Exchange Voting on EOS is Fine
[XPOST] This is a (slightly modified) cross-post from an earlier post in 2020 on voice.com. Reposting on Medium because the topic is still relevant, I still generally agree, and voice.com is no longer a blogging platform.
How to Interpret Exchange Votes
Crypto exchanges use a fractional reserve ratio to make sure they keep enough liquid EOS to allow their users instantaneous withdrawals. But they need not keep any capital beyond their reserve amount in EOS. They could easily hold the rest of their capital in BTC, or lend the additional capital out at interest, or simply hold it in USDT to remove some volatility risk. Instead, exchanges that are voting are choosing to assume additional risk by keeping excess capital within EOS for the purpose of staking & voting.
For that reason, it’s incorrect to imagine that an exchange is voting with its user’s EOS without their permission. Rather, the exchange is a business using its own capital beyond what is strictly necessary to keep in EOS-denominated liquid reserves in order to invest in the EOS network. Any holder of EOS who leaves their EOS on an exchange, or even simply doesn’t participate in staking & voting, is equivalent to the holder of BTC who has no interest in mining, and is therefore implicitly opting out of participating in consensus.
Stake-Time in PoW
That said, the status quo can still be improved. The fixed unstake-time that we have today in EOS means that two entities who each stake 100 EOS are treated equally by the network, even if one entity is a rich investor who doesn’t care much about EOS, and another is a passionate advocate who can only afford 100 EOS.
The equivalent scenario in a PoW blockchain like Bitcoin allows more passionate participants to maximize their stake by leveraging the only other resource available to them: time. Whereas a rich, disinterested miner may simply pay a sum of money to participate in cloud mining through Genesis Mining (for example), a passionate participant with the same sum of money could spend time researching and optimizing their on-premises hardware, and specifically delegate their hash power to the pools with the highest ROI. The result is that the more passionate entities in PoW may use time as a resource to maximize their protocol-recognized “stake.” And truly, the second person described here really does have more at stake for Bitcoin and should be awarded a correspondingly greater stake. She actually has purchased ASIC hardware, which is a sunk cost, and she spent time that cannot be recovered. One who simply clicks a few buttons on a cloud-mining website and can just as easily repurpose that investment into mining on another chain does not have as much value at stake for Bitcoin.
Thanks to Dan’s 2019 concept of stake pools, this effect could be achieved in a PoS blockchain in a way similar to (but even better than) PoW, where the function between stake-time and stake-weight will be governed entirely by free-market forces. This is a novel contribution to PoS blockchain governance, as all earlier attempts to map stake-time and stake-weight of which I’m aware propose a hard-coded function. In other words, there was some arbitrary conversion between stake-time and its corresponding protocol-measured stake-weight.
Therefore, EOS could have a mechanism by which the free market weights the stake of participants proportionally to their long-term commitment to the chain. Participants who are unwilling to assume long-term risk (as is likely the case with exchanges and any company with responsibilities not exclusively tied to the success of EOS) will appropriately have the weight of their stake proportionally decreased relative to other voters.
Neutrality
If you find yourself designing a blockchain coin-voting mechanism to explicitly prevent some entities from voting, like exchanges, your protocol design is not neutral. Protocol-level neutrality is next to security in public blockchain design, indeed it’s a core component of security itself. Mechanism neutrality prevents hidden biases from manifesting over time and having larger downstream consequences. Consensus protocols are chaotic, which is to say that the initial conditions are responsible not only for outcomes at a particular moment but also for the evolution of the protocol parameters and the subsequently produced outcomes.
If you believe that exchanges in EOS have too much power, then here is a 3-step process to improve the situation:
- Locate the underlying principles at work that allow for the undesired power dynamics.
- Find a neutral change to these core principles, derived from simple economic axioms, that you predict would enable a more equitable outcome.
- Fork the chain, implement your changes, and let natural market efficiencies wrought by your changes usurp power from the incumbent protocol.
Good luck!
About the author
James Mart is an educator, software engineer, and economics & governance enthusiast. Find him on Twitter at _JamesMart.
