Block producers are the lifeblood of the EOS ecosystem. This is why it was necessary for EOS (and any cryptocurrency, for that matter) to have a fair in-built reward mechanism. EOS’s reward system is a little bit different than the rest. In this article, we are going to show you how it works and all the subtle nuances that Block.One has in grained into the system.

EOS and DPOS

The first thing that you must know to understand the reward scheme is the consensus mechanism. EOS has a different consensus mechanism than what most people are used to. You have Bitcoin’s Proof of Work (POW) which rewards miners for correctly solving computational puzzles and then you have proof of stake (POS) where people stake a part of their tokens and then bet on a block. If they bet correctly, they get rewarded proportionately to their stake.

EOS uses a variation of POS called Delegated Proof Of Stake (DPOS). In this version, the EOS network votes for 21 block producers and those 21 take care of the consensus mechanism. When it comes rewarding them, however, EOS doesn’t have a direct payment mechanism like like POW or traditional POS. In stead, they have an in-built token inflation mechanism, where in the overall supply inflates by 5% every year. These surplus tokens are then distributed accordingly (more on that in a bit).

Now, this is a pretty different reward mechanism and it may put off someone who is looking for a more “instant payoff.” However, Block.one feels that this is the best way to go forward for the long-term development of the project. Now, let’s look at the reward distribution proposal that has been brought forward by EOSIO Dawn 4.0.

EOS Reward Distribution

Image Credit: Medium

Ok, so let’s take a closer look at what is going on here.

Like we said, the yearly inflation rate of the EOS tokens is 5%. This 5% gets divided into two batches, 1% and 4%. The 4% goes to the worker proposal system, which will be covered later on. Right now, let’s focus on the 1%.

The main logic behind the distribution algorithm is to make sure:

The producers are paid sufficiently for their service.

No one is paid in an insufficient way to not cover their costs.

Everyone who qualifies must get a minimum per day payment so that “wealthy individuals who have no intention of producing blocks don’t attempt to earn interest on their producer candidate by voting on themselves.”

Like we have mentioned, there are 21 active block producers, however there can be any number of standby producers as well, who may have received certain number of votes in the election, however they weren’t able to qualify in the top 21. So this is where things get interesting. The 1% that is meant for block producers gets split into further two parts:

0.25%. (Block Rewards)

0.75% (Vote Rewards)

All the 21 block producers are entitled to the 0.25% block reward in proportion to the number of blocks they discover.

For the 0.75%, it gets distributed among the 21 producers and the standby producers, based on the number of votes they receive provided certain conditions are met.

The vote rewards are given out at most once per day.

The reward is distributed in accordance with the number of votes the candidates have received.

The producers must qualify for at least 100 tokens in order to get their slice of the pie.

This voter reward mechanism incentivizes producers to bring even more value to the system. Let’s take an example.

Alice and Bob are two competing producers. If Alice brings in more value than Bob, the network will recognize her worth and give her more votes. On account of having more votes, Alice will receive more voter rewards. This in turn will incentivize Bob to step up and produce more value, so that he can get more votes, and subsequently more rewards, the next time round.

You can check the number of active producers in the EOS network over here. As you can see, there 54 producers (as of writing) who have qualified (>100 EOS/day) for the voter rewards. The first 21 are the main producers while 22–54 are on stand by.

What Happens to The 4%?

As you may have noticed, a significant portion of the block rewards (4%) has been kept for “worker proposal system.” What exactly does that mean? Consider this for a second. There will be 50 million EOS tokens that will enter the market as a result of inflation in the first year itself.

Of this, 40 million tokens will be kept for worker proposal systems, which at current valuation stands at roughly$400 million.

That’s a humongous amount of money! It would do no harm to know exactly how EOS plans to do with that much money. Well, it turns out, that you can do pretty much anything you want. The EOS community can vote on how they want those funds to be used. Here are some of the ideas that are circulating in the community. Most of the funds will be used for research and development on the EOS blockchain but there are also proposals of keeping some of the tokens for charitable and relief purposes. Plus, there is also a possibility of EOS introducing a token burning mechanism which can be used to burn excess tokens to keep the “supply || demand” ratio in check.

Conclusion

It looks like EOS has a pretty well thoughts out reward mechanism. However, there are certain questions that have been raised about the rate of inflation. Some critics think that a 5% inflation is a little too much and the excess supply of tokens may devalue EOS. It needs to be seen if the EOS community and developers decide on using a token burning mechanism to keep the supply in check.

Having said that, it will be interesting to see the kind of projects and innovations that may come about as a result of the worker proposal system.