Note: I would like to announce that I am excited to join the Rhizome P-Rep team. The other Rhizome team members have been generating enlightening ICON content for far longer than I have, and I am excited to be a part of their team. Please take a moment to view our P-Rep proposal and website, and please follow us on Twitter; most importantly, don’t forget to vote for us when ICONSENSUS begins!
If you’ve been reading this series, it’s no secret that I’m bullish on ICON as a project. That being said, a true analysis of the project would be incomplete without a consideration of possible points of failure.
Fortunately, a majority of the points discussed are avoidable — but avoiding them will require the right behavior from the community. ICON’s decentralization hands us a great deal of power, which means we have significant impact over the long-term success over the project. This is how it’s supposed to be — it just means we have to be diligent in how we participate in the process.
I should also note that this isn’t an exhaustive list — there are certainly other factors that may serve as roadblocks to the success of the project that I haven’t thought of — and perhaps nobody could foresee — so please treat this article as more of a brainstorming session rather than a concrete analysis.
The two risks described below are from a “macro” perspective that relates to the blockchain technology in general, but would of course have an impact on ICON as well.
Blockchain Adoption Falls Short
This is probably the most obvious possible point of failure, but unfortunately an area where the community limited control.
Despite the fact that Bitcoin has been around for 10 years, and Ethereum for nearly half that time, the blockchain industry is still in the very early stages of development and adoption. Many of us have been following this industry for multiple years — which feels like a “long time” — but is nothing relative to the big picture of achieving true mass adoption.
Remember: the promise of blockchain is that it may revolutionize nearly our entire society from a technological standpoint. Those changes don’t happen over night.
The biggest obstacle to blockchain — and ICON — is enterprise adoption. That means large entities — primarily corporations and governments — will need to integrate blockchain services into their internal systems in order for us to truly see “mass adoption.”
For entities that have existed for decades — or even centuries, in the case of governments — throwing out their existing systems in exchange for a technology that is yet to be proven as functional over a long-term is a significant risk; if they get it wrong, and the technology isn’t capable of delivering what it promises, then the consequences could be dire — especially for governments.
That’s why they are wading into the water, rather than jumping in. (For many institutions, they aren’t even in the water yet, let alone the beach.)
As this “experimentation” phase continues, the vast majority of these institutions may decide the benefits of the technology aren’t necessarily worth the risk. Sure, some may decide to try it out; but unless we reach an important tipping point — a critical mass — it’s unlikely that the true demand for blockchain services will ever match the speculative hype that defined the 2017 bull market.
Obviously, it’s hard to envision a scenario where blockchain adoption falls short in general, but prevails when it comes to ICON.
Fortunately, momentum seems to be on the side of adoption. More institutions are exploring blockchain today than were yesterday; more individuals are leaving legacy industries to jump into blockchain today than did yesterday; and more people (including the President of the United States) are aware of blockchain today than were yesterday. Overall, momentum and progress are clearly on our side; but despite that, there is still a chance that this momentum could fizzle out down the road.
While the ability of government to “shut down” a decentralized network is likely impossible, governments hostile to blockchain technology (for whatever reason) could implement regulations within the surrounding blockchain ecosystem that could stifle future growth.
Overly-restrictive regulations surrounding exchanges — including outright bans — could shut off the flow of liquidity into the market.
A clampdown on the issuance of tokens from centralized entities (see: Facebook)— whether these be restrictions on ICOs, IEOs, airdrops, or other distributions — would also restrict funding available for nascent projects in need of fundraising.
Extreme taxation on crypto-related capital gains could also significantly curtail the industry. For instance, imagine if a government decided that any rewards received as a result of staking were subject to a special capital gains tax of 90%? That alone would significant dissuade participation in proof-of-stake networks like ICON.
A government doesn’t need to “ban” a cryptocurrency to dramatically hurt the growth of the technology. A savvy government (in conjunction with others) could go after growth areas.
Do I think this is likely? Not at this point. Had governments wished to take this action, they would have presumably done so when the technology was younger and easier to curtail. Additionally, with many governments embracing the technology — such as Seoul — there is a greater chance of a “race to the top” in crypto among governments, rather than a “race to the bottom,” where nations are more concerned about advantages of the technology adopted by other countries, rather than the perceived risks it creates internally.
Challenges for ICON
The risks described below are related to the ICON specifically, although projects with similar governance structures or issues could theoretically be subject to these concerns as well.
The community has been tasked with the responsibility of electing strong candidates to serve as P-Reps in order to govern and operate the ICON Network. Accordingly, if we fail to elect quality P-Reps — or if the candidate pool is too weak — the future prospects of the network will be severely limited.
There are a few ways this could potentially play out.
First, there could be too many of one type of P-Rep elected. If all the eggs are placed into the Marketing basket, for instance, we may have excellent marketing for the network, but at the expense of development — both product and business. While it would be great for retail investors to have greater knowledge of ICON, if nobody is doing the work to onboard new enterprise clients, or provide products to lure those clients, then the network won’t generate value, and eventually those retail investors will leave when the price of ICX fails to continue moving upward due to lack of widespread demand.
Second, P-Reps may not be adequately prepared to operate a node from a technical standpoint. There is partly an incentive against this created by the 6% penalty burn for unreliable P-Reps. I also sense that P-Rep candidates have taken this seriously and are doing whatever possible to ensure a healthy node operation. Nonetheless, a node operation isn’t as easy as flipping a switch, and if a certain number of P-Reps fail to carry their weight in this regard, it could have disastrous consequences for the network.
