As we race onwards in creating a crypto-anarchist world, entrepreneurs are building and experimenting with various forms of self-governance. Throughout this process there is an underlying question that guides these innovations; what is the best way to decentralize power? In order to answer this question it is important to understand the history of crypto-governance modalities, and the present alternatives being developed.
PROOF OF WORK (PoW) AND ITS ISSUES
PoW was adopted by Satoshi Nakamoto to secure the Bitcoin blockchain and achieve consensus on the network. The PoW algorithm works by having all nodes race to solve a cryptographic puzzle. This puzzle is solved by miners, and the first one to find the solution gets crypto as a reward, along with miner fees. As part of this process, miners verify the legitimacy of transactions and bundle them into blocks. Miners come together in what are known as pools to increase their chances of solving the cryptographic puzzle. Within these pools they combine their hashing power and distribute their awards evenly.
Many blame mining pools for creating centralization within Bitcoin. In his interview with Liberty Block's own Jeff Berwick, Dan Larimer states that the mining pools are in fact the "Block Producers" of the PoW network in Bitcoin - not the actual miners.
Mining is also blamed for an unnecessary amount of energy consumption. Digiconomist currently has BTC consuming over 62 Terawatt hours (TWh) of electricity - which is enough to power over 6 million homes in the US.
Both PoW and Proof of Stake (PoS) achieve the same purpose of avoiding double spending as they verify the legitimacy of each transaction. In an attempt to curb the massive amounts of electricity that PoW uses, and to discourage possible centralization via mining pools, PoS was introduced as more innovative and more effective than PoW. PoS grew out of the idea that allowing everyone to compete against one another - as in PoW - is just wasteful.
PROOF OF STAKE (PoS)
PoS uses an election process where one node is randomly chosen to validate the next block. PoS has no miners but instead has validators. Validators are not chosen completely randomly. To become a validator, a node has to deposit a certain amount of coins into the network as stake.
In other words, where in PoW you invest energy, in PoS you invest the digital currency itself inside the system to prove that you are committed to check the security rules and help with the security of the network.
The amount of coins at stake determines the chances of the validator being chosen to forge the next block. That is, the probability of being chosen to validate the next block is proportional to the amount of money you put up as stake.
If a node is chosen to validate the next block, it checks that all of the transactions within it are valid. Upon verifying this, the node signs off on the block and adds it onto the blockchain. As a reward the PoS validator receives the transaction fees of the block as payment.
PoS validators lose part of their stake if they approve fraudulent transactions. As long as the stake is higher than the fees, we can trust them to correctly do their job. If they don’t do their job right they lose more money than they gain. If a node suddenly stops being a validator, his stake (plus all of the transaction fees he got) will be released after a certain period of time to make sure there were no fraudulent blocks.
PROBLEMS WITH PoS
There are a few problems with PoS that the community is competing to solve. One of the biggest problems is that people who have lots of coins in stake earn more coins. That is, the PoS algorithm increasingly favors wealthier validators as it selects validators. It cannot be completely random because the amount of coins held in stake has to be factored in.
Again, the randomness is proportional to amount of coins held at stake. This proportionality- by necessity of its design- favors wealthier people who would get chosen more frequently. The wealthier nodes would in turn earn more transaction fees, becoming richer and increasing their chances of being chosen as a validator even further.
Another set of issues arise from the fact that the coins you are committing into the PoS system are part of the system, and the system determines their value. PoS’s origin of value is intrinsic to itself. This opens the door to many layers of possible manipulation between the digital currency and its native digital environment. For example, you can cheat within PoS by bartering coins in a way that garners you more value in other ways within the same PoS system.
(As a counter example, in Bitcoin’s PoW this does not occur because what one invests into the system is energy outside the system via mining equipment. This extrinsic investment of energy keeps Bitcoin’s PoW blockchain from being manipulated from within the PoW consensus system. This does not mean that mining itself is free from being a source of extrinsic manipulation. PoW mining can still be centralized into a 51% attack. This is the reason why various communities are moving away from PoW mining.)
Ethereum and EOS are the two communities that desire to move away from PoW mining as they create better versions of PoS. Each community holds to their own roadmap as to how to create the best PoS protocol.
ETHEREUM’s CASPER PoS
Ethereum is currently on the final stages of implementing the replacement to its original PoW algorithm with Casper PoS. What makes Casper different from other PoS protocols is that it implements a process by which they can punish bad actors or events.
Under Casper, participants can become validators by staking Ether. As validators, participants discover blocks to be added to the blockchain. A block is validated by the placement of a bet on it. If the the block is accepted, then the validators receive a reward proportionate to their bet.
If a validator acts maliciously, and bets nothing, then they will get immediately reprimanded with all of their stake slashed. To slash is to take away a bad actor’s deposits “if the protocol determines that they acted in some way that violates some set of rules”.
It is impossible for there to be nothing at stake. Malicious elements will always have something to lose. Casper also punishes those validators that go offline unintentionally or not. This property aims to reduce censorship of transactions.
