Does Lock-Up Lead to Stability? Implications For Runs in the Proof-of-Stake Protocol

Abstract

As blockchains shift from energy-hungry Proof-of-Work to capital-intensive Proof-of-Stake, they trade electricity costs for a new vulnerability: the risk of a capital run that can destabilize consensus and security. We model investors who choose between staking their coin to earn rewards or exiting to cash out, potentially triggering mass withdrawals. These "staking runs" are more likely when protocols are weak, when failure would hit coin prices hard, or when staking rewards are low. Leverage worsens things: margin calls accelerate exits and amplify run dynamics. Longer lock-up periods slow the run but may not prevent it. Previous research shows that low rewards are good for protocol security. We show they also raise the risk of a run. A run on a major Proof-of-Stake chain---like Ethereum---could destabilize the entire crypto ecosystem, threatening DeFi platforms that depend on it.