Upgrade to Pro — share decks privately, control downloads, hide ads and more …

Power by Proxy: The Case for Crypto Cartels

Meltem
January 30, 2019

Power by Proxy: The Case for Crypto Cartels

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.

Meltem

January 30, 2019
Tweet

More Decks by Meltem

Other Decks in Technology

Transcript

  1. Power by Proxy
    The Case for Crypto Cartels
    Meltem Demirors

    View Slide

  2. DISCLOSURES
    @Melt_Dem
    All opinions expressed by Meltem Demirors in this presentation are solely her opinions and do not reflect the opinions of
    CoinShares Co, CoinShares Capital, CoinShares UK, or their parent company CoinShares Holdings Limited or affiliates.
    You should not treat any opinion expressed by Ms. Demirors as a specific inducement to make a particular investment or
    follow a particular strategy, but only as an expression of her opinion. Ms. Demirors’ opinions are based upon information
    she considers reliable, but neither CoinShares Co nor its affiliates and/or subsidiaries warrant its completeness or
    accuracy, and it should not be relied upon as such. Ms. Demirors, CoinShares Co, its affiliates and/or subsidiaries are not
    under any obligation to update or correct any information provided in this presentation. Ms. Demirors’ statements and
    opinions are subject to change without notice. No part of Ms. Demirors’ compensation from CoinShares is related to the
    specific opinions she expresses.
    Past performance is not indicative of future results. Neither Ms. Demirors nor CoinShares guarantees any specific outcome
    or profit. You should be aware of the real risk of loss in following any strategy or investment. Strategies or investments
    discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned
    may not be suitable for you. This material does not take into account your particular investment objectives, financial
    situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision
    regarding investments or strategies. Before acting on information, you should consider whether it is suitable for your
    particular circumstances and strongly consider seeking advice from your own financial or investment adviser.
    See Ms. Demirors’ holdings, investments, and disclosures at www.meltemdemirors.com

    View Slide

  3. 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

    View Slide

  4. 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

    View Slide

  5. 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)

    View Slide

  6. 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

    View Slide

  7. 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

    View Slide

  8. 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

    View Slide

  9. GOVERNANCE IS A SKILL
    @Melt_Dem 9
    POLITICS
    TECH
    FINANCE
    TODAY
    • Stable hardware
    • Secure custody for risk assets
    • Availability (not missing blocks)
    TOMORROW
    • Size of bond / stake
    • Net fee structure
    • Payout schedule and share of
    voter / participant reward
    • Fee transparency
    • Marketing
    • Blogging and “thought
    leadership”
    • Secure stable infrastructure
    (hardware, power, software)
    • User tools such as simple voting
    interfaces, tax tools, etc.
    • Automated accounting and payout
    tools (compounding interest)
    • Fee structure transparency
    • Stakeholder incentives
    • Proxy voting mechanisms
    • Political competence
    • Deep knowledge of project
    • Campaigning, optics, marketing

    View Slide

  10. TURNOUT DEPENDS ON STAKES
    @Melt_Dem 10
    0
    40
    80
    German
    Election
    Brexit US 2016
    Elections
    DASH
    Masternodes
    Decred
    Politeia
    EOS Block
    Producer
    Ethereum
    Hard Fork
    (2016)
    Aragon AGP-1
    Governance Proposal
    % Voter Turnout
    $540M
    $147M
    $2B
    $51M*
    $11M
    Sources: Tezos Foundation, TzScan.io, DASH website, StakingRewards.com, EOS Authority voting statistics, Decred website and dcrstats.com, Cryptoslate, NEO.edu, Coinmonks

    View Slide

  11. 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

    View Slide

  12. 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

    View Slide

  13. 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

    View Slide

  14. AND…
    @Melt_Dem 14
    SPECULATOR USER
    =

    View Slide

  15. 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

    View Slide

  16. 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

    View Slide