A Node Operator’s Confession of EOS DPoS Corruption [2/3]

Hahn Ryu

Published in

NodeONE

11 min readDec 7, 2023

There Is Nowhere to Hide Behind the Code

Image created with Dall-E (prompt: “draw anonymous vote-buy”)

About this Series

“There is Nowhere to Hide behind the Code — A Node Operator’s Confession of EOS DPoS Corruption” is a three-part series of articles that deeply explores the corruption and governance issues within the EOS DPoS (Delegated Proof of Stake) system. It depicts how the ‘code is law’ approach can be used to betray the ‘intent’ of the token holders via centralized exchanges’ staking practice. This series, through the perspective of a whistleblower, exposes the reality of vote trading and selling in the EOS blockchain, critically addressing the corruption process in blockchain governance. The series is structured as follows:

Part 1/3 — I Believe that the Truth Heals

Preface: Why This Series Deserves Your Attention
Confession: I Believe that the Truth Heals
Primer: Brief History of the Deterioration of EOS Governance Integrity

Part 2/3 — How to form a Cartel on DPoS Blockchains

How Vote-selling Works: Introducing the Vote Broker
How Cartel Stabilizes on DPoS: How Vote-Swapping Works
The Role of Centralized Exchanges: Staking Is Actually Voting

Part 3/3 — Master in Master’s Place, Servant in Servant’s Place

Where legitimacy Comes From: You Can’t Hide Behind the Code
Conclusion: Master in Master’s Place, Servant in Servant’s Place

How Vote-selling Works: Introducing The Vote Broker

I would like to introduce a new character in the story of EOS and DPoS: the vote broker. While the community has discussed all the issues around vote trading and exchanges voting with customer tokens, there has not been enough attention paid to the vote broker. This is the one person that exchanges will delegate their vote decisions to.

This person may be an employee of the exchange, or they may be a contractor, hired to deal with the matter of token staking and governance. This person is very powerful, and arguably the most powerful person in the governance structure of EOS.

It is not the token holders who decide who will be the controlling BPs, but the voting broker behind the curtain who votes as he pleases with your tokens.

BPs are not incentivised to engage with the broader EOS community as they only need to maintain their relationship with the voting broker behind this curtain to receive votes. The reason there are so many BPs in the Top 21 that holders do not know about is because they have no need to communicate with actual holders.

For example, in November 2022, when the MSIG(Multi-SIGnature proposal) to mint 68 million tokens was passed, the chain’s BP voting power landscape was as follows:

No matter how many votes a BP received from other sources to get into the top 21, it could never get to the top 21 without the votes of one of the two biggest exchanges that shapes the voting landscape: Exchange A, who controls 33% of total votes required to be in the top 21(44m/132m).

And there is one person who controls all voting EOS tokens custodied by Exchange A: one man who I will identify as Tony.

Among the 17 BPs that made the decision to mint 68 million tokens out of thin air without a public review process, 14 were voted on by Tony, who controlled 44 million customer tokens of Exchange A through his 24 proxies at the time behind the curtain.

Those stakers receiving around 2% APR on Exchange A had no clue an unknown foreign person named Tony would have used their voting power to make a critical decision like minting 68m tokens, which might have significantly impacted the value of their token. Nobody would have imagined.

How many people would agree with the decision to dilute 6% of their stake to keep earning 2% APR? The BPs that made this decision could never have ranked in the top 21 if not for Exchange A’s vote, which was decided by Tony.

The omission of the fact of an exchange voting with custodied user tokens, constitutes “insufficient notice” on the part of the exchange that is entrusted with the stewardship of its customer’s tokens.

This may be a huge blow to the holder, but it is a very comfortable source of guaranteed income for the BPs who have succeeded in creating a private and secret relationship with these vote brokers.

The votes you received from Tony would be maintained no matter what you did in the community or how many block generation rounds you missed, as long as you didn’t displease Tony. All any BP had to do was repay 80% or so to Tony and other brokers every Monday.

Now let’s look deeper into how cartels stabilize on DPoS via vote-swapping.

How Cartel Stabilizes on DPoS: How Vote-Swapping Works

So-called sock-puppet BPs have been a problem in the EOS community for a long time. No one in the community knows who they are, and it is unclear whether they are running a node with actual infrastructure or not, but they are like leeches who are sitting in the BP rankings and sending money somewhere on a regular basis.

Usually, the reason why these sock-puppet BPs appear is to offset the imbalance in the amount of votes between the two parties when swapping votes through 1T30V (1 token 30 votes). Vote swapping is usually done through the following process. (This is a capture of the actual vote swapping proposal DM.)

Unfortunately(?), at the time of the above conversation, NodeONE did not have enough votes to swap, but let’s assume that the BP who proposed the vote swapping above had 5 million EOS, and NodeONE had 1 million EOS.

The voting ratio is 5 million vs 1 million, so the two sides are unbalanced. In this case, the side with 5 million uses 4 extra sock puppet BPs in their affiliation and uses 1T30V to receive residual 4 million more votes back to balance both sides.

This is why there are so many unknown BPs in the ecosystem that are filling up the BP list.

As you can see in the chart above, the economic scale of sock puppet BP is 4,100 EOS per day, which is about $2,900 per day in current value, or $1m per year. Even at this point, the price of EOS is bottoming out at around mere $0.7, while its highest price was $22.

The way vote swapping according to vote volume imbalance is usually coordinated is as follows:

Chinese vote broker A and myself on the left. Tony and me on the right.

The mechanism of how the current top 21 BPs are ranked up through the ladder is virtually in the same vein. The only difference between these and the anonymous sock puppet BPs above is that top 21 BP’s trading/buying scale is larger and their brand names are (generally) known.

