Delegation, Decentralization, Minimizing Risk

Asmodat
Asmodat
Jun 20 · 10 min read

In this article we will try to answer the following questions

  • Can Proof of Stake networks be decentralized ?
  • What is The Enlightened Democracy ?
  • Can delegators increase value of their tokens ?
  • How to minimize risk when delegating ?

Background

The new paradigm is slowly approaching and multitude of new Proof of Stake tokens start to arise from the ashes of cryptocurrency depression in an accelerating peace, very much similar as in the very early Days of the Proof of Work hype. In my previous article on I argued that the economy and underlying security of the PoW and PoS does not really differ as much as many might think, and that staking coins can be perceived as miners while validators as mining pools. What really differs between them is the level of practical decentralization that can be achieved. It is not easy to operate a mining pool in case of Proof of Work and attract new users, however doing so in case of Proof of Stake is not only easier, it is expected that there are going to be many of them in the counts of hundreds or thousands.

Over the past decade we have observed that regardless of honest or not initial wealth distribution, every cryptocurrency network eventually centralizes, the inevitability of the rich get richer, poorer get poorer rule known from real world could have not be escaped in the Proof of Work era as the difficulty of operating mining operations raised exponentially due to bias in favor of geographical location and access to cheaper electricity.

A lot had to change for nothing to change and in Proof of Stake we start to see exactly the same patterns. Although 5–15 “Mining Pools” required to perform an attack in case of Cosmos Hub is an immensely greater level of decentralization than (and on top of that all from the same country…) or just 2 individual miners , this does not mean that Proof of Stake is doomed to fail market expectations of the trustless, unstoppable economies. The opposite is true and this article aims to explain why it finally become possible and how you as delegator can use it to your advantage.

Can Proof of Stake Coins Really be Decentralized ?

The question is not if, rather how, and this comes from a logical conclusion that if there would exist an Utopian, theoretical network, with honest wealth distribution so that in this perfect scenario distribution started with everyone owning an equal amount of voting power then it would be possible to over long periods of time maintain maybe not perfect but way greater level of decentralization then in case of Proof of Work. This is true due to exponentially lower cost and difficulty to become a miner in the real world where access to resources and money is scarce but access to basic technological inventions like the internet or mobile phones is distributed much better. In other words, all of the power to maintain the network decentralization lies in the people hands thus their conscious choices CAN ensure that it is possible.

I argue that this theoretical utopia network can’t really be created on the protocol level, and that in every network, every new rule added to the protocol aiming to decentralize it creates two more go-arounds or can’t perfectly comprehend the complexity of the real world, all of the infinite consequences and edge cases that humans are exposed to on the daily basis. If this was possible on one protocol level, then it would create immense computational overhead and eventually defeat the purpose of the Proof of Stake root advantages of the consensus lightness and ease of becoming a network actor. In my opinion this is true because decentralization does not equal security, and no lightweight algorithm detached from the real world can perfectly judge whether or not given set or count of actors is malicious or not. Overwhelming majority of networks simply assumes that the majority of actors is honest, unbiasable and uhackable which in real world scenarios likely CAN NOT be true always even if MIGHT be true most of the time. The argument is that even if we assume it was true then identifying the honest part of the set of actors is not trivial and spans across infinite edge cases.

For the above reasons I will explore further in this article a most basic, most secure, simplest variation of the Proof of Stake, the Bonded Proof of Stake known from the and provide few ideas on how such network can not only maintain sufficient decentralization level and how delegators can use it to their advantage to boost the value and market perception of their own staking coin.

What is Enlightened Democracy

Under conditions presented so far we can not only conclude but also observe that actors in any network (delegators and validators) CAN become biased, create cartels and eventually reduce the Proof of Stake consensus into the glorified Proof of Authority because non network-conscious actors under no protocol rules can in all cases ensure security even in case of networks being perfectly decentralized which leads either to the monarchy and constant reduction of trusted actors or potential “decentralized monarchy of manipulated crowd” so common in the real world democracies. We can however argue that monarchies either that of individual or large group of actors, behaving like monarchy can be both good or bad.

The idea that even under adversary conditions breaking the assumptions of security in perfectly decentralized system a large and smart, network-conscious group of actors CAN optimally protect the network even if they do it by temporarily centralizing stake I wish to coin as Enlightened Democracy. By identifying that the power over ensuring security lies in people’s hands, that is those owning and assigning tokens representing trust it is only logical to state that by increasing the level of network-consciousness and delegators education we can immensely increase the security of the network, especially those networks that have small, limited validator set (to achieve faster finality) thus are prone to sybil attacks because the cost to perform such attacks grows with the level of delegators due diligence.

Strength of this concept lies in the assumption that people as individuals being exposed to various environmental conditions and ways of thinking, by combining all the knowledge and experiences are capable as a group to achieve a greater level of consciousness about network operation thus guarantee its security way better than any protocol rules aiming to ensure decentralization of voting power under assumption of majority of validators being honest. The only condition for this concept to fulfill its goals is delegators brilliance but because this factor is positive regardless of the economic or network context we can argue that pursuing means to achieve it can’t bear negative consequences even if above theories were proven to not be true or sufficient for the purpose of optimizing network security.

What can delegators do to increase value of their tokens ?

