Tezos Delegation Service Problems (and how to solve them)

Re-incentivizing ‘Staking-as-a-Service’ for future Tezos bakers

Kevin Mehrabi
Nov 11, 2019 · 6 min read

This article is for anyone who has ever thought about running a baking delegation service (or even tried it) but who changed their mind because “it just wasn’t worth doing anymore.”

This is Part 1 of a 3-part series on open-source technology—the Bakepool Project, contributed to the Tezos ecosystem by Michelson.org and talented friends.

  • Part 1 (this article): This article will outline the philosophical basis for a new baking delegation modularization technology we propose, called Bakepool; the ‘what’ and ‘why’
  • Part 2: The subsequent article will explain the methodology of bakepool; how bakepools operate, and the different roles and permissions; the ‘how’ and the ‘who’
  • Part 3: The last article will explain the future of the baking economy and how to use bakepools from any angle; the ‘when’ and the ‘what next’ and the ‘and then what’

The Goal:

Incentivize an increasing growth rate of the Tezos baker validator network by advancing the economic opportunities for baking. Modularizing Tezos baking delegation services through smart-contracts alleviates baking pain points for bakers; enabling the outsourcing of labor and resources renders, for a would-be baker, the financial worth of operating an independent Tezos baking node, whereas they otherwise would not self-bake.

Philosophical Basis

The Tezos ecosystem will always adapt itself to self-improve. This includes continually working to decentralize the baking landscape so that we do not enter a narrow big-’bakerocracy’ (pardon the neologism). The Tezos community’s standard of what it means to be truly decentralized increases every day as Tezos advances every day, along with the growth in interest of new potential validators joining the community.

Optimal fair and equitable standards are not achieved on a binary on/off switch —rather, ‘fair and equitable’ is a spectrum and a process, and a good blockchain network like Tezos armed with the unity-assuring benefit of its unique on-chain governance will continue to thrust itself further and farther on that end of the spectrum.

An example of graduating decentralization was outlined in Awa Sun Yin’s recent article, responding to a community outcry after the Babylon upgrade:

The process of developing Babylon had many firsts. It was the first time that two independent core development teams worked together on a proposal, which was a non-trivial step towards decentralisation of core development.

Some in the Tezos community believed that Babylon, as a dual-firm proposal (between Nomatic Labs and Cryptium Labs), was too centralized and that had the proposal been more inclusive of outside parties, we would have had a stronger dismount. First of all, pushing for more decentralization is a good thing. There’s always that sentiment. It’s a spectrum, it has no end.

Yet, context is key, and an arc/trend is a more informative data resource than a single point. The previous proposal, Athens, came from just 1 firm. Had 3 firms been included in building the proposal, I’m sure that many out there would say that “oh they were being too ambitious” and “they should have started leaner.” Yet obviously the overall thrust is showing that we are getting increasingly decentralized (and decentralize still, onward! we will decentralize further and beyond to new frontiers! across land and sea; on and on it goes!).

That’s what matters most, the thrust and direction of that thrust. And after seeing that logic I agree, logically the first step would be going from 1 to 2 and that’s something to truly celebrate.

Athens to Babylon Decentralization. Good start.

The Tezos blockchain community desires inclusion, not exclusion. To help pave roads and opportunities for the growing influx of ecosystem members (and therefore an influx of bakers).

Amount of Distinct Bakers in the Tezos Network shows a relatively flat growth rate

Therefore, and obviously, a larger more distributed network is better both philosophical and financial outcomes of all network optimists. That is how we increase the momentum of growth. By analyzing the baker onboarding funnel both qualitatively and quantitatively and removing critical friction points that ultimately have been bottlenecking growth—resulting in what is a growth spurt period for our validator network that is in the hundreds. Once we implement this technology, the validator network will grow to thousands, it is my estimate. There will be much more incentive for people who have been following Tezos just as much as any typical person in the community but hasn’t been independently baking because it just wasn’t a worthy endeavor for them.

