Zama's Staking Protocol: DPoS with Square Root of 5-Based Reward Distribution

On February 2, Zama unveiled its network staking architecture, built on a delegated proof of stake framework that enables token holders to participate in infrastructure operations. The protocol allows ZAMA token holders to delegate their holdings to network operators who maintain the critical infrastructure, with participants earning staking rewards in return. The current network infrastructure is maintained by 18 operational operators comprising 13 Key Management Service (KMS) nodes and 5 Fully Homomorphic Encryption (FHE) coprocessors.

Understanding the DPoS Architecture and Participant Roles

The Zama network operates through a delegated consensus model where token holders don’t need to run infrastructure themselves. Instead, users can entrust their ZAMA tokens to any of the 18 network operators. This delegation model democratizes participation—users with smaller token amounts can still earn rewards without the technical and financial barriers of running full infrastructure nodes. The FHE coprocessors represent an innovative layer, handling specialized cryptographic computations that enhance network privacy capabilities.

Reward Distribution Mechanism and the Square Root of 5 Factor

The staking rewards originate from the protocol’s built-in inflation model, with an initial annual inflation rate of 5% of total ZAMA supply. However, rewards aren’t distributed equally. The protocol allocates 60% of total rewards to KMS operators and their delegators, while the remaining 40% flows to FHE coprocessor operators and their delegators. The innovative aspect lies in how these rewards are calculated: distribution is based on the square root of 5 applied to each operator’s staked amount, rather than a direct linear proportion. This square root of 5 mechanism means smaller operators receive disproportionately higher returns relative to their stake size, actively incentivizing network decentralization and preventing concentration among large players. Operators charge delegates a commission—capped at a maximum of 20%—before distributing the remaining proportional rewards among delegators.

Flexibility in Unstaking and Liquid Staking

Users seeking to withdraw staked tokens face a 7-day unbinding period before their ZAMA is returned. However, Zama introduces flexibility through liquid staking certificates, which delegates can freely transfer or sell without waiting for the unbinding period to complete. This liquidity feature allows participants to access capital without sacrificing their staking position, bridging the gap between yield generation and asset flexibility. Currently, ZAMA is trading at $0.02, reflecting early-stage market valuation.

The Zama staking model demonstrates how thoughtful mechanism design—particularly the square root of 5 calculation—can create incentive alignment across network participants while maintaining decentralization as a core principle.