Cardano: Don’t fear the ADA Whales

Mmmm tasty small holders of ADA. Original image source,

The large holders of Cardano colloquially referred to as “whales” are a hot topic in the Cardano community. A post titled “Will ADA Whales Ever Give Up Their Power?” on the Cardano forums raised a number of concerns about the current distribution of ADA. I’m usually more interested in the technical side of Cardano, but this topic got me thinking. After all, if ADA Whales are a problem, they must end up being a technical problem at some point.

The thread eventually devolved into name calling so I thought it better to write my thoughts here. Here are the parts of the post I thought were worth responding to (emphasis my own):

Cardano Is Supposed to be a Trust-Less System, but How Can We Trust Anonymous Whales? I’m sure they’re all nice and trustworthy mammals, but one of the most important goals of Cardano is to achieve a trust-less economic system that does not require faith in fallible human nature or unknown whale intentions. I’m not questioning anybody’s intentions, but these anonymous whales currently thwart the spirit and intent of that goal. At this moment, it appears that these whales represent an even greater potential threat to ADA than the Federal Reserve is to USD today because the Fed is at least theoretically accountable to the will of the American people indirectly through the election of the president and members of Congress, who appoint the Fed Chairperson. However, these unelected, anonymous whales are protected and entrenched by anonymity and contract law, which supersedes all other mechanisms of democratic governance.

• This argument seems to contradict itself in the first sentence: “Cardano Is Supposed to be a Trust-Less System, but How can we trust anonymous whales?” — That’s the point, we don’t have to. It’s trust-less; whales or no whales. Their “unknown” intentions don’t matter unless they all collude (I expand on this in the next section).
• The whales are unelected and anonymous but why are they a threat? They don’t have much power. The totality of their power is being able to spend their ADA and to vote on what the decentralised treasury spends its funds on.
• The worst thing they can do is vote for bad projects. If >50% of the stakeholders are greedy and shortsighted they could vote to use the treasury money to just pay themselves. This would increase their ADA balance but would destroy its value in the long term (and possibly the short term too).
• It’s in the interest of the whales to vote to fund the best projects that increase the use of Cardano around the world. Maybe they will do this badly, but I don’t know why I should expect them to do a worse job than anyone else.

ADA Voucher Sale vs. ICO. Charles/team elected to execute a private placement (voucher sale) for private investors. This approach has trade-offs: Private placements are generally more efficient, they’re perceived to be more respectable and regulatory compliant, and they avoid the stigma associated with scammy ICOs. However, private placements also concentrate wealth and power into the hands of a relatively small number of whales. Some people think this trade-off could represent a fatal flaw in Cardano’s long-term governance model. Whether that’s true or not depends on the specific terms and conditions of the ADA voucher purchase contracts. So . . .

• This starts off with a good point: The decision to conduct the ADA sale as they did was a trade off. To be clear the trade off was between: having a more geographically diverse distribution of ADA vs having dubious legal status. IOHK/Cardano foundation chose to have a well defined legal status.
• The terms of the voucher are irrelevant. Once someone has control over ADA in their Daedalus wallet there is no practical way of anyone enforcing anything on them. If there are any terms, they’re unenforcible.

Cardano’s Monetary Policy Is Not Enough to Create Long-Term Trust. Whenever I’ve seen similar concerns expressed in the past, the team directs people to the Cardano monetary policy. That’s a good start, but that only accounts for approximately 20% of total issued ADA to IOHK/Cardano Foundation/Emurgo. That doesn’t account for the other ~70–80% that is controlled by whales that are anonymous to the community. Thus, the published monetary policy is not enough to give us confidence that the ADA economy will not be dominated by a few whales. Even with stake-pooling, the current ADA distribution profile makes it impossible to achieve Cardano’s full potential for many reasons.

• The “control of economy” argument doesn’t make sense. Let’s say I have a large amount of ADA like 1%. That would probably make me the biggest whale out there. How do I use this to “dominate” the ADA economy? The ADA economy is currently non-existent. You can make a reservation at this hotel. So should I book out every room forever with my 260 million ADA until I have none left? I don’t really see the threat of large holders of ADA. Economically, having a lot of ADA just means you can buy stuff sold in terms of ADA.
• With the treasury funds, someone with 1% of ADA has 1% of the vote. I wouldn’t call that particularly dominant. The whales are not all the same person. There were 10,000 different buyers during the voucher sale. I don’t see how an individual whale can dominate anything, nor why they would collaborate in large enough numbers to have any affect.

