Tezos.Community staking growth over time. Graph by @tezscan.io

There are many factors that go into managing staking rewards. At Tezos.Community, we wanted to lay out a simple framework that delegators can review when they consider if they want to delegate to us.

Summary

All KT1 addresses delegated to Tezos.Community prior to the start of Cycle 27 (Wednesday, September 19th, 2018) will continue to receive rewards for their delegation. Rewards will be reduced to all delegates as Tezos.Community becomes over delegated. New KT1 addresses that select Tezos.Community as their delegate after the start of Cycle 27 will not receive rewards. Please do not delegate to us after cycle 27 until we secure additional bond funds and announce delegation is re-opened.

The Details

Tezos is a Proof of Stake protocol, and that means that it is the responsibility of the stakeholders to run the blockchain. This happens by stakeholders running a baking node, or alternatively, delegating their staking rights to someone else who is running a node. Delegation is done by choice of the delegator, and each delegator should do their due diligence on their delegation decision, and should actively consult with their service to understand how conditions may have changed over time. Delegation services can not “stop” or “turn off” their acceptance of delegations, thus an additional reason to do your own research.

Organizations that provide this kind of delegation service combine staking rights from many different stakeholders, and use their own bond as collateral to run the chain’s consensus mechanism.

Bakers and delegators alike are selected to bake and endorse blocks based on the the number of “rolls” (10,000 XTZ) staked with that baker. The actual amount of bond that the baker has is not considered by the blockchain during the awarding of baking rights.

This leads to a scenario where a baker may have too much staking and too little bond — what we call over delegation. When this happens, the baker will bake and endorse as much as they can each cycle until their bond is all used up, and will then miss their remaining baking and endorsement slots. These misses are then baked by other bakers who have sufficient bond.

When a delegation service starts missing slots, the result is that the total rewards received during that cycle will be capped based on their available bond. One could imagine a scenario where a delegator might only have a few rolls of bond, but millions in delegation rights. This baker might have offered a no-cost or low cost service that attracted many delegators.

Three additional complications can significantly affect the determination of when a baker becomes over delegated:

The 100% thesis: The standard reward level coded into the Tezos protocol assumes 100% of all XTZs are staked during every cycle. This will likely never happen, as today slightly more than 55% of all XTZs created during genesis have been “activated”, and approximately 80% of those are in a staked mode. In this situation the rewards received by those astute enough to activate and stake their tokens goes up directly proportional to their share versus the 100% target level. However the bond requirements for baking and endorsing are scaled up at the same rate creating a scenario where bakers who might otherwise have sufficient bond coverage for full network staking, no longer have coverage for our partial network condition. It appears that there is no free lunch in Tezos.

The standard reward level coded into the Tezos protocol assumes 100% of all XTZs are staked during every cycle. This will likely never happen, as today slightly more than 55% of all XTZs created during genesis have been “activated”, and approximately 80% of those are in a staked mode. In this situation the rewards received by those astute enough to activate and stake their tokens goes up directly proportional to their share versus the 100% target level. However the bond requirements for baking and endorsing are scaled up at the same rate creating a scenario where bakers who might otherwise have sufficient bond coverage for full network staking, no longer have coverage for our partial network condition. It appears that there is no free lunch in Tezos. The free lunch: As they moved toward launch of the betanet in late June, 2018, the core developers recognized that it would likely take time and coordination effort for bakers and delegators to begin operations, and that many delegation services would not have sufficient bond to cover the rights they would receive. So the developers provided a free lunch. They manipulated the amount of bond required for baking and endorsing so that early cycles would have a lower requirement than later cycles. In fact, they coded the bond requirements to start at zero for cycle 0, and increase 1/64th per cycle. So Cycle 64 and onward will have the full bond requirements. This free lunch has been a bonanza for delegation services who have baked free from maximum bond constraint for nearly 30 cycles, but who don’t have the necessary bond to cover all baking rights from cycle 64 onward (note that Tezos.Community falls into this camp).

As they moved toward launch of the betanet in late June, 2018, the core developers recognized that it would likely take time and coordination effort for bakers and delegators to begin operations, and that many delegation services would not have sufficient bond to cover the rights they would receive. So the developers provided a free lunch. They manipulated the amount of bond required for baking and endorsing so that early cycles would have a lower requirement than later cycles. In fact, they coded the bond requirements to start at zero for cycle 0, and increase 1/64th per cycle. So Cycle 64 and onward will have the full bond requirements. This free lunch has been a bonanza for delegation services who have baked free from maximum bond constraint for nearly 30 cycles, but who don’t have the necessary bond to cover all baking rights from cycle 64 onward (note that Tezos.Community falls into this camp). Changing levels of bonds: One last complication relates to a baker adjusting how much bond they have available. Baking rights are assigned to bakers based on the number of XTZs staked at the “snapshot” taken 7 cycles before the actual baking cycle in question. Once your staking rights are in — they are in for that cycle, regardless of what you do to your XTZs after the snapshot. Trade them, bake them elsewhere, hide them in your backyard. Regardless, you are aligned with the baker you selected. However, that baker may adjust their bond level at any point before the actual cycle requiring bond coverage. At least two scenarios come into effect here:

One could imagine an unscrupulous baker (we call it the bugza effect) who might have a large bond, attract a large amount of delegation, and then subsequently sell their XTZ holdings, leaving delegators without an ability to provide utility to the network with their holdings during those cycles where they remain delegated. To see this in action look at this ex-delegation service named XTez.io (http://tzscan.io/tz1LesY3S4wfe15SNm1W3qJmQzWxLqVjTruH?default=baking) While they only have less than 1 XTZ in their bonding wallet, they have over 254,000 XTZ staking balance. This means that people who have delegated to XTez are not receiving rewards, and do not appear to be concerned with that. In other scenarios, some delegation services have created a “bond pool” where tokens from a small group of holders are pooled to provide bond coverage for the service. Tezos.Community is an example of this. In such a scenario, it is possible, in fact likely, that a bond pool member may withdraw their tokens at some point in the future. This withdrawal will adjust the number of rewards generated during that cycle and all future cycles.

What does this mean to Tezos.Community delegators?

First, Tezos.Community wants to thank everyone who has helped build and run our baking operation. From our tech team to our delegators to our bond pool, we could not have done this without you, and your ongoing efforts are contributing to Tezos being safe, secure and decentralized.

Secondly, we acknowledge that despite running the largest delegation service with over 1.7M XTZ available for bond coverage today, we simply do not have enough bond coverage to cover all the delegation demand we have received. We have previously stated that we will run a first-come first-served operation, and this is now being put into effect as follows:

If you assigned your KT1 address to Tezos.Community prior to the end of Cycle 26 (expected on Wednesday, Sept 19th), you will be eligible to participate in our baking operation.

If you assigned your KT1 address to Tezos.Community after the completion of Cycle 26, your XTZ staking rights will not be eligible for rewards associated with our baking operation.

Because of many unknowns; the fluctuating size of our bond pool, rate of activation and staking across the network, and the free-lunch, we can not accurately project exactly how many rewards we will generate each cycle. Our Delegator Dashboard remains the best place to see our rewards projections, but be aware that actual results may vary from those projected.

We will continue to share all rewards that we receive from baking, endorsing, gas, accusing etc. as we have since cycle 10 with 85% being shared with the delegators and 15% returned for running the service.

If you have any questions about our policies or how this affects you, please reach out to us at support@tezos.community.