# Welfare optimal staking distribution [Discuss on twitter with the author](https://twitter.com/nikete/status/1615018834737463296) The security properties of a Proof of Stake network are fully determined by: (1) the staking algorithm (2) the staking token distribution (3) the social consensus that is established by client teams and smart contract developers (widely constructed as the community that develops the intellectual and code infrastructure of the network). In a simple model; the comitment provided by the network is automated liquidity provision for swaps when there is intrinsic heterogeneity in the utility different agents from the underlying tokens(as in [1]). Efficiency for social welfare dictates that these revenues be distributed to incentivize the the value generated by the system. Doing so in a way that can be reasoned about, requires to some extent it is incentive compatible, since this gives access to the preferences. The base fee is a natural revenue stream of a PoS network. I conjecture it is the only non-distortionary revenue source. Burning a token is incentive-equivalent to redistributing it proportional to holdings. Burning of the base fee is from this perspective only optimal in so far as holders are the only ones providing marginal value to the network. The holders do provide value by paying for the issuance which smoothes the security budget (keen on references to analysis of these incentives)[2]. The vast majority of usage is not used for simple transfers, but instead in calling contracts. It seems clear that both validators and contracts have marginal value in a PoS network. Validators have a inherent revenue source in MEV, and many networks also rewards them with some form of inflationary transfer. There are no in-protocol rewards for those who deplot the contracts at the moment. This seems to imply the current mechanism might be imrpoved by using # optimal stake distribution to support neutral infrastructure for credible commits Let us say that the welfare is generated not by a specific application, but rather by giving the ability for credible commitments to more actors. Some open questions: - What is the optimal stake distribution to support that? -- The one where the "truthful majority assumption" is replaced with a "greedy majority assumption" and the security guarantees improve the most? -- The one where the cost of capital for a given security guarantee is lowest? ## redistribution to contract deployers instead of (some of) the base fee burn How is redistribution to contracts proportional to gas usage incentive-compatible? (e.g., is there incentive to be gas inefficient, or incentive to rebate the rebate back to users?) it is not incentive compatible, it is also not incentive compatible with a burn system to deploy pure public good contracts to the network, some of which would become incentive compatible under such [1] https://arxiv.org/abs/2211.07220 ### issuance and burn for stable security budgets I still need to understand this better "If you give validators issuance, and part of transaction fees, but burn the rest of transaction fees, when the burn offsets issuance, you get both rewards and deflation, along with a sustainable security budget. This is better than purely fee-driven security, because issuance is less volatile than fees, so it provides a more constant security budget. Holders pay for security via issuance, and users "refund them" via the fee burn. To get block producers to do the right thing, you can either reward or punish them. If you can't punish, then you need higher rewards to create high opportunity costs. Having a stake individually attributable to a validator, enables penalties, lowering issuance requirements. " ... @DrMemebrain You don't want there to be "a game" when it comes to the level of security of the chain where people can manipulate the yield, and cause waves in the number of active validators. If this dampening didn't exist, you could use that fact to create an attack opportunity. the dampening raises the cost of the attack, but does not remove it, right? So another way to say it is, why dampen this little/much? what is it being traded off against? [2] https://twitter.com/TimBeiko/status/1615048071360163840 https://twitter.com/TimBeiko/status/1615056271329366017 https://twitter.com/nikete/status/1615259132621094912