Basic understanding of Dynamic Staking

#blockchain #smartcontract #ethereum #solidity

Introduction

In the ever-expanding landscape of decentralized finance (DeFi), staking has emerged as a popular mechanism for users to earn rewards by participating in network security and governance. Unlike traditional financial systems, staking allows cryptocurrency holders to lock up their assets to support blockchain operations, all while earning passive income. However, the conventional staking model often comes with restrictions, such as lock-in periods and fixed reward structures that can limit user flexibility and engagement.

This article explores the concept of staking and delves into the mechanism and example workflow of innovative dynamic staking. I will guide you basic knowledge of dynamic staking that offers stakeholders the freedom to withdraw their assets at any time while earning rewards calculated in real-time based on their contributions. By understanding the mechanics of dynamic staking, you can create more flexible and user-friendly DeFi applications that cater to the evolving needs of the crypto community.

What is Staking?

Staking is a process used in various blockchain networks, particularly those that operate on a proof-of-stake (PoS) consensus mechanism. In simple terms, staking allows users to lock up a certain amount of cryptocurrency in a wallet to support the operations of a blockchain network. In return for their contribution, stakeholders earn rewards, typically in the form of additional tokens.

The primary purpose of staking is to enhance network security and efficiency. By staking their tokens, participants help validate transactions and maintain the integrity of the blockchain. The more tokens a user stakes, the higher their chances of being selected to validate a block and earn rewards.

General Staking Mechanism

In traditional staking models, users commit their tokens for a predetermined period, often referred to as a "lock-in" period. During this time, they cannot access or withdraw their staked tokens. The rewards are usually calculated based on the amount of tokens staked and the duration of the staking period.

Here’s a simplified workflow of how traditional staking works:

User Participation: A user decides to stake a certain amount of cryptocurrency.
Locking Tokens: The user locks their tokens in a staking contract for a fixed period.
Earning Rewards: Throughout the staking period, the user earns rewards based on their staked amount.
Withdrawal: At the end of the staking period, the user can withdraw their original tokens along with any earned rewards.

While this approach provides predictable rewards, it also comes with drawbacks, such as the inability to access funds during the lock-in period and the potential for missed opportunities if market conditions change.

Dynamic Staking: A New Approach

Dynamic staking introduces a more flexible and responsive model for staking that addresses some of the limitations of traditional staking. Instead of requiring users to lock their tokens for a specific period, dynamic staking allows stakeholders to withdraw their tokens at any time while still earning rewards based on their contributions.

Key Features of Dynamic Staking

No Lock-in Period: Stakeholders can remove their staked tokens whenever they want, providing liquidity and flexibility.
Dynamic APY Calculation: The Annual Percentage Yield (APY) is calculated based on real-time data, including the number of stakeholders, their staked amounts, and the total rewards accumulated in the staking contract.
Share-Based Rewards: Instead of a fixed reward per staked token, rewards are distributed based on the number of shares each stakeholder holds, which reflects their proportional contribution to the staking pool.

Example workflow of Dynamic Staking

Before diving into the code, let's understand the key concepts of the dynamic staking mechanism:

MRK is the token used in the staking system. It represents the currency that stakeholders can stake to earn rewards.
Shares represent each stakeholder's claim to the total pool of STK in the staking contract. Shares are proportional to the amount of STK staked.
Rewards are additional STK tokens deposited into the staking contract, typically as a form of incentive for stakeholders to participate.
Alice, Bob, Charlie, and Dave are stakeholders who participate in the dynamic staking system in this example scenario.
They can stake, claim, unstake MRK tokens
The MRK/share ratio is a proportional ratio that represents the amount of MRK available in the contract per share owned by the stakeholders. This ratio determines how much MRK a stakeholder receives when they withdraw their shares. It changes as stakeholders deposit more MRK or as rewards are added to the contract, affecting each stakeholder's payout.

Now, let's walk through a simplified example of how dynamic staking works:

Initial State: The MRK/share ratio begins at 1:1.
Alice, Bob and Charlie stakes 500, 1000, 500 MRK tokens. In return, they receive 500, 1000, 500 shares respectively.
Action 1: 100 MRK Token is deposited into the staking contract as rewards.
Updated State: The MRK/share ratio increases to 1.05, calculated as follows:

    Total MRK = 500 (Alice) + 1000 (Bob) + 500 (Charlie) + 100 (reward) = 2100 MRK
    MRK/Share Ratio = 2100 MRK / 2000 shares = 1.05

Action 2: Alice and Bob claims rewards, so they will receive 25, 50 MRK tokens respectively.

    Alice's Claim Amount = (500 MRK * 0.05) = 25 MRK
    Alice's remaining shares = 500 - 25 / 1.05 = 476.19 shares
    Bob's Claim Amount = (1000 MRK * 0.05) = 50 MRK
    Bob's remaining shares = 1000 - 50 / 1.05 = 952.38 shares
    Charlie's remaining shares = 500 shares

    Remaining Total MRK tokens  = 2100 - (25 + 50) = 2025 MRK
    Remaining Shares = 476.19 + 952.38 + 500 = 1928.57 shares
    MRK/Share Ratio = 2025 MRK / 1928.57 shares = 1.05

As you can see, MRK/Share Ratio remains constant at 1.05 because no new rewards are added to the contract.

Action 3: Dave stakes 500 MRK tokens and his shares will be 500 / 1.05 = 476.19 shares.

So remaining total MRK tokens = 2025 + 500 = 2525 MRK, and remaining shares = 1928.57 + 476.19 = 2404.76 shares

Action 4: Charlie claims 250 MRK tokens. He receives 12.5 MRKs. Charlie's remaining shares = 500 - 12.5 / 1.05 = 488.10 shares Remaining MRK tokens = 2525 - 12.5 = 2512.5 MRK, remaining shares = 2404.76 - 12.5 / 1.05 = 2392.86 shares

Still MRK/Share Ratio remains constant at 1.05 because no new rewards are added to the contract.

Action 5: Dave stakes another 500 MRK tokens, so his shares will be 476.19 + 500 / 1.05 = 952.38 shares and total MRK tokens are 2512.5 + 500 = 3012.5 MRK, and total shares are 2392.86 + 500 / 1.05 = 2869.05 shares
Action 6: Another reward of 100 MRK is deposited into the staking contract.
Then the MRK/share ratio is updated to 1.08485, calculated as follows:

 MRK/Share Ratio = (3012.5 + 100) MRK / 2869.05 shares = 1.08485

And they now have 476.19, 952.38, 488.10, 952.38 shares respectively.
So they will receive approx. 516, 1038, 528, 1038 MRK tokens respectively when they withdraw their whole staked MRK tokens and their rewards will be 16.5, 33, 17.5, 33 MRK tokens respectively.

Conclusion

Dynamic staking represents a significant evolution in the staking landscape, providing users with the flexibility to manage their investments while still benefiting from rewards. By calculating rewards based on real-time data and allowing for immediate withdrawals, this model enhances user experience and engagement.

Thanks.
Happy coding.

Top comments (11)

Steven • Dec 7

Thanks for sharing article.
I can get the main point about dynamic staking, but it would be better if you explain it with smart contract implementation.