In early 2019, IDEX went live with the first iteration of its staking network. Stakers lock their tokens in a dedicated address and run the IDEXD staking program, which helps operate the infrastructure of the IDEX exchange. Stakers earn 25% of the trade fees from IDEX (in ETH) for their role in helping run the platform.

This first iteration of staking has been a huge success with over 675 total users staking throughout the span of the program. Up to 55% of the circulating supply of IDEX tokens has been staked with the current amount sitting at 52% of the total circulating supply. To date, over 1,500 ETH has been paid out to stakers with a market value of ~$300k USD at the time of payment.

With the release of IDEX 2.0, stakers will have a new role in both securing the layer-2 network and providing API services. In return for the work they provide, stakers will be compensated with 50% of the IDEX trade fees.

In designing staking for IDEX, we considered factors that have contributed to the success of many of today’s most popular crypto networks and ultimately took a different route. Why?

Staking gains—profits or inflation that hurts your bottom line?

Staking was a big narrative in 2019 as users were seeking yield on their crypto, a way to compound and grow their holdings by participating in cryptonetworks. However, it’s important for stakers to more closely analyze the incentives of the network they are supporting. In many cases, the staking process is not as lucrative as it may seem.

Inflation Funded Rewards

The vast majority of cryptonetworks are funded via inflation. Users stake their holdings for the ability to earn more of the staking token. These tokens are issued by the protocol itself, increasing the total supply of the underlying token in order to compensate stakers. This process has a few implications.

If everyone stakes, no one gains. Stakers earn a proportional payout of the new tokens. If everyone participates, then the overall proportions of network ownership stay the same.

Staking is a tax on non-stakers. Even in the most active protocols, a percentage of the supply inevitably goes unstaked. Those who don’t stake will see their share decline when compared to those who do.

This isn’t to say that inflation funding is a bad thing. Many networks have garnered a large amount of community interest by launching with high double-digit or even triple-digit inflation percentages. But in order to be sustainable, there must be a future in which inflation drops to a much lower level, and transaction fees from the network are enough compensation for stakers to participate. This challenge is shared by all cryptonetworks, even Bitcoin, where a robust fee market is necessary for long-term security.

Payment in Staking Token

Stakers earn their yield by receiving more of the staking token. In order for these networks to grow beyond the bootstrap phase, there must be additional use cases and demand for the underlying token outside of just staking collateral.

Bitcoin miners earn BTC as block rewards and tx fees. However, there is robust demand for BTC for its perceived monetary properties. BTC has a use and value outside of just amassing more BTC.

Today ETH miners earn ETH as block rewards and tx fees, and in the future as staking rewards. Similar to BTC, ETH is in demand as payment for transactions and as the higher quality collateral for the emerging DeFi space.

In both examples, the reward has additional demand entirely unrelated to the mining process. For the vast majority of POS networks, it’s unclear what (if any) demand exists outside of use as a tool for earning more of the same token.

This distinction is important because of the fact that some portion of the earned tokens is sold back into the market. Stakers have infrastructure costs that they must cover in order to participate in the network. And in most jurisdictions, stakers will have to sell some portion of their rewards in order to pay their taxes (Ben Davenport did a great thought experiment on the staking network wealth transfer to Uncle Sam). In order to combat this pressure, it’s important that other uses exist. Markets may be able to absorb this during an initial hype period, but without alternative demand it cannot be sustained.

Our PoSitive Perspective

IDEX’s staking program is unique due to how it addresses the challenges outlined above.

Real Return vs. Inflation

The IDEX staking reward program compensates node operators using trade fees from the exchange. Historical yields have averaged 12% throughout the life of the program. There are no inflation mechanics at plan, as the IDEX staking network has already reached a sustainable level of compensation based entirely on the usage of the underlying protocol.

Rewards Paid in ETH

IDEX collects fees in both tokens and ETH. The token fees are converted to ETH prior to being paid out to stakers. Unlike other networks, the payout is denominated in an exogenous asset with its own demand and liquid markets (it’s the “second best” cryptocurrency available). Because IDEX distributes staking rewards in ETH, IDEX and its token remains unaffected when stakers choose to cash out to cover infrastructure or tax costs.

Stake Responsibly

As the search for more earning opportunities and the need for network nodes cross paths, lucrative staking reward programs seem to be the perfect answer. However, as it stands, many of these programs have not solved the challenge of maintaining economic equilibrium in their ecosystem.