Governing Penumbra: Private Staking, delUM, and Private Governance

This post is the second in a series about the Penumbra chain’s economics, work done on consensus, governing the advancement of software deployed on the network itself, and how these two relate to the UM token. The hope is that by the end of it, there will be a greater understanding about how token holding is related within the Penumbra network.

A second use of the UM token is as a local utility for signaling support of governance and as an underlying inflationary hedge in the form of a reward for the work done to secure the consensus of the chain. 

In short: the Penumbra network emits a fixed rate of issuance into circulation in response to work done on the chain. Engaging with this issuance mechanism, from an economic point of view, is a way for token holders to hedge against dilution of the circulating supply by ensuring that they maintain a fixed percentage of the network’s supply in response to this issuance. 

What Staking Means for Penumbra

Chains offer delegated authority to a skilled group of actors (Validators) who ensure that the "chain" part of "block-chain" remains unbroken, verifying and agreeing that the contents of these blocks are the correct data to be permanently recorded in their sequential addition to the chain.

Validators are a set of nodes whose role is to scan blocks for their content, confirm that these blocks are valid within the context of the chain, and verify with the rest of the group that they see identical content in each block. Once consensus is reached that a block proposed by a validator is indeed valid, it is signed by a subset of Validators and added to the historical record of blocks that constitutes the chain. This record is held as canonical by all other participating nodes, and subsequent blocks are appended to it, forming the basis for the trustworthiness of transactions on the chain.

Validators are indirectly compensated through new issuance from the consensus of the protocol itself, but only as a fraction of the tokens 'staked' to them as service providers. Issuance is distributed to these service workers at the end of each payment period, known as an Epoch. On Penumbra, the Epoch period is approximately two days, measured by a discrete number of blocks.

How a protocol elects service workers to the authority necessary to sign transaction blocks is equally important: since blockchains are designed to be permissionless, allowing any holder of UM to join, it’s crucial to devise a system that ensures those who provide consensus are trusted in their role.

This part of the consensus mechanism gives rise to the reward system name for protocol token issuance. The public freely elects this group by actively attesting to their credibility, known as Staking, typically using a protocol-native token as a credibility measure. Token holders delegate the weight of their tokens to service providers, signaling trustworthiness.

Thus, staking serves as a reputation gauge for those most qualified to provide consensus. Token holders stake their tokens on the bet that the selected provider will effectively sign the chain’s blocks. Participants in this election system, known as token holders, are rewarded for their work through token issuance, from which validators earn a commission.

To capture the rewards for their participation, Delegators unwind their tokens from a protocol contract, a process that takes seven days on Penumbra. Staking demonstrates alignment with the protocol’s success by electing service workers essential for maintaining chain continuity.

Where Penumbra Innovates on Staking: delUM

On Penumbra, all of the preceding is true, but it differs in a specific and unique set of design choices, which prioritize the user experience above all else. Since blockchain security is at this point well understood, innovating on the stack means ensuring the user is the priority.

On most chains, all of the aforementioned mechanics are fully public, and issuance is offered to the recipients pro rata.This means in most cases a user has to compound their new issuance manually. This design choice was not included when Penumbra was created. Instead of issuing the token directly to the user and requiring them to compound the rate of issuance, on Penumbra, delegators hold the UM token as an immutable, non-inflationary token tied to the validator to whom they have delegated. This means that the amount of UM staked at the moment of locking up tokens in these staking contracts is represented by a different token held by the delegator, a token called delUM (delegated UM).

This token remains a fixed amount for the duration in which a delegate chooses to stake their funds. If a delegator stakes 100 UM, they will hold 100 delUM that will appreciate in value relative to the issuance that their chosen validator receives as a reward for participating in consensus. This means that when undelegated after a 7-day period, delUM will be worth the original amount of UM deposited, in addition to whatever issuance was accrued over the period of time that the delegator staked their tokens. For example, 100 UM over a period of one year at a fixed token issuance rate on the network across a homogenous validator set would net around 2% per year, meaning that when 100 delUM has been un-delegated at the end of a year, they would have 102 UM.

delUM, however, is importantly liquid, meaning that it can be traded at any time and is a Penumbra-native liquid staking token that does not require the token holder to disengage from the staking contract in order to claim the total issuance received over the period it was locked up. Only that this token is representing a particular amount of UM tied to a specific validator, the delegator would have to find a buyer in order to instantly sell the token.

delUM and Private Governance

delUM also represents an important part of a delegator's authority to vote or make decisions with respect to the chain's governance. As with many chains, Penumbra's governance system uses the vote weight of staked UM for each validator. This means that the vote weight of cumulative UM delegated to each validator constitutes a percentage of total UM staked to the protocol. On Penumbra, the "quorum" (percentage of tokens participating in governance) is set at 40% for most proposals, with a consensus of this quorum requiring 60% of tokens voting in a particular position in order for it to either pass or fail.

Most important to all of these mechanisms on the part of users as part of what secures Penumbra's governance is that, in contrast to all other chains using all of the rules described above, all of Penumbra's staking architecture is completely private. On other chains, it is possible to target the delegation of a particular validator based on the amount any publicly available account has committed to the role, and it is possible to target any expressed position by a validator or delegator. This is antithetical to the theory of free expression on how any party participating in the system of governance should be allowed to engage, because it introduces visibility as an attack surface for public opinion. Penumbra makes voting private for this exact reason; you should be allowed to disclose how you voted by choice, not as a requirement.

The direction of an individual delegator's stake is also not public. It is not possible to see which accounts are staking to which validator, meaning that again, the preferences disclosed by any individual holder of UM is expressly their choice first, and can only be done off-chain, preserving the right to privacy of users who engage with the chain.

This way, the token represents a tool for rewarding delegators for the work done by selecting validators, and the work done by these validators to provide consensus. In contrast to other networks with higher inflation rates, which curve off the rate of issuance as the chain matures, the issuance is fixed at 2% in order to maintain stability and sustainability in the long run. This choice is mutable and can be changed, but has worked so far to ensure the long-term sustainability of asset dilution. 

How Does This Impact Penumbra’s Infrastructure?

The reason for this choice of issuance rate pairs with the final element of token dynamics, made available by Penumbra: natively reclaimed MEV revenue as a result of Penumbra’s protocol-native DEX, which we’ll be discussing in the next post.