While making a presentation at Edcon (Community Ethereum Development Conference), Vitalik Buterin, Ethereum’s co-founder,stated that stakers in hybrid Casper are expected to earn an annual interest rate of 5%, with punishment ranging between 1% and 100%. Buterin who revealed the final details of Hybrid Casper also stated that withdrawals would take up to four months for stakers. Hybrid Casper, a hybrid consensus protocol, has been under test for the past four months and is expected to be released in another 2-3 months.
The interesting changes that are going to be brought about in the most crucial update of the Ethereum network would punish centralization through a complex crypto economics system.
According to the Casper protocol, going offline doesn’t mean remaining disconnected for a short period of time, say for example, five minutes or so due to internet related issues, but being offline for half of the staking time or 2/3rds of the time. The amount a staker would lose by being offline depends on others. A staker who goes offline will still gain interest if all other stakers remain online practically. Likewise, a staker should remain online 2/3rds of the time, if 2/3rd of others stay online.
The system is designed to punish misbehavior if others are misbehaving at the same time. However, the system will be lenient towards a staker for misbehaving intentionally or unintentionally if others are behaving propersly. Therefore large pools will be the most affected.
Asia Pacific Ethereum Community (Buterin starts at 3:51)
This means, if a staker’s node gets hacked , disc gets corrupted, VPN gets hacked or any other unforeseen event happens, and causes only the staker to misbehave, then the staker would lose only 2%. However, if other stakers are misbehaving at the sametime, then the penalties would go up quickly. If only 1% of the stakers are misbehaving, then the penalty would be 3×1+2% = 5%. If 10% stakers misbehave, then the penalty would be 3×10+2% = 32%.
The system works this way because of quadratic leaking, which protects the network. 1/3 is the critical number in the system. The system re-adjusts itself because of this system. The misbehaviors are slowly left out, until the behaving Eth return to 100%, and the chain begins the process of finalization again.
Going with this process, a hacker needs 1.67 million Ether, worth about $1.40 billion, to perform a successful attack on hybrid Casper. Any partial attack would only be temporary. Furthermore, while designing the staking system, it would be advantageous to select the least popular pool, operating system, and VPS provider.
Ultimately, staking is done to get interest, which is also dependent on others. If 2.50 million Eth is staked, then interest would amount to 10%. If 10 million is Eth is staked, then interest would be 5%. The interest would further decrease to 2.5% if 40 million Eth is staked. So, effectively, the reward system encourages decentralization as too much staking will only decrease the returns.
Presently 1,500 Ether is required to stake. Being in a smallest pool is the most advantageous both in terms of return and avoiding penalties. Once sharding goes live, Ethereum team is planning to bring down the stake requirement to 32 Ethers. Sharding is expected to go live in another 12-18 months. A staker has to wait for four months to exit from staking and get back the deposit with accrued interest. In the PoW consensus mechanism employed by Bitcoin network, there is a three month waiting time before block rewards can be spent.
This means, a staker cannot withdraw immediately and runaway after misbehaving. Furthermore, it will take time to logoff from the network. This ensures that a staker does not run away when there is an attack on the network, but defend it with the deposit. The stakers are paid for this reason. To put it simpler, it is a reward paid to protect the network. For an effective attack, as mentioned earlier, 1.6 billion Ether is required. It will certainly make any hacker think twice and even the damage will be only temporary.