Staking reward mechanics

We had discussed the purpose of the staking mechanic in the first post of this series. To briefly summarize, it incentivizes token holders to participate in both the decentralized governance of the API3 project and provide collateral for the insurance products that will be built to provide quantifiable security for the services that API3 will provide.

How does one stake? Are there any requirements?

Once the authoritative DAO is live on Ethereum mainnet, all API3 token holders will be able to deposit their tokens at its pool and stake them. This will grant you voting power that you can use actively or delegate to another user, and weekly staking rewards. You do not have to claim these rewards weekly or actively re-stake them. You will receive them automatically and they will auto-compound.

How much does staking pay?

For both purposes of staking, the DAO will seek a specific level of participation (i.e., will target a specific % of the total API3 supply to be staked). The staking reward will float to have the total staked amount reach equilibrium at the target. In other words, the staking reward will increase while the staked amount is below the target, and vice versa. It will not have a pre-determined schedule.

Okay, but how exactly does it get calculated?

Reward amount is represented as APR — annual percentage rate (and you can derive APY — annual percentage yield —using an online calculator). Each week, stakers get paid roughly APR/52. We have a governable “APR update step”, which is the step size each week the APR will be updated with. We also have governable minimum and maximum APR values, but these (especially maximum APR) are there as safety measures and should not affect rewards in day-to-day operation. In general, governing the stake target will be the primary tool for regulating rewards.

As a piece of trivia, this floating staking reward scheme is commonly attributed to Livepeer. We initially planned to regulate the rewards using a PID controller, but then opted for this simpler model due to its predictability and understandability.

When do I receive my rewards?

In one way, immediately, because you will immediately start receiving voting power and staking rewards for them. On the other hand, you will not be able to withdraw your rewards for a year. Since rewards get paid out every week, you can think of this as a rolling unlock (the rewards you receive this week will get unlocked 1 year later, the rewards you will receive next week will get unlocked 1 year 1 week later, etc.) This 1 year-lock is the secret sauce to good decentralized governance, it essentially aligns the incentives of the stakers/governors with the ones of the DAO/project/token for a whole year.

Why are the rewards not paid block-by-block?

In some staking schemes, rewards are paid block-by-block (i.e., each time a user interacts with the staking contract, they trigger a reward payment first) instead of periodically. Although this has its advantages, we opted for weekly rewards to be able to implement the 1 year-lock for the rewards in a gas-efficient way. Simply speaking, if we pay rewards very frequently, looking through these records to calculate how much in rewards you have received in the last year would be costly, causing expensive transactions.

Will I get slashed if there is an insurance claim payout?

No, because these insurance products are not implemented yet. Once they are, a proposal with a 50% quorum requirement will have to be passed for them to go active, i.e., you will not miss it.

Can’t I evade insurance claim payouts by simply unstaking anyway?

We have implemented a delay mechanic for unstaking during which the user remains subject to slashing. If the user initiates an unstaking in the event of a potential claim payout, the dispute would resolve during that period and the user would get slashed anyway. To prevent users from constantly initiating unstaking events as a way of sitting on the fence, no reward gets paid for tokens that are in the process of being unstaked. Initially, this delay period will be 1 week, but it may be increased by a DAO vote as insurance products go live.

Conclusion

The practical aspects of staking are quite simple, which resulted in this being a short post. The more and longer you stake, the more tokens you will be rewarded. However, you will need to make sure that the DAO is governed properly, because you will only be able to receive these tokens in a year. In the next post, we will get into ways stakers can govern.