Economic analysis of Block.One’s “Stake-based voting and rewards proposal”

Introduction

The following paper is an economic analysis of the “Stake-based voting and rewards proposal” put forth by Block.One. This paper will address each of the various sub-proposals in Block.One’s original proposal, as well as add one additional proposal. The proposals listed here are broken into finer resolution than the proposals Block.One originally listed, in order that responses can be more focused.

The primary factor considered in the formation of the positions taken in this paper is whether the proposals are well-aligned with economic “first principles.” For example, specific configurations for mechanisms like inflation are not as important for the purposes of this paper as the concept of inflation itself and what it does to the distribution of value among token holders.

One major aspect of a stake-based blockchain’s security comes directly from the cost associated with “staking” the network token. “Stake” is explicitly named to refer to that value which is voluntarily put at risk of loss should the corresponding blockchain fail. The more value an entity has at stake, the more risk they accept for the future success of the blockchain, which justifies increasing the weight of their vote accordingly. This is a guiding first principle for this document, and most blockchain incentive designs.

Block.One’s proposal #1 — “Staking pool reward”

EOS ought to adopt a staking pool system which rewards token-holders directly for their vote.

Proposal #1 response

Adopting this proposal will enhance the security and alignment of the EOS network. The devil, however, is in the details.

Block.One’s proposal #2 — “Reward Prerequisites”

To receive rewards, holders are required to stake their tokens and either vote for at least 21 block producer candidates, or proxy their vote.

Note: Implied in this proposal is that the amount of a particular account’s reward will be proportional to the percentage of tokens which that account is voting out of the total number of voted tokens. That amount will either be paid out in full (100%) if the voting requirements are met, or not paid out at all (0%).

Proposal #2 counter-proposal — “Reward Incentives”

Instead of reward requirements, the reward amount could be multiplied by a coefficient equal to: (N-1) / 30, where N is the number of different block producer accounts being voted for. With this scheme, an account which votes for 1 block producer only receives 0% reward, but as the number of unique candidates you vote for approaches 30, your reward amount approaches 100% of your maximum reward.

This gives people the freedom to express their actual opinion on chain without a 100% reward penalty if they don’t vote for a specific number. This reward function simply incentivizes participation by increasing rewards as people vote for more candidates.

Block.One’s proposal #3 — “Total inflation”

The overall system inflation rate ought to be 1.2% to 3.8% annually (includes block producer rewards).

Proposal #3 response

The number used ought to be enough to subsidize block producer infrastructure and provide reasonable expectation of rewards to potential stakers to incentivize participation in voting. The number should be low enough that it appears sustainable, but high enough that staking APR seems moderately good. Any number in the proposed range seems reasonable to achieve these goals.

Block.One’s proposal #4 — “Block Producer share of inflation”

At least 32% of total inflationary rewards, depending on rate of overall inflation, based on the above overall inflation range. Specifically, this share should represent 1.2% of EOS total supply annually.

Proposal #4 response

For a sufficiently valuable blockchain, block producers ought not need any network inflation as payment for their infrastructure and leadership. Block producers are political leaders who could be sufficiently paid for their services through the reputational boost of being elected. In this ideal scenario, 100% of all network inflation is distributed to those who stake & vote.

However, with the current size of the EOS blockchain, there may not be enough reputational value gained through election to subsidize a desirable number of block producer candidate’s infrastructure. Therefore, Block.One’s proposal to use inflation as a mechanism to achieve distributed contributions from all token holders to subsidize infrastructure costs and sweeten the incentive for quality leaders while the community is small ought to be acceptable.

Block.One’s proposal #5 — “Staker share of inflation”

At most 68% of total inflationary rewards, depending on rate of overall inflation, based on the above overall inflation range.

Proposal #5 response

68% of total inflation being used as the reward pool for voters is a good starting point.

Block.One’s proposal #6 — “Withdrawal limitations”

To the extent the EOS community deems limitations on staked-token withdrawal beneficial, a withdrawal cadence of once every 7 days, with a per-withdrawal limit of 67% of staked funds; otherwise, a withdrawal cadence of once per day, with no per-withdrawal limit.

Proposal #6 response

Withdrawal limitations are simply a way to increase the cost of staking. As with any form of increase to the cost of staking, it may increase the average the average amount of value each voter has at stake, at the cost of reducing the number of voters (those for whom the additional loss of liquidity is prohibitive will no longer stake/vote). A 7 day withdrawal cadence at 67% of staked funds ought to be a worthwhile increase to the cost of voting.