Casper has been worked on by two different teams as the overall work of two projects: Casper the Friendly Finality Gadget (FFG), and Casper the Friendly GHOST: Correct-by-Construct (CBC). Casper FFG is the hybrid PoW/PoS consensus mechanism, which should be implemented in a few months—reducing Ethereum’s inflation by 80%. This will be the version implemented first.
Casper CBC is the end-game for Casper; the full transformation in making Ethereum completely PoS from being completely PoW. Upon its final creation, Casper CBC is supposed to be based on a unique type of protocol- that is still being created- which adjusts itself dynamically against any “ideal adversary.”
EOS DELEGATED PROOF OF STAKE (dPoS)
In the spirit of creating a more secure network, dPoS works by the election of witnesses/delegates that run the transmitter/block producer. Only witnesses are able to validate blocks and confirm transactions. Unlike PoS, dPoS is not a system open for anyone to be able to validate transactions by simply staking money. That is, you cannot buy your way into being a block producer; you have to be voted in.
Only 21 Block Producers (BPs), at a time, will be allowed to create new blocks as witnesses. EOS token holders cast votes for whom they wish to become one of the 21 BPs. The lapse of time between voting sessions occurs every 252 blocks. Elected witnesses are constantly under pressure of being voted out for someone else- if they do not do a good job.
Voting is perpetual, within EOS, and people in the community can remove their votes of support from any bad delegates or BPs. This easiness of removal, combined with competition around being a block producer, gives EOS its edge in securing the network. That is, it is this competition that EOS sees as key in removing bad actors.
EOS is still under development and won’t be released until later this year. EOSIO Dawn 3.0 was recently released. At its core, EOS is supposed to be a highly scalable platform on which to run distributed applications. Upon completion it is projected that its blockchain will be able to support millions of transactions per second.
VITALIK GOES AFTER EOS
The most recent exchange between Vitalik Buterin and Dan Larimer highlights how their own underlying philosophical assumptions affect the development of their respective PoS protocols. They are both creating governance modalities based on their understanding of human persons.
Vitalik sees the corruption of governments throughout the world as the manifestation of human nature, one that needs to be curbed as we build this new world. This is the intentional source of Ethereum’s punishment system; that corruption needs to be stopped at its source by building out mechanisms that make it extremely difficult for bad actors.
He points out that cartels are already forming throughout the world which aim at controlling the governance of cryptocurrencies; “Of course, it does not matter at all who the specific actors are that are buying votes or forming cartels; this time it’s some Chinese pools, last time it was ‘members located in the USA, Russia, India, Germany, Canada, Italy, Portugal and many other countries from around the globe’.”
The Ethereum mastermind emphasizes how Chinese EOS supernodes have already commenced to strategize around forming alliances and buying votes. The EOS response to curbing this type of corruption came out in the form of issuing a strongly worded letter stating that “buying votes will be against the constitution.” Vitalik mocks this for he sees this mirroring the same political landscape that we are trying to leave. Vitalik does not view EOS’s dPoS as an effective mechanism that forbids bribery.
Ethereum’s creator is adamant in creating protocols that will forbid this type of collectivized corruption from taking place. He takes a jab at Larimer by accusing him of replicating the same types of allowances that the previous model of world governance permitted; “blockchains and cryptocurrency, originally founded in a vision of using technology to escape from the failures of human politics, have essentially all but replicated it.”
EOS’s defense against corruption, bribery, and voting fraud is looked upon by Vitalik as trite; he sees voters within EOS as not being incentivized strongly enough against corruption. That is, he sees Larimer as being presumptuous to expect people to act with good and fair intentions. Overall, Vitalik thinks that Larimer is too naïve on human motivation and warns that dPoS is hedging its bet on a system that depends on the ethical preference of its users.
The flaw in all of this, of course, is that the average voter has only a very small chance of impacting which delegates get selected, and so they only have a very small incentive to vote based on any of these high-minded and lofty goals; rather, their incentive is to vote for whoever offers the highest and most reliable bribe. Attacking is easy. If a cartel equilibrium does not form, then an attacker can simply offer a share percentage slightly higher than 100% (perhaps using fee sharing or some kind of “starter promotion” as justification), capture the majority of delegate positions, and then start an attack. If they get removed from the delegate position via a hard fork, they can simply restart the attack again with a different identity.
DAN LARIMER DEFENDS EOS AND CHAMPIONS THE MARKET
Larimer commences his answer to Vitalik by emphasizing the difference between their philosophical approaches to technological governance. He opens up with the picture below, along with the description: “Vitalik, for one, welcomes our new artificially intelligent overloads.”
The EOS creator responds to Vitalik’s critique on bribery and vote fraud by stating that people will always prefer to participate in communities were all stakeholders are treated fairly by those who are elected as witnesses to run the transmitters. He goes on to emphasize that “stakeholders who support the corrupt transmitters can also be removed from the community.”
