Biteye: An Overview of Celestia's Principles and Token Economics

Author: Biteye Core Contributor Fishery Isla

Editor: Biteye Core Contributor Crush 01 Introduction

"All tokens, locked or unlocked, may be staked."

"All locked or unlocked tokens can be staked."

On September 26, the modular blockchain project Celestia announced an airdrop of 60 million Celestia tokens (TIA) to 7,579 developers and 576,653 active on-chain addresses. Eligible users must claim their tokens before 20:00 on October 17, 2023. As the mainnet has not yet launched (planned for the end of 2023), the specific time for TIA transfers is still unknown.

Celestia is considered a top-tier project that started in the latter part of the last bull market (2020-2021), and investors have high expectations for it. Many institutions are eager to participate in the $55 million Series B financing.

Celestia completed a $1.5 million seed round in early 2021 under the name LazyLedger, announced its rebranding to Celestia in June 2021, and rapidly completed a Series B financing of $55 million in October. It only began its operational promotion gradually at the end of 2021, and announced the airdrop in September 2023, with the expectation of launching the mainnet by the end of the year, which will allow for airdrop transfers.

From project inception to airdrop, it has only been a little over two years. On one hand, the execution capability of the Celestia team is commendable, especially when compared to other top-tier projects like StarkWare, zkSync, and LayerZero, which have experienced delays.

On the other hand, Celestia benefits from being developed on the Cosmos SDK, where the sovereignty of the Cosmos ecosystem means that the chain's consensus is maintained by the native token's PoS (Proof of Stake). Other top-tier tokens are mostly just governance tokens, which can afford to delay. Therefore, to launch the mainnet, the airdrop confirmation must be completed first, and the balance will appear in the first block upon the mainnet launch.

Note that since the Celestia mainnet does not have smart contracts, trading can only begin once TIA deposits are enabled on CEX or after the Celestia mainnet launches Osmosis IBC.

Additionally, regarding staking operations after the launch, this is a key point that will be elaborated on in the airdrop section. 02 Background

Celestia has garnered significant attention in the institutional investment circle, and its ability to secure such a large amount of financing in a short time is largely due to the influence of a scholarly paper published in September 2018—"Fraud and Data Availability Proofs: Maximising Light Client Security and Scaling Blockchains with Dishonest Majorities."

This paper was published on arXiv, with the first author being Celestia CEO Mustafa and the third author being Vitalik. The concept of new types of fraud proofs proposed in this paper is the cornerstone of Celestia's technology today.

It is important to clarify that Vitalik being the third author only indicates his participation and endorsement of the technology in the paper, and does not mean he endorses the Celestia project. In fact, in early 2022, Vitalik expressed concerns on Reddit about the potential for a 51% attack when using Celestia DA to handle Ethereum assets.

Explaining the details is too complex, but simply put, Celestia's technical route is recognized by Ethereum, but Ethereum is exploring support for its own DA, while Celestia is a third party.

Most papers and reports in the market focus on theory, and until the TIA airdrop, many investors did not understand what Data Availability (DA) really is. The following will explain this part in simple and understandable language. 03 Inflation Economics and Staking Yield Principles

It is crucial to note that Cosmos tokens are different from regular airdrops. The total amount mentioned in the airdrop introduction specifically refers to the distribution ratio of all tokens at the genesis block time. The subsequent PoS issuance must be calculated separately; many Cosmos tokens have an unlimited total supply after the chain launches, and TIA is one of them.

In the TIA genesis block:

• Total Supply: Unlimited

• Supply (genesis block, percentages below refer to this): 1 billion

• Seed Round Investors: 15.9%

• A & B Round Investors: 19.7%

• R&D and Ecosystem: 26.8%

• Community: 20%

• Initial Core Contributors: 17.6%

Unlocking Information:

The team and investors will begin releasing 33% of their allocation after the first year. The team will receive the remaining funds over three years, while investors will receive theirs over two years.

R&D and ecosystem will unlock 25% at launch, with the remaining 75% unlocking continuously from the first year to the fourth year.

Initial core contributors will unlock 33% in the first year, with the remaining 67% unlocking continuously from the first year to the third year.

Seed round investors will unlock 33% of their seed funding in the first year, with the remaining 67% unlocking continuously from the first year to the second year.

A & B round investors: A and B round investors will unlock 33% in the first year, with the remaining 67% unlocking continuously from the first year to the second year.

At this point, it seems that apart from the unlimited supply, everything is similar to most airdrops. However, the real issue to pay attention to is the inflation distribution problem caused by the PoS unlimited supply. According to official documents, the TIA inflation rate starts at 8% per year and decreases by 10% each year until it reaches a long-term issuance rate of 1.5%. The exact annual inflation rate can be found in the chart below.