It’s embarrassing, but the text below is a KakaoTalk capture of me requesting a vote for Exchange A and Tony through an introduction from a BP and receiving the price proposal.

On the left is me being introduced to Exchange A via BP A. Me talking to Exchange A’s representative about Tony’s vote on the right.

As you can see from the above chat on the left, you as a vote buying BP can simply transfer 80–85% to the designated broker’s account every Monday and keep the rest of 15–20% for yourself.

A sock-puppet BP sending money to their exchange account every Monday. (Tony gets paid off-chain.)

Although 15–20% is not enough money to commit yourself for the community investing in infrastructure, hiring employees, or expanding the business, it is a good enough amount as a stable side job income. There’s nothing as sweet as this, so long as you can ignore the abandonment of ethics and the original intention of DPoS.

As long as you maintain a good relationship with Tony, you don’t have to put in much effort at all. No matter what MSIG you sign, as long as it doesn’t offend Tony, your position won’t change.

Healthy governance, or the spirit of DPoS as originally intended, hardly is the first priority of exchanges or their brokers. What matters to them is the stable income that the BPs pay to them, because this is the money they give to their customers to lock them in after some cut to the broker.

This is where the ENF and its leadership comes into play. A BP that wants to participate in the vote-trade game doesn’t have to worry too much about the chain’s small and big decisions. The implicit understanding is they just follow what the ENF tells them to do. (There are exceptions, of course.)

Follow Yves lead, so all you have to do is raise your hand when you’re supposed to, and vote how you’re supposed to, blindly assuming the ENF would do a good job: Like passing the proposal that automates transfer of the 2% inflation fund directly to the ENF, rather than maintain the ENF’s dependence on regular BP review and on-chain approval.

Can you imagine a parliament automatically approving the government budget from your taxes without a review process?

It is the vote-swapping pairing that solidifies the cartel. And this is why genuine and proficient BPs like EOS SW/eden who operate proper history nodes throw in the towel and leave the community.

Now take a look at how EOS DPoS governance is compromised by only a few exchanges and their brokers via their staking products that neglects its impact on governance.

The Role of Centralized Exchanges: Staking is actually Voting (and It’s same for all PoS and DPoS)

I’ve tried to draw a depiction of how the under-the-table politics of EOS vote-brokering and vote-trading has been solidifying the cartel using my first-hand experience of my interaction with Tony.

Now, one year has passed since the 68m tokens were minted. The landscape of BP control has changed quite a bit since then. Exchange A reduced Tony’s votes from 44m to 23m. Here’s how the power structure has changed between 1 year ago and now:

As you see above, the overall influence of exchanges (and their brokers) has reduced quite a bit. And the bar to be in the top 21 became about ⅔ of what it used to be. However, this change doesn’t imply anything meaningful other than it now is only NEARLY impossible for a BP to be in top 21 without Tony’s vote, rather than previously being ABSOLUTELY impossible within all the votes out there.

Absolutely impossible without Tony/Exchange A in 2022 means that total 149m major votes out there — Exchange A 44m = significantly lower than the 132m top 21 cutline.
Nearly impossible without Tony/Exchange A in 2023 means that total 113.69m major votes out there — Exchange A 22m = barely above the current 86m top 21 cutline.

For example, Bitfinex, which is sitting on top of 16m EOS token voting, never changed their votes which includes BPs that don’t even exist now, since March 2020. In this blissful indifference, 17m votes that the current top BPs are enjoying is likely never going to go away regardless of their performance.

Without Tony’s votes, it is crucial for you to receive votes from Bitfinex to be in TOP 21, but they have been largely MIA for 3 years. This means that you can’t ever be a TOP 21 BP, even if you are vote-buying, unless you get votes from Tony.

What it effectively implies is that the current incumbent TOP 21 structure is almost unchangeable, and thus there’s virtually no way to influence ENF and its leadership in a meaningful way, because of their symbiotic relationship in this structure.

Besides, exchanges virtually have no incentive to pay any attention at all to the ramification of their staking practice as long as their 80% rebates are constantly flowing in, unless something very significant happens.

After all, EOS is just one of many other altcoin chains where their revenue from vote-reward will in turn be given to their customers as a staking APR. This locks the exchange’s user base into their platform, which to some extent is all that matters to them.

Exchange representative worrying about revenue per vote declines as
the total amount of the votes participation increases in EOS network.

The sad truth is that they’re largely disconnected and indifferent to the ramifications and liabilities of political and economical decision making on-chain which will cause so much pain for many.

As long as it is quiet and as long as revenue flows, it’s all good. This is how Tony and his associates have been able to remain anonymous, being allowed to wield the power of the PUBLIC behind the curtain, PRIVATELY.

How DPoS can be corrupted when exchanges ignore the inherent decision making power that comes with ‘staking’.

Actually, it would have been much better if at least Exchange A held Tony accountable to Korean holders and let him cast votes while communicating with Korean holders in public, so that they can have a say in such an important decision like 68m token minting.

The problem is that Tony and brokers like him have never been held accountable while they wield the token holder’s power. All the while the ENF and its leadership have been knowingly benefiting from this inconvenient truth.

This is how the cartel is stabilized at the current stage as of now. I believe this is largely because of centralized exchanges’ structural indifference to the impact of the votes derived from their staking business practice.

Exchanges have to realize that staking is actually voting and their staking products have to be treated as such, and this is similarly true for all PoS and DPoS ecosystems, not only for EOS.

In the next article, I will go further into how the corruption of the EOS governance system may lead to other very powerful figures in the ecosystem. Stay tuned.

If you want to discuss about this article and governance in EOS, please join the conversation on the EOSproject Telegram group.