Third, the community could demand their P-Reps support policies that may be appealing in the short-term, but possibly fatal over the medium-long term, with P-Reps carrying out those demands in order to retain their elected status. As an example, the community could demand P-Reps vote to significantly alter fees for ICX transactions in order to require a higher amount of ICX is burned for each transaction. Could this boost the price of ICX in the short-term? Definitely. Would businesses be as interested in utilizing a network that is prohibitively expensive? Almost certainly not.
This concept is nothing new in an electoral system, of course. Politicians all the time adhere to the short-term demands of today’s constituents to the detriment of future citizens. However, it’s on us, the community — and P-Reps, to a certain extent — to prevent this from happening.
The examples above are all extreme examples, and there hasn’t been any indication we are moving toward any of these outcomes; however, even if they aren’t as extreme as above, behavior among both P-Reps and the community that drifts in any of these directions could start to have a negative impact on the network.
Another issue could be the centralization of the ICON network into the hands of just a few P-Rep candidates. This could be either as a result of the community collectively only supporting a few candidates, whale P-Rep candidates who vote themselves in at overwhelming rates, an exchange voting themselves in with ICX held in their cold wallet, or a combination of all the above.
Remember, voting power among P-Reps is allocated by weight, meaning that each P-Rep’s voting power is not “one of twenty-two,” but rather, directly correlated with the amount of ICX that has been delegated to their candidacy. That means a P-Rep with 10,000,000 delegated ICX has 10x more voting power than a P-Rep with 1,000,000 delegated ICX.
Fortunately, over time, ICONists, as well as DBPs and EEPs, will receive rewards at a higher rate rate collectively than P-Reps, which will gradually distribute voting power back to the community at large.
Once again, it’s ultimately up to the community to stay vigilant and ensure they are distributing their votes in a manner that mitigates the chances of centralization among just a handful of powerful actors.
Along similar lines, there is a risk of cartelization as well. This could happen as a result of several large ICX holders working together to concentrate power among themselves to the detriment of the network.
This could be done by:
- Paying under-the-table rewards to other whales, or even exchanges, to ensure their ICX is used to vote for cartel members
- Using their voting power — if it’s sufficient — to vote off other P-Rep candidates who may have accrued enough voting power to counteract the votes of the cartel
- Spreading their earned rewards (and thus ICX they can delegate) to other members of the cartel in order to strengthen their vote and further consolidate power.
Fortunately, ICON’s tokenomics are designed in a manner different from those who have suffered from cartels. Most importantly, ICONists are financially rewarded for voting, meaning it’s far harder for cartels to accumulate the votes necessary to consolidate sufficient power.
Here is a quote from 2infiniti, in his article about collusion in Delegated Proof of Contribution models:
With high participation from the entire community, it becomes difficult to cheat. High delegation rate increases the amount of ICX needed to win, making it extremely expensive to win majority power. Greater the total number of accounts, harder it will be to organize bribes. When the community acts together, they can also create and vote on policies to combat against bad actors. When overall difficulty to cheat increases, collusion problems naturally becomes lesser of a problem.
While cartels are certainly a threat, they are very hard to form if the community participates in the governance process in a manner sufficient enough to dilute the power of a potential cartel. But that means the community has to pay attention and vote!
The presence of liquidity (adequate buyers and sellers) for the ICX token is important for the long-term success of the project for the following reasons:
- P-Reps will need to sell a portion of their rewards in order to fund their operations (and, to a similar extent, so will DBPs and EEPs). Server expenses and HR costs cannot necessarily be paid in ICX, meaning ICX will need to be sold in order to cover these operations; if there is limited liquidity, running a P-Rep operation becomes more difficult.
- To outside observers, a lack of liquidity is a signal that momentum for the project may have stalled out; while the fundamentals may be as strong as ever, it will give pause to possible enterprise clients if ICX markets are illiquid.
- On a similar note, enterprise clients will require ICX to pay fees for network operations; if they’re unable to easily purchase ICX as a result of liquidity issues, it makes it more difficult to utilize the network, reducing confidence in the project.
To be clear, this is a bigger-picture problem and one that is still a ways off. Additionally, I believe that it’s likely that ICX will be listed on higher-volume exchanges such as Binance U.S. and Coinbase in the future, following decentralization and continued momentum.
This is another area where the community can step in — and has with success — in order to help prevent a potential problem.
As mentioned in the beginning of this article, there are almost certainly other factors that may create issues for the project. Many blockchain projects have fallen by the wayside for a number of reasons, many of which I believe ICON is not at risk of (an exit scam, or hack, for instance).
Fortunately for us, ICON has designed a model of governance that should help protect the project from the governance issues that have created problems for other projects; however, the model is built around the idea that the community will be active participants in governance and vigilant about who they elect as P-Reps. With a financial incentive on the table, this becomes far more likely; however, even with that being the case, many community members are considering voting either using an exchange (which is something I believe is not a good idea), or simply voting for ICON as a P-Rep in order to accumulate rewards without having to think much about governance.
Ultimately, the success of the project depends on active and thoughtful participation from the community as a whole. That’s a good thing and, frankly, I wouldn’t want a blockchain project to be any different.
It just means we have to be ready to take on the responsibility.