The current week in the crypto space has been marked by the crushing of the Terra/Luna ecosystem by a financial concerted maneuver. Luna token price went from about 100 dollars to zero in just a few days. This attack would have not been possible, or at least could have been lessened, if a better assesment of the weaknesses in the design of the UST, an algorithmic stable coin associated with the Terra blockchain, had been done by all the involved participants.
The Terra/Luna fiasco left countless investors in losses but, above all, it left a feeling that the crypto space is still both immature enough as to be successfully attacked by anyone with a few hundred million dollars; and naive enough as to dump billions of dollars in the pocket of any convincing entrepreneur, with insufficient regard to the actual product being delivered.
A few years ago, a different yet comparable in size fiasco ocurred in the crypto space. Back then, Block One, a firm led by another convincing entrepreneur managed to receive north of 4 Billion dollars from unsophisticated investors to build the EOS blockchain. The investors skipped many pertinent details of the project: the whole legal frame, the roles and power jurisdictions of the involved actors, the mechanisms of accountability; pretty much everything except the talent and good intentions of the involved promoters was lightly disregarded. Given such an artless behavior, it is actually quite remarkable that the EOS blockchain currently exists at all, and is up and running.
Luna and Block One incidents have in common the size of the losses for their investors, which range in the billions. They share the presence of broken promises from their promoters/executors. Both projects were touted as some kind of panacea during the collection of funds phase and they also share the lack of rigor from investors during the decision process. Both projects have many similarities but they are not identical. One key difference between them is the nature of their broken promises. That difference, and its implications for decentralized communities governance is the subject of this article.
In the case of Block One, the executors failed to deliver the products, functionalities and behaviors that they were expected to. On the contrary, in the Luna case, the promoters had already delivered a product that, according to them, was able to maintain certain overall behavior but didn't. Block One broke a promise on a future product; Luna's promoters delivered a product that didn't keep up to its promise. That's the difference. For the purpose of this article, the Block One style of fiasco will be denoted as 'B' and Luna's as 'L'.
In the area of decentralized governance there are currently two versions of fractal democracy. This two versions are, as of now, embodied in the Eden and Fractally communities which run very close to the EOS ecosystem. The Fractally protocol evolved when it was noticed that there was a lack of accountability on the promises made by the Eden participants. In other words, the fractal democracy designers found the Eden protocol particularly prone to fiasco incidents of type 'B' and, in response to that, designed Fractally.
The main difference between Eden and Fractally is as follows: Eden awards money to the involved players for their ability to bring the corresponding community into consensus of what needs to be done and then, after receiving the money, commit to do it. On the other hand, Fractally awards participants for the value they report to have already brought to the community during the last time window, typically a week.
I content that, under the current design, Fractally protocol not only is prone, but actually incentivizes fiasco events of type 'L'.
To see this, suppose for a moment that the whole crypto ecosystem was managed under the Fractally protocol and the "respect" people gave to each participant/project is measured in dollars invested in that project. Further suppose that most players dollar cost average their investments in a weekly basis. So, every week, each competing project receives some amount of "respect" from the market participants. Now, let's look at some questions regarding such panorama.
- According to current Fractally protocol, how does the community value the contribution from each project? Answer: by listening to what that project's promoter says about it. I.e, during a typical Fractally session, if some participant says the did some X contribution, his group mates grade that contribution according to what this participant says about it. In our example, if Luna was one of the competing projects, the community will award "respect" to that project by asking Do Kwon about it.
- Second, what time do each community member has to analyze the size and the implications of each contribution? Answer: practically zero, just the few seconds each presentation lasts. In our example, that would be equivalent to have each market participant decide, within just a few seconds, weather to grade EOS above of Luna or vice versa
- Is there any evidence that suggests that such a time interval is insufficient? Answer: Plenty. As a blatant example, look at the Luna/UST protocol with which people interacted during entire weeks without noticing its flaws and, although this is a particularly conspicuous case, it is well known that most people don't really know the technical details of their buys.
- Do the above points promote the emergence of Do Kwon type of characters who happen to be very convincing but are actually delivering flawed products. Answer: Of course!
- Is it possible that vast proportions of the community fail to identify such characters/projects until is too late? Answer: Yes, again, the clearest example is that of Luna which, was positioned by the market in the top ten of the crypto projects for quite some time.
- Is the periodic nature of the payments (Fractally meetings), which aims to accurately average overtime the earnings of the best contributors sufficient enough to prevent events that cause long lasting damage to the system? Answer: Nope. The statistical nature of the experiment ensures that over time the best projects (participants) will be promoted to the top. But this doesn't guarantees that in the process, some pretty bad grading occurs.
Those are the flaws I see in the Fractally protocol as is running today. Some of this flaws were already pointed out by another Fractally member by the name of Doug Butner. Further study, analysis and improvement of the protocol is needed. I hope make some future contributions in this regard.
Sincerely,
Sapiens