More Bakers: “To self-bake or not to self-bake”

For most Tezonians, the “to self-bake or not to self-bake” question is answered by some mix of motivators that have to be satisfied to the right level, which for each individual sovereign person is a mix of many factors including:

  • Personal Interest (quotient) — belief in Tezos, engagement in Tezos
  • Financial Incentive (quotient)—investment in Tezos

We need not be concerned that a growth spurt now is too soon since there are thousands of people who are just as engaged on Tezos as any baker else, but with the friction points of baking, they do not self-bake. These are important people to have been involved in both the validation and governance process.

Pacing Growth

However, and of course, some would argue that if we go too far and go from hundreds to millions, we will risk an uncultivated mass of new validators crashing the party and risking the house. By every economic law and principle, it’s true that slow and steady growth is key.

Thus, each growth spurt should be followed with a period of technological and governance development; before iterating the onboarding funnel yet again—to renovate yet another friction point, which will perhaps be bringing growth up by another multiple—we should thus intermittently work on developing other areas of our ecosystem first.

Baking Delegation Services through now

At this point, it is justified that we target a growth spurt to bring in new bakers. In particular, those who once self-baked, but stopped. We’ve spoken to many former bakers in personal interviews and found similar patterns and problems (user-stories).

Big Bakers: Those Baking Delegation Services that are so big and popular that they do not need to market for delegates. They can rely on wallet-slotting and to bring in all the delegates they need. New delegates go to them because they are big and popular. They get larger and can capacitate more delegates. It’s a Catch-22, endless cycle of self-sustaining prosperity. Their returns justify the time and cost of any other labor associated with running a BDS.

Common Bakers: Everyone else is a common baker; those that have to actually market for delegates continuously, and constantly trying to balance marketing with their own capacity. The mental effort and legwork often become so much that they give up not only on running a BDS but on baking all together and simply end up delegating to a big baker. It’s not that they don’t want to run a node, but that with a full-time job and a family, they just don’t have the time or to maintain a node if they are just growing with the rate of inflation—if there isn’t some sort of passive income reward like the Big Bakers get by running a service.

The big bakers are so big that people trust them, and so they get even bigger, while the common baker can’t even get a word in edgewise to the delegate market. The big bakers don’t need to aggressively market for delegates, as their popularity is self-reinforcing (name recognition, and wallet pre-loaded template options), while the common bakers need to work extra hard to attract delegates for their relatively unknown services. Basically, to attract delegates, the common bakers need to fly, while the big bakers can walk.

Ecosystem Consequences

Many common bakers quit baking early on, not able to justify maintaining labor-intensive campaigns to attract customers to their baking delegation service (i.e. delegates). The ecosystem pays the cost. With fewer — active — bakers, we are left with a smaller more centralized network.

Institutional Consequences

Likewise, institutional-grade Tez (XTZ token) holders, find it hard to trust a single baker (even those that compete on ‘institutional’ service) because a single baker represents a single point of potential failure as well. To diversify risk, many institutions have been opting to establish and maintain costly in-house bakers. This removes the risk of outsourcing but this also inherits all the burden of having a central point of failure. In whichever way institutional XTZ-holders or custodians bake — it’s these activities and their pertaining actuarial risk factors for which they negotiate their respective insurance coverage policies.

TL;DR: In brief, the anti-democratic, anti-competitive, and anti-decentralization consequences of our baking economic landscape are dire.

Fear not though; we have a solution.

Now: Baking Delegation Services 2.0

See Part 2: Decentralizing the ‘Delegation Service’

The official website for the Bakepool Project is bakepool.org
Telegram: https://t.me/bakepool
Twitter: https://twitter.com/bakepool

The Michelson Blog

Michelson.org Blog

Kevin Mehrabi

Written by

I have some thoughts. Founder/CEO, doing creative product things with #Tezos and #DeFi — oh and I like TV…a lot #Bahai #TzFi

The Michelson Blog

Michelson.org Blog

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