Proof-of-stake is a type of consensus mechanism used by blockchain networks to achieve distributed consensus. In this mechanism, network participants who want to validate the transactions are required to “lock” the network token/currency as collateral. The process of “locking” the tokens is known as staking. In return for validating transactions and blocks, these “validators” are rewarded with the native token based on the amount they have staked in the network.
Staking Mechanism
Terra uses a version of the PoS mechanism known as Delegated PoS whereby users of the network stake their LUNA with a set of approved validators. In return the users receive a “yield”. The current staking return can be seen at https://station.terra.money/.
For example, the current yield is 8.34% / year. Back in May 2021, the yield was easily north of 10+%.
Where does this yield come from?
Terra is one of the unique blockchains where the staking yield is not inflationary but is actually derived from the transactions happening on the network. Every transaction on the network involves paying a tax/gas fee. This transactions fees across millions/billions of transactions are then paid out to LUNA stakers.
Swap and Gas Fees
Pre-Columbus 5, a dynamic percentage of LUNA from generated seigniorage was diverted to a rewards pool. The distribution of the pool went to validators that produce accurate oracle votes. This mechanism was changed with Columbus-5 upgrade and now 100% of the seigniorage is burnt. Instead the swap fees are now redirected to the validators as reward.
In addition to the swap fees, every transaction requires a gas fee to be paid for the computation costs. This fees also guards against malicious actors spamming the network.
Airdrops
In addition to the swap fees rewards, Anchor, Mirror and Pylon (until recently) weekly air dropped their token to the LUNA stakers further increasing the staking yield. In addition to these protocols, many other projects have done a one-time airdrop for LUNA stakers.
The Community Pool & Ozone
The TFL team recently put forth Proposal 133 to burn 88,675,000 LUNA from the Community Pool to mint almost 4–5 Billion UST for the Ozone insurance protocol. This insurance protocol was created to offer de-peg and smart contract exploit protections.
The fees generated from these LUNA→UST swaps will be distributed to the LUNA stakers over the next 2 years.
TLDR;
Staking yield post-Columbus 5 upgrade is derived from:
- Swap/gas fees from transactions
- Airdrops for LUNA stakers
- Ozone LUNA→UST swaps
Impact
We can see the impact of the Columbus-5 upgrade on the staking yield in November. The staking yield rises from around 3–4% to 10+% and even touched 15% briefly.
Since then the LUNA price has pumped again and touched $100, the staking yield has lowered below 10% again. This is because the $1.9 Billion generated from the Ozone burns will be paid out over the next 2 years. As the value of LUNA rises, in percent terms that $1.9 Billion becomes less compared to the value of LUNA. The reverse also applies i.e. when the LUNA value falls, the staking yield goes up.