Suggestion: Establish a Timeline to Achieve a Specific Gini Index Target. The Gini Index (aka “Gini Coefficient”) is the standard tool used by governments, the IMF, World Bank, and many NGOs to measure and compare the concentration of wealth (also a rough proxy for the distribution of political power) within and between countries/economies. The team already has the data to publish Cardano’s Gini Index right now. Given what we already know, the Gini Index is obviously very high (probably at least .80). However, publishing a Gini target and demonstrating meaningful progress toward achieving that target would be a powerful tool to reduce the fears and anxiety of many people in our community. In fact, this publicly accessible tool (and several others) could then be used to gauge the health and integrity of the ADA economy on an ongoing basis. This would give the community advanced warning so that we could hold a vote to take steps to prevent unhealthy concentrations of ADA in the future, as necessary.

• The Gini index is impossible to calculate for ADA in the long term. An individual person or group can anonymously own many addresses. It might be approximately calculable at the moment because most of the initial ADA hasn’t moved, but once that changes you won’t be able to know anything.
• The Gini coefficient isn’t used for currencies. For example the IMF and the World bank don’t calculate the Gini coefficient for US dollars, they calculate it for the United States. Zimbabwe currently uses US dollars but has a seperate Gini coefficient calculation.
• Gini is used to calculate wealth distribution in a certain geographical location. It’s considered important because of the sociological theory that areas with high wealth disparity tend to have less opportunities for poor people. The inability to pursue wealth within the system leads to people resorting to illegal and anti-social actions to try and survive. That might mean crime, social instability, riots or even revolution. There is no risk of people with small amounts of ADA forming into a rioting mob and committing acts of violence in their respective countries because of ADA based wealth disparity. The Gini coefficient is not important for ADA except as a curiosity.

Salvaging the argument

Whenever I wrestle with an idea I find it more useful to argue against the strongest possible version of that idea. I haven’t found the ADA whale arguments very convincing so far, so I’m going to try make the best case I can against ADA whales. I think the best way to start is to remind ourselves of the goals of the Cardano project. If we can show any particular goal is violated by the fact of ADA whales then we can really be concerned.

Dishonest majority (51%) attacks

The first and most basic goal of Cardano is to have a working proof of stake cryptocurrency. As I wrote in my overview of Ouroboros there are two properties that blockchains need to be a working cryptocurrency. Informally they’re defined as:

• Persistence: When a transaction is included in the blockchain it stays in the blockchain.
• Liveness: Your transactions can’t be censored.

Do ADA whales inhibit either of these properties? The answer on this is very clear and formally proven: If a cartel of stakeholders can collude to form a majority of stake then yes. So let’s make an argument that the way ADA was distributed makes this catastrophic scenario more likely.

Since the ADA whales are concentrated in Japan, there may be an easy way to figure out who they are and coerce them into handing over their stake. If an extremist government got in control of Japan and demanded everyone hand over their cryptocurrency they might be able to get >50% of stake. How could they figure it out who owns ADA? Well, as the post points out, IOHK knows who they are. They could also use network analysis at the internet backbone level to see which IPs are connecting to https://update-cardano-mainnet.iohk.io from within Japan which every Daedalus wallet does. From the IPs you could get their identities.

Another way Japanese whales could be used to attack Cardano would be to create staking pools attractive to Japanese speakers. For example, if the most popular staking pools in Japan happened to be all controlled by the same malicious group they may be able to attract enough stake to control Cardano. Although this could be done regardless of where the whales are from, it’s probably easier if they are all in the same jurisdiction and speaking the same language.

It’s important to note that the anonymity of whales is a barrier against dishonest majority attacks. The post suggests that the anonymity of the whales is a weakness of Cardano, whereas it’s actually a strength. Unlike in delegated proof of stake (DPOS) currencies, block creators in Ouroboros can remain anonymous. You don’t have to reveal your identity to be elected a block creator. Instead, cryptographic games played on the blockchain determine who the block creators are. If you don’t know who they are then you can’t coerce them into giving up their ADA. If there is any problem with Cardano it’s that the whales aren’t anonymous enough.

Greedy narrow minded whales

I think this is mostly what the post was getting at. A fundamental goal of Cardano is to create the financial stack for the developing world. To achieve this, the project may need the support of the whales. Having stake allows you to vote on what the Cardano treasury spends its money on. Given that whales are concentrated in the same area, they might hold the same values and priorities. What if they don’t care about the developing world?

I don’t really see this being an issue. In order to be the financial stack of the developing world it’s going to need to be the best general purpose cryptocurrency possible. If they’re invested in Cardano then they’re already on board with that.

Conclusion

I don’t think that the above arguments are strong enough for me to condemn how Cardano was initially distributed. It was a trade off. Maybe it would have been better to distribute ADA throughout more countries and forgo the legal benefits of having a “legit” public offering in a certain jurisdiction. But maybe not. I think the people at IOHK and Cardano have far more insight than anyone about how important a clean legal ICO is and they’ve thought about the trade offs more than anyone.

Probably best to leave your comments on reddit or the cardano forums.