The 8% can be understood as if all 1 billion tokens issued at the genesis block were staked from the beginning, the annual yield would be 8%, meaning 8 million TIA would be produced in a year (fixed), and the second year would become 8 million minus 800,000 (10%), resulting in 7.2 million.

In reality, the APR of PoS staking is not calculated this way; we need to consider how many will actually participate in staking. This is clearly a question that arises from market dynamics: under normal circumstances, if few people stake, the staking APR will be high, which in turn attracts new participants, and the rewards will be distributed among more people, causing the APR to decrease, and this cycle continues.

Any player who has engaged in Yield Farming will understand this knowledge. What follows is what most people do not know, the key!

The official document states: "All tokens, locked or unlocked, may be staked, but staking rewards are unlocked upon receipt." This means that "all locked or unlocked tokens can be staked, but staking rewards are unlocked upon receipt."

In other words, apart from the 7.4% retail airdrop, the remaining 926 million TIA, even if in a locked state or used for other purposes, such as ecosystem funds, can also participate in staking.

At first glance, this seems reasonable, and the staking rewards are locked, but it actually contradicts normal logic; tokens in a locked state can still be staked. When to stake and how much to stake are all unknowns, and these variables are closely related to staking rewards.

The early Cosmos chain played precisely with the economics of staking. If one only looks at the circulation line chart provided by the official (below) without understanding the rules of the game above, it is easy to make misjudgments.

Let’s do some calculations. On the day the chain launches, assuming the official does not participate in staking, if 10% of the 7.4% retail airdrop participates in staking (a random assumption, as claiming takes time, and some will sell after claiming, which is reasonable), then the daily interest rate will be quite outrageous:

(8%/365)/0.74% = 2.96%

Next, if we continue to assume that the official does not participate in staking, and the staking rate of the retail airdrop reaches an exaggerated 50%, the daily interest rate would still be 0.59%. The rewards earned are not ordinary tokens, thus relying solely on APR can still convince a significant portion of investors to enter staking, pushing up secondary market prices.

In fact, if only the 7.4% circulating amount is internally competing, the APR may remain at a high level, but it is still relatively healthy.

The problem lies in the fact that, according to the experience of the Cosmos ecosystem, the official will periodically and in varying amounts participate in staking a portion of the tokens, especially the investors' share, as they will not willingly be diluted by inflation.

Once the locked shares participate in staking, the APR will plummet, leading to a massive unlocking sell-off. According to the experience of the Cosmos ecosystem, it takes 14 or 21 days for TIA to transition from staking status back to circulating status.

If retail investors are unaware of the above rules, it could lead to investment misjudgments. Last spring's Cosmos ecosystem EVM Evmos is an example of this:

High APR was maintained for about three months, after which the official participated in staking, causing the APR to plummet, which triggered strong sell-offs. Even investors who did not choose to sell shifted from reinvestment strategies to withdrawal and buy strategies.

In short, if the staking APR is very high after the chain launches and the official has not participated in staking, non-long-term investors should be cautious.

Finally, let’s discuss what makes Celestia so popular and the core technology behind it, "DA." 04 What is "Data Availability"?

Data Availability, abbreviated as DA, literally translates to "data availability." However, in the Chinese context, DA does not refer to a certain property; it is more appropriate to understand it as a method for verifying newly published blocks. Many friends have misunderstood DA, and the translation has to bear a large part of the blame.

Most people mistakenly understand DA as the retrievability (downloadability) of blockchain data. It is important to clarify that DA refers to the behavior of nodes downloading a block and verifying whether the transaction data is correct when a block is added to the blockchain. If this block is verified as correct by many nodes, then the block officially reaches consensus.

In other words, data availability is related to the time before a block reaches consensus. Therefore, DA is crucial for blockchain security; if there are vulnerabilities in DA, block proposers can insert malicious transactions into the block, leading to serious consequences. Optimizing DA can improve blockchain performance.

Ethereum's DA uses P2P broadcasting, meaning every full node must download and propagate new blocks and store Rollup data to ensure that the changes proposed by block producers match the changes independently computed by nodes. This method does not require trust, but it is inefficient, places high demands on nodes and network speed, and can affect decentralization.

Celestia's DA technology introduces erasure coding and data random sampling to design a transmission and verification protocol. Unlike Ethereum nodes that need to download the entire block data, Celestia only needs to download a small portion of the block to statistically verify whether the block is correct using Fraud proofs. This helps reduce hardware and network requirements, allowing its service layers for settlement and execution to operate under more decentralized conditions with high throughput performance.

DA is a technology route that many are targeting, and competition is fierce, including Ethereum's Proto-Danksharding, Polygon Avail, zkSync's zkPorter, and Eigenlayer's EigenDA.

The security of this emerging DA track and the potential for further technological exploration remain to be observed after the launch of the Celestia mainnet.

References:

[01] https://ethereum.org/en/developers/docs/data-availability/
[02] https://docs.celestia.org/learn/staking-governance-supply/