and consequently network security in proof of stake blockchains. For this purpose we will study the Gridcoin blockchain, as its recent change of reward mechanism provides an ideal case study.
Gridcoin is a proof of stake cryptocurrency that rewards contributions to the distributed scientific computation grid based on the Berkeley Open Infrastructure for Network Computing (BOINC). As such it proposes proof of research (PoR) as a sustainable alternative to proof of work (PoW), which is known to be wasteful in computation resources.
Previously users were incentivized to participate in the PoS network via a 1.5% annual interest mechanism (APR) that would be minted as soon as a block was staked. The staking probability would be proportional to the users holdings. Due to this reward mechanism many users would connect to the network to stake a block, collect their accumulated interest and then disconnect again, only to return after enough interest has accumulated. This led to a reduction in the number of staked coins, overall network participation and hence reduced network security. The later being expressed through the difficulty parameter, which is a function of the total amount coins staked at any given time.
In order to address this deficiency the Gridcoin community decided to change the APR reward mechanism. It is important to note that Gridcoin wallet supports voting on the blockchain and thus such decisions are regularly put on vote, as a classic example of blockchain governance. As a result of such a vote, the community decided to switch to a constant block reward mechanism (CBR) as of block 1420001. In CBR, in addition to the research rewards (due to PoR), users are rewarded with a fixed amount of 10 GRC for each block they stake. In this way, rather then accumulating an interest without being active on the network, the users are incentivized to keep their wallets online in order to increase their probabilities of staking blocks. It was hypothesized that CBR would bring more coins and users online and thus increase the difficulty making the network more secure.
In order to test this hypothesis we decided to analyze the variation of the network difficulty parameter, which is readily recorded in each staked block. Particularly we are interested if there changes that can be attributed to the change of the reward mechanism. For this purpose we collected the block statistics for the last 365 days and plotted average, maximum and minimum values of the difficulty parameter aggregated over 6 hour intervals (i.e 120 blocks) in Figure 1.
In Figure 2 we show the probability density functions of the average difficulty parameter (binned at units of 0.25) for the blocks staked with APR and CBR reward mechanisms separately.
From the presented data it is safe to conclude that the switch to CBR has indeed achieved the desired effect of increasing the Gridcoin network security and user participation. This can also be regarded as a positive outcome of blockchain governance, where a community has realized a deficiency in a protocol, proposed an improvement and has managed to implement it through decentralized consensus.