The long term market value of any network usually correlates with its perceived by investors security and trust beside countless other factors such as utility or temporary spikes in popularity. Thus if we assume that Enlightened Democracy can be used to ensure greater level of network security it can be speculated that market value of the token might also be positively correlated to its actors brilliance and conscious involvement in network operations. Furthermore, even if the protocol of the network would claim to guarantee optimal security but the community operating that network was perceived as uneducated the market value of the network would be greatly diminished versus its potential. Finally if consensus would not allow people to directly influence the security of the network, such network will unlikely be present long term on the market.

Given the above context lets for a brief moment have a look at the statistics of the Cosmos Hub trust distribution. Currently 34% of all delegators stake is delegated to 1.24 validators on average (median 1), 67% to 1.98 validators (median 1) and 99% to 2.82 (median 2) which given market assumption of network decentralization of stake correlating with security of the network the numbers above might suggest very poor risk management and low network-consciousness of delegators or operations under adversary conditions making ATOM token not appear as optimal investment choice. It is clear that the market will not understand well security guarantees of the Cosmos Network especially when still persisting in the mentality of the Proof of Work paradigm.

I argue that in the long term market will eventually realize that if Enlightened Democracy theory assumptions are true and we enter a Proof of Stake paradigm then regardless how much the protocol is abstracted or convoluted the basic dependency of its security thus also market value will always lie in delegators brilliance and due diligence, that the “Proof of Work” used to guarantee network security must come from within people’s minds because it’s currently the most powerful and common computational resource on the planet to which every individual regardless where in the world has a full access.

The answer to this chapter question should now seem way more trivial, that delegators already have all the means to directly influence the market value of their tokens by exercising due diligence and proactive behaviour to help their network achieve a greater level of security regardless if that would occur by decentralizing or temporarily centralizing the network. It is most likely that if market can notice delegators poor management of stake in relation to the perfect scenario then the staking asset is not going to reach its full potential and proof a long term reliability in providing trustless transfer or other applications, that is not relying solely on centralized entities or glorified bonded-token backed authorities.

How to minimize risk when delegating ?

There is no single good answer to this question. Your strategy should be unique and not biased by other people suggestions, if you decide based on social recommendation and dumbly send all your money that way it is likely you will be introducing a huge centralization risk and as result greatly depreciate value of your own network as explained in the previous chapter. More about centralization risk I talk about precisely in .

There is never going to be a one golden bullet in regards to strategies of risk management, however it should always be possible to reduce them into following rules.

  1. Assess the vulnerability of critical assets to specific threats.
  2. Determine the risk (i.e. the expected likelihood and consequences of specific types of threats)
  3. Identify ways to reduce those risks
  4. Prioritize risk reduction measures

Usually the best way to distribute risk when there is no one you can trust is to operate your own validator node, however if the number of spots in the validator set is limited and you do not have enough stake to self delegate all of it to yourself and become a validator then you will be forced to trust someone you likely do not know. In order to learn how to operate your own validator node you can start , it is however not trivial and requires a lot of time and knowledge spent to properly secure the infrastructure.

The second best option to reduce centralization risk and secure network while boosting the value of your token is to analyze each individual validator and assign to him your individual, unbiased score then delegate a proportional amount of stake in relation to that score. There is a multitude of ways how this can be achieved, the one suggested can be executed as follows.

From the write down all their names including those who are not jailed. After that create a list of factors that MIGHT influence your score. Some good ideas you might discover by checking out one of the . Below list of suggestions might also give you clues regarding what kind of “factors” you might want to look for. There can of course be countless others that might be of most importance to you and each of those can have both negative or positive impact. Take also note, that there can be certain penalties for validators misbehavior, some of them might be strongly enforcement by high amounts of stake slashed for validator faults such as double signing and some not, like penalties for validator node going offline. In general availability of validator node is one of the most important factors to consider by delegators however certain implementations to ensure availability often result in higher risk of double signing.

  • How many blocks does the validator missed since genesis (up-time) ?
  • Was the validator ever jailed for downtime or other misbehavior ?
  • Amount of self bonded stake.
  • Commission fees charged including min, max and max commission change ranges.
  • How long did validator operated on the network so far or did he joined it recently ?
  • Does the validator also operate on the ?
  • Does the validator team provide for delegators ?
  • Does the validator provide for other validators and community ?
  • Are the operators and provide help and input to other members ?
  • Is there a web page that provides contact information where you can learn more ?
  • Is validator a private person, team of people or company providing staking service ?
  • Does the operator provide some additional services like wallets or explorers ?
  • Is operator a ?

Finally based on the list of features collected you can assign to each individual validator a score in range from 0 to 100. Where 0 means validator is most likely malicious or nothing is known about him and 100 means you operate the node yourself or can absolutely trust a validator that is being scored. Finally your list might look as follows:

Once rating is done then sum all the values together, for example 60 + 75 + 33 +0+…+5=634 (X) to later divide the total number of atoms you want to stake, for example 2'000 ATOM (Y) by that sum of ranks. In example 2'000/634 = 3.15 ATOM per 1 score in the rating (Y/X) which will be your delegation per rank (Z). Now to each validator that you ranked above 0 delegate an amount equal to his rank (R) times delegations per rank (Z). For example to XXX Validator delegate 60*3.15=189 ATOM (R*Z) and to YYY Validator 75*3.15=236.25 ATOM. This way you can uniformly distribute the risk in proportion to the subjective probability of fault which is nothing else then following the century old saying suggesting not to stake all the eggs into the same basket. How many validators you should rank above 0 should be up to your judgement and depend on how many operators you think are likely not malicious and can operate the service with maximum uptime.