Risk-Reward Based Governance for EOS

On New Year’s Day, Block.one CEO Brendan Blumer made waves in the EOS community with a tweet suggesting that the EOS constitution be modified to allow block producers to pay dividends to users who contribute to their stake.

While a few people responded to this suggestion with varying degrees of horror, Blumer’s suggestion is well grounded. Let’s look at the reasons why.

Unlike most other blockchains, EOS has a constitution with governance features baked into the smart contract. Anybody who opens an EOS account must agree to the contract of the constitution.

Any EOS token holder who violates the constitution is in breach of contract, and could theoretically be subject to civil action.

EOS and other “delegated proof of stake” (DOPS) blockchains have “block producers” instead of “miners.” Block producers are selected by users “staking their tokens” to a given block producer. The candidates with the top 21 stakes are selected as the active block producers. The 21 active block producers produce blocks on rotation.

The current version of the EOS Mainnet Constitution prohibits Block Producers (BPs) from paying any benefit to users who stake tokens to them.

Article IV — No Vote Buying
No Member shall offer nor accept anything of value in exchange for a vote of any type, nor shall any Member unduly influence the vote of another.

The idea behind this rule was that limiting the benefits users may get from block producers to the service of forging blocks would create an incentive to vote for quality block producers. If you vote for bad block producers, it might reduce the value of your EOS tokens.

However, the problem this creates is that users are asked to stake a substantial quantity of capital in order to choose the block producers, with no return.

Holders of capital are always looking for return. This is why people bought EOS tokens in the first place. What inevitably happens is that large token holders are able to make verbal back-room deals to commit their stake to certain block producers for certain benefits, but small token holders are not able to do this.

This clause of the constitution is effectively unenforceable because it would be very difficult to prove a backroom deal had been made. Therefore this rule restricts the rights of conscientious token holders, while dishonest token holders can violate it with a certain degree of impunity. This gives dishonest token holders and dishonest block producers an advantage over the rest.

Blumer’s suggestion to amend the constitution to allow block producers to pay dividends or other benefits to users who stake tokens to them, is a step toward block producers being governed like joint stock companies.

Changing the rule would also be a step towards democratization because it will allow small token holders to invest their tokens for a return from a given block producer on an equal footing with the big guys.

From a personal rights perspective, Blumer’s suggestion is a step toward more freedom. If someone has purchased some EOS tokens, why should their property rights be curtailed by a rule that prevents them from being paid a return for staking them to a BP?

When EOS was created, the goal was not to create a democracy, but to create a business platform for distributed apps with reliable governance. The governance ideas built into EOS were designed to reward good behavior and punish bad behavior, within a very narrow definition of good and bad. Bad behavior is narrowly defined as breach of contract, or stealing other people’s tokens, which is also breach of contract.

The original reason for including the no-benefits rule in the EOS constitution was to discourage “vote buying” by Block Producers. However, there is nothing wrong with vote buying in and of itself. What is wrong with a BP paying dividends back to the users who invested in them?

The problem we are actually trying to avoid is negligent or malicious bad performance by the BPs. The current rule casts its net too widely, and is also effectively unenforceable.

Update:

What Brendan Blumer is proposing is a bit different than what I originally interpreted his tweet to mean.

Based on subsequent tweets, he is suggesting something like this:

  1. BPs may offer rebates.
  2. Rebates will be paid to all tokens who voted, regardless of which BP they voted for, via some kind of mechanism built into the EOS blockchain.
  3. Non-voting tokens will not receive rebates.

So, this idea is more of a participation incentive for users to get involved with voting for BPs. The economic effects are likely to be quite different from what I I have argued in the comments below.

[I have moved the section where I suggest an alternative implementation to a separate article: An Alternative EOS Staking Algorithm]