Block.One’s proposal #7 — “Remove bpay”

EOS ought to remove bpay rewards and instead distribute all rewards through vpay.

Proposal #7 response

Elimination of bpay is necessary to incentivize the consolidation of one’s funds on EOS, and eliminate incentive for one entity to create multiple block producer candidates. As Dan Larimer stated in his 2019 Blockchain Governance Proposal, “Paying block producers anything other than a linear relationship to their votes will incentivize a sybil attack and result in increased centralization of power instead of 21 distinct parties.”

It’s important for blockchains to be transparent about who is controlling what stake on the blockchain. This is what allows anyone to verify a blockchain’s political decentralization. Therefore, the removal of BPay is an especially important upgrade to EOS.

Block.One’s proposal #8 — “Vote requirements”

To help facilitate a healthy distribution of vpay rewards all votes must include 21 block producer candidates.

Proposal #8 response

This proposal ought to be rejected, as it diminishes the ability for individuals to express their opinion on-chain.

Anyone ought to be able to vote for any number of candidates. If higher numbers of voted candidates correspondingly benefits the security of the network, then the network ought to increase rewards for voters proportional to the number of candidates voted for, as already proposed in the Proposal #2 counter-proposal.

Block.One’s proposal #9 — “Missed-blocks penalty”

We are proposing that Block Producers who underperform, or fail to produce blocks at their designated time, will create a penalty effect that decreases the total inflation in the system.

Proposal #9 response

Any metrics which can be objectively measured on-chain ought to eventually be considered for inclusion in a penalty system as described in this proposal by Block.One. An inflation penalty for missed blocks is a good start.

Proposal #10 — “1-token-1-divisible-vote”

Vote weight for each account ought to be divided, rather than multiplied (as it is today), with each additional candidate selected in a vote.

1-token-1-divisible-vote was first discussed as an improvement to EOS governance by EOS New York in their 2019 article: A Possible Future for EOS Governance: Uniting Stake-holder Incentives to Maximize Decentralization and Chain Performance.

History of 1-token-30-votes

Some people often mention how 1-token-30-votes fosters increased block producer collaboration, whereas 1-token-1-vote or 1-token-1-divisible-vote would diminish block-producer collaboration. This is true, although it’s unclear if it’s negative. Competition breeds innovation, and increased competition among the block-producers to stand-out as worthy electors may be far more valuable to token-holders.

However, this collaborative aspect of 1-token-30-votes was never its original justification. When votes are consolidated under 1-token-1-vote schemes (Such as 1T1DV), there tends to be an exponential decline in the amount of stake backing each additional block producer in a validator set. With EOS’s size 21 block producer set, it would only take the bottom 7 block producers to coordinate some types of attacks on the chain. A major benefit of 1-token-30-votes is that it encourages more stake to back the bottom third of the validator set.

Justification for 1-token-1-divisible-vote

A side effect of 1-token-30-votes is that the top stakeholders may coordinate their votes between each other to effectively capture the top positions and split rewards. 1-token-30-votes also makes the game-theory much harder to analyze and by obfuscating who has value at stake, and how much. Therefore, counter proposal “Reward incentives” should be preferred over 1-token-30-votes as a method to encourage additional stake to accrue to lower-ranked candidates.

1-token-1-divisible-vote ensures that stakeholders maximize their vote weight by consolidating their votes. This makes the game theory simple and effective. Yield-seeking voters on EOS will prefer to maximize yield by voting for many block producer candidates and in so doing help secure the chain, while some other voters will prefer to sacrifice some or all of their yield in exchange for increased political influence.

In Bitcoin mining, if one chooses to mine for multiple mining pools, their hardware’s hash power must be divided between mining pools (it does not multiply with each additionally selected mining pool). If one takes seriously the analogy between Bitcoin mining and EOS staking, then we may have confidence that 1-token-1-divisible-vote has already been tested by the market and has been shown to work.

Conclusion

The additional proposal to add 1T1DV into this proposal ought to be considered by Block.One, block producers, and other parties interested in EOS governance. The benefits of 1T1DV are significant, and would better align the interests of the block producers and token holders, helping to ensure the long-term political sustainability of EOS.

Many thanks to Block.One and Prysm for conducting economic and market research to help generate these proposals for the EOS ecosystem. Overall, the original proposals by Block.One would positively benefit the EOS ecosystem. This document intends to build upon their efforts to further align the interests of the parties in the EOS ecosystem. EOS is already one of the most aligned public networks, and these upgrades will help further EOS’s market leadership in incentive alignment.