He also mentions that there is a separation of powers between those with stake and the witnesses that control the transmitter/block producers. That is, “no one gets monopoly power to charge bribes (fees) to use the transmitter.” Even if a cartel were to be formed between stakeholders and transmitters, as warned so by Vitalik, both corrupt entities could be voted off by the community.
The most important aspect of Larimer’s response revolves around his clear understanding of both his and Vitalik’s philosophical motivations. He points out that Vitalik is idealistic for desiring to manipulate/control human nature via technology. Larimer has an opposing worldview to that of Vitalik; one that champions market forces over technology.
There are three incontrovertible premises upon which I base my work:
- The vast majority of people have good intentions
- You cannot prove a negative
- There is no such thing as a closed economic system.
— Dan Larimer
Larimer accuses Vitalik of being naïve in his own way for wanting to create the perfect code, the perfect algorithm for humanity; “Vitalik is looking for the preverbal Dues ex Machina (God from the machine) to save mankind from its own tragic corruption.” Here Larimer criticizes Vitalik for thinking that everything will be perfect once the perfect code is written.
EOS’s mastermind is of the mindset that perfect code for governance is an illusion. He explains that attempting to use technology for a perfect governance system implies that we would be relying on strong artificial intelligence. Artificial intelligence is dependent on the subjective input of imperfect human beings. This by default makes any AI imperfect for human governance: “this intelligence needs to be programmed with some definition of “right” and “wrong” and that definition must be measurable. Unless the AI system is omniscient, it must derive its conclusions from the potentially byzantine subjective inputs of individuals.”
Market over technology is Larimer’s philosophical stance. For Larimer the system that is going to win is the one that is most agile in pivoting to market forces. That is, the system best for governance is the one that can best adjust when errors are found, or change towards a better idea when introduced. Larimer is building EOS in a way that it can evolve with the market.
While Vitalik and his team build Casper PoS to explicitly provide a direct channel for punishing bad actors, within the protocol itself, Larimer sees market forces as the best means to punish bad actors: “I, on the other hand, am looking to create tools to be used by competing groups of good people where at least 2/3 are honest… I believe people are fundamentally good. The more effective a group is at maintaining its integrity as it grows, the larger the group will grow. The more corrupt a group is the faster it will die.”
Throughout his writings, Larimer draws a distinction between open economic systems and closed economic systems. He sees Vitalik’s world view as one that aims to control the economy of Ethereum from within Ethereum. That is, he sees Vitalik not understanding that market forces go beyond anything we can control. This is seen in the way that Vitalik aims to set the parameters for good behavior within Casper PoS.
Larimer believes that we ought to understand the governance of the economy to come forth from outside any actual protocol; the market itself is self-regulating. That is, the protocol cannot control the way people behave, but rather the protocol can mutate in accordance to market demand. EOS is being built with an understanding that there is no such thing as a closed economic system. For Larimer the market is something that will always be beyond any one single entity’s encompassment. That would be tyrannical from a free-market libertarian perspective.
Dan Larimer concludes by stating that he is not a moral absolutist and believes that “each community might have its own definition of ‘right and wrong’.” He concludes his response with his goal in creating EOS; “…to lower the barrier to entry for the creation of new communities that allow free market competition to reward the most effective communities and punish the most corrupt.”
EOS Constitution
The crypto-governance of EOS has begun to take shape in the form of a Constitution. In explaining this constitution, many within the community refer to it as a preliminary step; that is, as a measure to be seen as a “starting point not as an endpoint.”
The shared desire for the EOS community is to safeguard the growth of a free market environment; one governed by the interactions and parameters set by voluntary exchange.
EOS’s constitution is set to be dynamic. This dynamic governance encourages community involvement. We currently find the community strengthening its consensus via continual proposed changes to the constitution.
WHO WON?
The answer to this question belongs to you, the readers. Some of you may find Vitalik to be smart for aiming to set up a system that incentivizes good choices, while punishing bad behavior. Others may find this stance as seemingly tyrannical. Vitalik bases his stance on the corruption found throughout human history, as present via government, bureaucratic, and corporate authorities.
Dan Larimer holds to his premises based on praxeological principles; the principles of libertarian philosophy. Larimer believes that the market will sort itself out and good actors will prevail. He does not want to create a space that aims at completely controlling human behavior- even if it is under the guise of good intentions. His goal is to give people the tools necessary so that they may govern themselves as they please. Some may find Larimer’s stance as naïve and as being too hopeful on the goodness of human persons.
The underlying stances here are the same that classical liberals once experienced. Is human nature fundamentally good or evil? Do people need to be controlled to keep them from their own bad behaviors? Do we find the best in humanity when we give human persons absolute freedom?
Meditate on what this means for you and for your world. Then choose wisely which governance model you prefer to build your future on. The good thing about this crypto revolution is that we now have a choice.
-Rafael LaVerde