Optimal Incentive Mechanisms for Fair and Equitable Rewards in PoS Blockchains

Abstract

Blockchain technology that came with the introduction of Bitcoin offers many powerful use-cases while promising the establishment of distributed autonomous organizations (DAOs) that may transform our current understanding of client-server interactions on the cyberspace. They employ distributed consensus mechanisms that were subject to a lot of research in recent years. While most of such research focused on security and performance of consensus protocols, less attention was given to their incentive mechanisms which relate to a critical feature of blockchains. Unfortunately, while blockchains are advocating decentralized operations, they are not egalitarian due to existing incentive mechanisms. Many current consensus protocols inadvertently incentivize centralization of mining power and inequitable participation. This paper explores and evaluates alternative incentive mechanisms for a more decentralized and equitable participation. We first evaluate inequality in existing Proof of Stake (PoS) based incentive mechanisms, then we examine three alternatives in which rewards scheme is more partial to low-stakeholders. Through simulation, we show that two of our alternative mechanisms can reduce inequality and offer an attractive solution for sustainability of blockchain-based applications and DAOs.