This talk was given at AraCon 2019 in Berlin on January 30, 2019, and focuses on formal on-chain governance mechanisms and how they may evolve as political functions and economic actors.
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A SHORT OUTLINE @Melt_Dem 3 • Examining On-Chain Governance • Who Has the Right to Govern • Who Has the Will to Govern • A Case for Crypto Cartels • What History Can Teach Us About Political Organizations
GOVERNANCE IS AN EXPERIMENT Network: Miners, Full Nodes, Block Producer, Baker Application Universe: Smart contracts, distributed computing, tokenization Protocols: EOS, DASH, NEO, Tezos, Decred @Melt_Dem 4 Off Chain Governance Layer (formal / informal) Voting tools, polling tools, community updates, forums, foundations On Chain Governance Layer (formal / informal) Delegation services, staking pools, voting service providers • Decision making that first takes place on a social level • Can be informal or formal in nature • May be encoded into the protocol • Hard coded mechanism for changing system rules • Decisions are automatically hard coded once constituents agree • Tools are still immature
CURRENT ON-CHAIN GOVERNANCE PROJECTS @Melt_Dem 5 DPoS <1 year CONSENSUS AGE RISK MODEL Delegate (no risk) Bake (risk) PoW + Proof of Service 5 years No risk using masternode key 78% delegated 479 bakers PARTICIPATION PARTIES 55% in masternodes 4,662 active masternodes DPoS <1 year Sources: Tezos Foundation, TzScan.io, DASH website, StakingRewards.com, EOS Authority voting statistics, Decred website and dcrstats.com, Cryptoslate, NEO.edu, Coinmonks 48% staked, 25% voted on BPs Buy “tickets” to vote, pay tsxn fee No risk to vote for BPs Hybrid PoW PoS 3 years 48% staked for voting 23 VSPs hold 50% of tickets DBFT 2 years Unclear Foundation holds 50% of votes No risk to vote for consensus nodes Tezos NEO EOS DASH Decred 21 BPs 100 SPs These 5 networks represent roughly $4B of market value (as of 1/30/2019)
RISK AND REWARD MATTER @Melt_Dem 6 Tezos NEO EOS ROI 7 – 10% SET UP DASH 5 – 15% 1k DASH ($67k) collateral Pay ~15% to delegate 10k XTZ ($4k) to bake GOVERNANCE Masternodes vote on governance decisions Bakers vote in Amendment Process THREAT MODEL Delegate (no risk) Bake (risk) No risk using masternode key Token holders vote for block producers No risk to voters, may get paid by BP n/a Decred 1% on avg but varies 111 DCR ($1.7k) per ticket, 1 – 5% to VSP Token holders buy tickets to “vote” Time lock DCR to vote or use VSP BPs $100k+ to run, voting costs nothing 7 Consensus nodes, voted for by NEO holders 1000 GAS (2nd token) needed to create vote Low risk - time lock tokens in election n/a The risks and rewards of participating in governance can be confusing Sources: Tezos Foundation, TzScan.io, DASH website, StakingRewards.com, EOS Authority voting statistics, Decred website and dcrstats.com, Cryptoslate, NEO.edu, Coinmonks
THE DYNAMICS OF POWER @Melt_Dem 7 EXCHANGE USERS FUNDS / VCs FOUNDATION PROJECT TEAM • Users have no control over keys or assets • Limited ability to stake or delegate tokens will on exchange • Some exchanges may delegate tokens for profit without informing users • Vested interest in specific outcomes • Heavily pursued by “service providers” who charge 10%+ • Sometimes collude to run their own pools for staking • Typically do not have the right to participate in governance / vote • Often receive a reward from voting or can be granted more capital • May support research into governance tools • Limited clarity as to how many tokens teams received and if they are staking / participating • Limited disclosure around conflicts Images: Flaticon.com
DIFFICULT TO UNTANGLE INCENTIVES @Melt_Dem 8 Founders got 8.5% of tokens TEAM Unknown 8% dev subsidy, 9% dev pre-mine Team holds 10% of foundation tokens Tezos NEO EOS DASH Decred Unknown how much EOS team owns Run own baker or delegate for users EXCHANGES Must run own masternode Must buy tickets outside exchange Unclear Bitfinex and others enable voting Investors running own bakers INVESTORS Most masternodes run by investors Running staking operations Unclear >70% of EOS held by 100 addresses Foundations holds 10% of tokens FOUNDATION Sell memberships, receive 10% of BR 10% of tokens go to foundation for “dev” Foundation holds 50% of votes Block.one controls 10% of voting power It’s very difficult to find reliable information about stakeholders and their participation in formal, on-chain governance, as well as their motivations Sources: Tezos Foundation, TzScan.io, DASH website, StakingRewards.com, EOS Authority voting statistics, Decred website and dcrstats.com, Cryptoslate, NEO.edu, Coinmonks
PUTTING IT ALL TOGETHER @Melt_Dem 11 Many service providers, price taker, homogeneous product Few sellers, interdependent, non- price competition One seller, price setter, no competition PERFECT COMPETITION OLIGOPOLOGY MONOPOLY Competitive Non-Competitive Explicit or implicit agreements to collude to maximize profits can take the form of joint ventures, mergers, partnerships, and cartels
INCENTIVES ARE THERE @Melt_Dem 12 $5M $4k $??? $150k $1k Sources: Data gathered from Sources on listed in prior graphic, using market prices as of Jan 30, 2019 per block producer for a $1M delegation Per consensus node per masternode per $100k in tickets
EMERGENT CRYPTO GOVERNANCE COLLUSION @Melt_Dem 13 • The network - the type of work being done really influences who should be doing it • Not all networks are built the same, and they require expertise – no one entity can be a master in all protocols • No funds have capacity to do everything themselves, especially not economically • No individual investors have the capacity, or appetite, to do all of that themselves EXCHANGES FUNDS / VCs FOUNDATIONS PROJECT TEAMS
POLYBIUS’ SEQUENCE @Melt_Dem 15 Leadership of influential wise leader emerges, power passes by heredity. Generations of rule result in abuse of authority for personal gain Influential and powerful class overthrow the monarchy Descendents of aristocrats abuse power for personal gain MONARCHY TYRANNY ARISTROCRACY OLIGARCHY Emergence of rule by many and representative systems DEMOCRACY People of the state become corrupted and entitled, rule by mob OCHLOCRACY
LESSONS FROM POLITICAL HISTORY @Melt_Dem 16 • Tenure of rulers must be kept short to prevent them becoming despots • External threats, whether real or imagined, preserve internal peace • If any one individual gains too much power – whether it be monetary, political, or military – banish them • Decision makers and governance bodies must never accept money to make decisions • The middle class must be large • If all citizens are aware of law, history, and constitution, they will endeavor to maintain “good” governance
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