Review of the latest Cardano governance video.

Review of the latest Cardano governance video.

By Allen Walters | Publish0x posts | 15 Jul 2020


Here you can watch the full video:

 A summary, some thoughts on the approach, and a comparison to Tezos' current on-chain governance:

First thing to notice: Cardano's governance attempts are in its infancy and highly experimental at this stage. Starting the experiment, they will limit the process to the governance of funding. So governance will only be used decide which projects receive funding through ADA distribution. So for projects that apply for funding through newly created ADA. (Funding through inflation.) Governance for actual implementation of core upgrades will start to be part of a later stage which is expected end 2021 - 2022. The Cardano governance experiment will start out on a side-chain.

If we look at Tezos, we see that Tezos already has a full on-chain governance system which is running for over 2 years at this time of writing. Three upgrades have been successfully implemented through this system and 3 have been rejected. You can review all voting rounds on this website.
Funding can be done through inflation: an invoice with an amount of XTZ can be added to the proposal. For now, this has only been done once, for a symbolic amount of 100 XTZ, just to prove the concept works. The Tezos Foundation has $600 million of funds in assets to fund development and to kick-start the ecosystem. This should be sufficient for the next 15 - 20 years to say the least. However, the option is there to add an invoice on-chain, for projects that did not get funding through the Foundation. And if Tezos will ever run out of funding, development can be funded through the on-chain invoicing system.

Proposal and selection of new ideas
The selection process for submitted ideas in the Cardano system, is similar to Tezos' governance process. Several plans can be submitted. These will be reviewed and commented on, and finally the plans will be narrowed down to a final voting stage. One of the first noticeable differences on this subject, is the fact that it looks like Cardano allows several plans to be voted on in the final stage, while Tezos selects one single upgrade, which can be voted on to be either implemented or rejected. Since Cardano strictly starts with governing funding, this should not be an issue. This way several projects can be funded in one voting round. But when it comes to voting for core upgrades, the preference should be to have a final vote for one single selected upgrade to either accept or decline, just like Tezos has today.

Cardano voting: The obligation to lock your ADA
A key difference with Tezos' voting mechanism is this: For ADA holders, to be able to vote, you will need to lock your funds. If you don't feel comfortable locking your ADA, you can't vote.

This is an important disadvantage in my opinion. There will be a percentage of holders that will not be comfortable to lock their ADA for a certain period of time just to be able to vote. This obstacle will prevent a portion of all holders to actually vote.
Another downside of locking funds, will be that a known portion of ADA will be stagnant for a known period. This seems like an obvious fact, but it is important to note that this is a risk factor. This factor comes in to play when voting is done on important and controversial proposals and an actual large percentage of holders will lock and vote. This will result in a large percentage of locked and stagnant ADA, which will be great moment to manipulate ADA value since less of the circulating supply is liquid. These are two important disadvantages.

One of the reasons to lock ADA for voting, is to make sure to establish a voting threshold that will be matched when the actual voting is done. Likely to solve the first issue the Cardano experiment ran into: There has been a first attempt of governance through ADA holders. There has been a vote to decide whether or not the PoS testnet (ITN) would be kept alive for one extra month. In this attempt, the participation threshold of 30% of the circulating supply was not met. Just 28% voted. From which a whopping 96% voted yes. So although the obvious sentiment was a clear yes, the proposal was rejected. To prevent this from happening again, a voting threshold will be installed that will be similar to the amount of ADA that will is locked by its holders for voting purposes. This way, it is known how many holders want to vote. (Or more precisely: how many holders are willing to lock their ADA in order to be able to vote. In reality there will be more holders that want to vote, but not in exchange for locked up funds.)

Another argument would be the fact that this way, you would exclude exchanges from voting. The theory behind this is the idea that regulations would make it impossible for exchanges to lock ADA since they do not technically own them. Because all exchanges worldwide follow regulations right? Mkay. Well, if indeed exchanges are compliant, then we should not forget that they also offer their clients to earn staking rewards through delegation. Just like Tezos, Cardano makes it possible for holders to delegate their coins and earn rewards without running a node. (Initially, the whole purpose of delegating for Tezos holders, is to incentivice them to also delegate their voting rights to a staker (baker) of choice. A concept that is lost in the Cardano system since voting rights are now earned by locking your coins.)
Anyway, since earning rewards through delegation is an option, many exchanges offer this option to their clients that hold XTZ or (after PoS goes live for Cardano) ADA. To offer this, exchanges will start up nodes of their own. They did so for Tezos, and they will do so for Cardano. This is a business model for exchanges. 
To start up a staking pool for Cardano, there is no minimum of ADA you need to start out with, or to fixate as stake. But if you do, you will improve your rewards performance. It won't take a genious to understand that, to improve rewards performance, exchanges will add stake (called pledge for Cardano), which means they will fixate ADA. In the Tezos ecosystem we see that some exchanges play by the rules and only use XTZ they own in a separate basket, but some exchanges fixate XTZ that they simultaneously use as collateral for clients that hold XTZ on the exchange. To put it short: the idea that exchanges do not technically own ADA and will not be able to fixate ADA for voting purposes does not hold ground in reality: they have the keys and are able to do with them what they like. In any case, exchanges do fixate for staking. The same will go for Cardano. Exchanges will fixate ADA, and can play a part in voting rights.

Now we combine both disadvantages and see the toxic outcome: The previous voting round shows that the will for holders to take the trouble to vote isn't very strong in the first place. The need to fixate ADA to be able to vote, will not increase that sentiment, but is rather to be expected to suppress that even more. Especially for proposals that seem not that controversial at first sight, voting turn out could be slim. This will increase the voting power of whales. Among whom exchanges. Add to this the fact that 39 addresses own 40% of all ADA in circulating supply, and Cardano's whole decentralized governance system is questionable. 

In closing:
Charles Hoskinson ends the video by speaking about the governance issue in cryptocurrency as follows: "No cryptocurrency has resolved this." If that statement can be answered positively, then the same goes for ADA, while he pretty much already proclaims victory in the video. The first attempt to create a working governance solution is flawed on many levels and yet, to claim victory in the early theoretical stages is typical for the extravagant Cardano leader.
One thing is for sure, Tezos has on-chain governance up and running for the past 2 years and is at it's 7th proposal, with 3 proposals implemented after on-chain voting rounds. If you would have the opinion that Tezos' system isn't perfect yet, than you can't get around the fact that it is the most advanced and functional "sandbox" system in decentralized on-chain governance, alive today. And ADA's attempt, because that's all it is so far, is way behind and in it's absolute infancy. Tezos evolves and can change it's protocol just like Cardano intents to be able to. Only Tezos is already doing it and is by definition the first true functional governance chain. As a matter of fact, Tezos has StakerDAO which is live on chain today and uses the governance principle of Tezos to govern its DAO. Another application that is build on Tezos doing something similar is Electis. Electis is a non-governmental organization based on the following principles: non profit, non commercial, and politically and philosophically neutral. One of their biggest pilot projects is the world-wide Cross-University Voting Project, build on Tezos. Today, Electis announced the next phase of their project: Electeez: the first Tezos-based voting application for communities will soon be ready to use!

This review is based on my personal view on the theoretic approach as verbalized in the Cardano video. Kind request to people who feel the urge to comment: keep it respectful and preferably technical.

 


Allen Walters
Allen Walters

Fascinated by blockchain and future proofing cryptocurrency. Discover the tech before it gets relevant.


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