Research Review and everything you need to know about staking Harmony.
Proof of Stake is the most attractive group of consensus algorithms for new Blockchain networks. 18 out of the Top 30 Coins by Market Capitalization are already utilizing or are planning to utilize the benefits that come along with Proof of Stake. Those include, but are not limited to, faster and absolute finality, higher performance, and lower cost of security.
Harmony upgraded its mainnet on 19.05.2020 to support staking. The network has introduced the Effective Proof of Stake (ePoS) Consensus Algorithm. With this article, we will explain and review the mechanics, economics, and dynamics that come along with ePoS. We will especially look at the aligned incentive of stakeholders. Furthermore, we will provide tips for token holders on how to get the most out of a Harmony $ONE investment while staking.
What is Harmony?
Harmony is an open blockchain with a mission to solve the scalability issue via Sharding. Harmony is the first-ever sharded Proof of Stake Blockchain to go live. The Blockchain is designed to deploy decentralized applications. One could argue, that Harmony is a competitor to Ethereum or other Smart Contract Platforms.
What is Sharding?
Sharding is a method to split the entire data-storage into multiple blockchains. As a solution for blockchain scaling it allows faster settlement times and reduces the cost of transactions significantly. Harmony has split its network into 4 blockchains. So basically, Harmony combines the power of 4 Blockchains into one Network of Blockchains. From the end-user perspective, this approach does not make a significant difference. Scaling is happening under the hood by smart transaction routing. Each Blockchain (Shard) is being validated by ¼ of all Harmony Validators. The consensus is derived from Effective Proof of Stake.
What is Effective Proof of Stake?
Harmony has implemented a unique consensus algorithm called Effective Proof of Stake. It is designed to prevent stake and voting power centralization. At the same time, it is supporting automatic stake compounding and delegation.
In most Proof of Stake networks, the voting power is determined by the total stake (validator stake + delegated stake). Within the Harmony Network, the voting power is determined by the effective stake. The effective stake of each validator is calculated at the end of each epoch (staking cycle). Validators with more stake than the median stake amount across all validators are being “punished”, whereas validators with less stake than the median stake amount are being “subsidized”. This mechanism incentivizes large staking providers to decentralize their operations by setting up multiple validators. And it incentivizes token holders to delegate their stake to smaller validators. Delegating your stake to a smaller validator will effectively increase your rewards.
Harmony Token Economics
Rewards are not fixed for staking participants. They are subject to change based on the performance of the validator, and the total number of staked tokens on the network. For estimation we can consult the following indicative figures:
- A constant annual reward of 441M ONE regardless of changes in underlying variables such as block time and total staked %
- Transaction fees offset issuance creating a path to 0 issuance as protocol gains adoption
Under current conditions with around 56% of all tokens being staked, this results in an average return of 11.18% for validators and 10.15% for delegators.
What are the risks for stakers?
Staking means to expose funds to certain risks and earn rewards for doing so. For most Proof of Stake networks we can say, the higher the risks are for stakers, the higher is the network security. Potential Risks, namely lock-up periods and slashing, foster long-term commitment, and correct behavior in validator operations. However, these risks are a strong trade-off for the user in terms of UX.
Harmony has chosen an approach that seems to have a well-balanced trade-off between network security and user experience.
Stakes are locked up until the end of each epoch. The lock-up period for delegators is thus a maximum of around 1.5 days. This is comparably shorter than e.g. most of the Cosmos SDK-based Proof of Stake Blockchains.
There are slashing conditions for double-signing, but not directly for the uptime of validators. If a validator does not manage to stay online ⅔ of the time, it is kicked out of the active validator set. The stake itself is not at risk. For double-signing, there is a minimum of 2% slashing on the stake. The slashing increases linearly as the number of validators being slashed at the same time (e.g. 33% slashing if 1/3 of the validators double signing)
Recruiting high-quality infrastructure providers (validators) and thus bootstrapping the network decentralization and performance is considered by many protocol teams and projects in the space as one of the most challenging tasks.
With the launch of a Proof of Stake Network, the Foundations or Core Protocol teams are slowly handing over the control and voting power over the network to the validators.
So with that in mind, we can argue that a diverse and strongly committed set of validators is extremely important and often determines the success of blockchain networks.
