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Trying to get the gist of the staking

Do I get it right?

  1. As a user I can stake assets (not clear yet would it be ETH or the token)
  2. The Reward inside the staking contract is updated from the Exchange
  3. Does it have any relation to minting and mining new transactions and adding them to the block or it's made on the node level?

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  • There are plenty of various staking schemes around. Do you have any specific in mind? – Lauri Peltonen Dec 19 '20 at 18:00
  • Hi @LauriPeltonen This is the ERC20 based token and the protocol should be the basic one. Trying to find out where the reward usually comes from usually – Dmitry Dyachkov Dec 19 '20 at 18:29
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It's up to you to decide from where the rewards are coming, I will share with you the concepts that I'm familiar with.

Let's say we have ERC20 token X, here are few staking concepts that could work:

  • Staking token X in order to receive token Y: minting new token called Y, but like Lauri Peltonens said, this has nothing to do with token X. You're creating a new token and here is the question why would users want to stake their token X in order to receive token Y? It's up to you how you add value to this token to make people want it ( stake token X for it or even buy it ).

  • Staking token X in order to receive token X: part of the total supply of token X can be for example locked for typical transfers and can be unlocked only for staking rewards. It's up to you to decide what value you choose to set aside for the staking rewards.

  • Staking token X in order to receive token X: this is something that I call soft staking. Here we don't need any amount set aside for staking rewards, but the rewards are being generated by the users going inside the staking program ( staking token amount ) or users which are leaving the staking program ( unstaking token amount ). Everytime a user join or leave the staking program, the smart contract will charge him a small fee. This fee will be splitted to all of the stakers inside the staking app based on their stake. So if for example John joining fee is 20 tokens X and my stake is 1/10 of all the staked tokens I will get 2 tokens, because John joined ( the formula is ( myStake / totalStakes ) * userFee which is in the example ( 1 / 10 ) * 20 ). The same formula applies for leaving fees also. In general this concept would work the best for people that are not typical traders ( people that buy assets and leave them like this for long time ), they will generate profits at the expense of panic sellers which are going in and out in the staking program more often. The often you stake or unstake token amounts the more fees you will have to pay.

  • Staking token X in order to be allowed to join into governance program: that's correct, after user staked his tokens he is not receiving rewards, but he has the right to participate in decision-making. How much weight his vote will have will be measured by the number of tokens that he staked.

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Now don't quote me on this, but as I see it, most staking schemes are simply pyramid schemes. But, on the other hand, much of the entire DeFi is a pyramid scheme as many of the projects don't really contribute anything real but simply try to be the next popular platform, take the money and leave.

Before I go any further you should remember that the value of all tokens is always based on simply supply and demand (except possibly in crowdfunding and stuff like that).

So if you have token X and you tell people to stake it to gain token Y. The pure act of staking shouldn't change the value of X much - a bit of tokens go out of circulation for a while but the supply stays the same. What about Y, will it have value? Well, it will only have value if people want to buy it. So it needs new users into the system who want to buy it (or old users with new assets).

As for your questions: there is typically no exchange involved in staking. Staking simply means that you lock your tokens for a time period. Staking has nothing to do with mining of blocks or transactions.

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  • Lauri, am I correct to say that the tokens could be backed not only by physical assets, say, gold, which is very evident to think of, but also could be backed by the infrastructure, an ecosystem of products that facilitate item exchanges, to make payments, which is the case of whatever bank for example, as of now, some banks also create their tokens. In essence, what the token is - what is backed by a trust. And the trust also could be all what I named above. – Dmitry Dyachkov Dec 19 '20 at 21:19
  • Tokens are not typically "backed" by anything. If you mean stable tokens which are backed by something, it's a completely different question and you should post a new question about it (or search for old questions for answers). Tokens may or may not represent something tangible but their value is typically quite volatile. – Lauri Peltonen Dec 20 '20 at 13:19

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