On March 18th, 2021 Block.one requested feedback on the stake-based voting rewards proposal. Prysm Group, a consultancy firm that specialises in blockchain economics and governance, wrote a review of Block.one’s proposal. Our focus will mainly concern the game theory and potential outcomes of voter rewards and key points in the Prysm analysis.
Summary
One of the main concerns we have with the proposal is the lack of clear description of the problems that the proposal is aiming to solve. Without a stated intention it’s difficult to organize our response without a precise, nuanced definition of the potential goals. However, we do illustrate outcomes we expect.
Overall, we do not see how this proposal makes any significant positive change. Most notably, it will increase profits for the largest custodians of the network, who have not invested their own monetary assets into EOS. These custodians already control EOS governance and receive the most rewards. This disconnect makes it fundamentally difficult to support. Furthermore, more tokens for the largest custodians also means more power to vote for their interests, thus increasing risk of centralization and dominance over voting.
However, there is the possibility of increased economic activity by token holders in general. The two primary outcomes would likely be reinvesting their voter rewards back into EOS native projects or trading into assets external to EOS. Whether or not these outcomes are beneficial in any significant way is not clear or predictable.
Key Points By Prysm Analysis: Voter Rewards
On Page 6 of the Prysm analysis they state “Currently, accounts that delegate tokens receive no rewards or remuneration from the network for this activity” … continuing on page 7 “Finally, unlike the current delegation mechanism, the staking mechanism provides rewards to stakers”.
The above assertion is one of the primary issues we have with the analysis and conclusions thereafter. While the current system does not have a reward mechanism built into the system contract, rewards are received by token holders via vote buying. Vote buying is one of the natural outcomes of DPoS. Voters are regularly awarded a percentage of block producer rewards in exchange for their votes.
The stake-based voting rewards analysis is made on the basis that the new proposal provides something new. But in practicality, adding more rewards does not do anything new. However, it does adds more inflation within the same vote buying game theory we see today.
Most concerning to us in the proposed model is the ability of the largest custodians of EOS tokens (those who have not bought the tokens themselves but use them for vote buying, reciprocal voting purposes and profit) will be able to add even more profits by receiving additional staking rewards. We do not see how this point in particular will benefit the network as a whole. There is little to no evidence that the tokens received by any large custodian through vote buying are being used to invest back in the EOS ecosystem.
To the contrary, it’s been well documented and expressed by the EOS community that the largest custodians have unduly power of the top 21, in a way that is not commensurate with their monetary investment or day to day commitments to the network. This point in particular is debatable. While we would like BPs to be more involved in both block production and investing back into incubation of network projects etc. the network as it stands remains robust and has not suffered outages.
Prysm later expanded on the outcomes that may come from voter rewards…
On Page 16–17 “The proposed stake-based voting and rewards mechanism would provide two types of benefits to potential stakers: rewards earned in EOS tokens which can then be used in the network or traded…”
We believe this point is one of the only redeemable potentials of the proposal. There remains a possibility that increased inflation would result in more investment back into EOS by token holders. However, it’s unclear if this outcome would be significant. The majority of increased rewards could leave the network, which would be counter productive for the growth of EOS.
Suggestions
Our primary concern for the longevity and adoption of EOS is capital investment into the ecosystem. If network inflation is increased, capital should be directed to a mechanism that can delegate to credible projects building on EOS and be held accountable.
The new voter rewards proposal does not direct capital in an organized way. If inflation is increased, we suggest entities like WPS, Eden and/or EOStarter be capitalized to make meaningful investments into the EOS ecosystem. Even if all three options failed, the learning process would yield valuable information about how to proceed, if at all, with a funding mechanism such as WPS, Eden or EOStarter.