Harmony has 1000 validator slots (250 for each shard), whereas 1 validator can fill multiple slots. 640 Slots are filled by the community and the remaining 360 slots are operated by the Harmony team. Shortly, it is planned to free up all 1000 slots to community validators.
At the time of writing there are 138 Validators in total, whereas 76 Validators are elected and filling the 640 slots.
The Harmony Validator Set is made of established Staking Provider Companies such as Figment Networks, InfStones, Everstake, and Blockdaemon, as well as Harmony community-centric validators like Harmony Community Node, HarmonyNews.one and Edgar Arout.
The Top 10 Staking Providers in Harmony control 40.36% of the network’s voting power.
For comparison, the Top 10 Staking Providers in Tezos control 61.5% of the network’s voting power if we consider all Tezos Foundation Nodes as one entity. (36.48% if the exclude the Tezos Foundation Nodes)
In Cosmos, the Top 10 Staking Providers control 44.33% of the network’s voting power.
Harmony seems to be very competitive in terms of voting power decentralization and we could assume Staking Provider operations themself to be a bit more decentralized since Staking Providers are “forced” to split their stake across multiple validator nodes if their stake gets too big.
Staking in Proof of Stake networks is a great way to support the network health of your investment and earn rewards for doing so. Since token holders are incentivized to become active participants in the network, we can observe unique dynamics within each Proof of Stake network. We believe that networks, which can establish a strong culture around staking are directly supporting the pro-active involvement of community members. Ultimately the users and community make a strong case for the success of Proof of Stake networks.
The Team behind Harmony has always had a strong focus on building out tools and support for all staking participants. The Staking Explorer allows us to find and compare the right validators and can be used to directly delegate stakes and claim rewards.
With retail-friendly explainer videos, the team does help a lot to bootstrap a strong set of active network participants.
The Harmony Network does have 6704 unique and active delegators. This does not include any stakers from Binance or other custodial staking platforms. At Staking Rewards, we are tracking the number of unique delegators since 24.05.2020 and one clearly sees continuous growth in retail staking demand. The spikes in the chart below are due to large validators with a lot of delegators entering the active validator set.
How to stake Harmony?
For those wishing to participate in staking without running a validator, delegation is the best approach to get involved and earn block rewards. Harmony ONE holders can delegate their tokens to available validators using the official staking explorer. If the tokens are delegated to an elected validator, a portion of the block reward earned by the validator will be credited to the delegator. The earned block rewards are stored in a separate reward balance of the delegator, which can be immediately withdrawn to the delegator’s account balance. The block rewards can also be staked again to achieve the compounding effect of staking.
How to choose the right Staking Provider?
Since reward rates are based on the effective stake of validators it is even more important to choose a Staking Provider that you fully trust in efficient stake handling across validators.
At Staking Rewards, we are providing an overview of the expected rewards for each Provider. Furthermore, you can see additional metrics and learn more about each provider’s offering. It is recommended to make yourself familiar with the performance of the Validator. This metric visualizes the reliability of their infrastructure set up. Anything above 98% is top-notch.
Looking at the size, expertise, and track record of the team will give you a good understanding of their long-term commitment and ability to act professionally with any kind of hot-fixes, maintenance, and upgrades.
The commission rate is a direct measure that affects your staking returns. Make sure to delegate funds to someone with reasonable fees.
Last but not least, we encourage you to look at the tooling and additional services that Providers are contributing to the Harmony ecosystem. Providers who add value to Harmony, in general, are helping to not just to provide you great staking returns, but effectively helping to bring more users to Harmony and drive up the $ONE price.
Summary & Conclusion
Harmony has adopted an innovative Proof of Stake consensus. With this model, the network is encouraging decentralization of validator operations. The economic model is structured clearly and offsets inflation by increasing transaction fees. We believe it is a sustainable model that responds well to network conditions.
Sharding makes Harmony a highly scalable blockchain which puts it ahead of competitors.
The Harmony Validator Support and Community is growing and we can see a very healthy development on that side. Users got great support and the user experience for stakers is smooth without any unnecessary risks or token dilution.
To learn more about Harmony feel free to dig into the following pages: