Quadratic Voting for Passive Stakers

[vixcontango]

Validators’ Agency Problem
Prop 848 to halve ATOM’s max inflation rate has revealed a weakness in how the Cosmos chains are governed. On Cosmos chains, validators can vote with the stake delegated to them and if an individual staker decides to vote differently, their individual vote overrides the vote of the validator. This sounds sensible in theory but in practice it could become problematic. The reason is that validators can exert outsized influence over the network without actually having paid for that influence. It is the stakers who paid for the ATOMs and the validators sometimes use the economic power of the delegated stake against the interest of their stakers. A lot of stakers aren’t involved in the governance of the chain, they are mainly interested in maximizing the staking rewards they get. As such many stakers select big validators who sport low commissions and don’t really keep track of how their validators participate in governance. That lack of interest and participation allows the validators to use their stakers’ voting power to influence voting on chain proposals to benefit their own interest over their stakers’ interest.

In the financial industry, this is a well-known problem called the “Agency Problem”. To become a financial advisor or a broker, a person not only has to pass a test of financial knowledge but also has to commit to acting for the benefit of the client. This is called fulfilling your “fiduciary duty”. When a person gives his money to another person to manage (his financial agent), it is not clear that the agent will act in the best interest of the client. The agent could very well act in his own best interest. For example, a broker can recommend frequent trades to a client in order to generate higher commissions to himself. Trading frequently usually results in bigger losses than usual because of the trading commissions. As such the broker is giving advice that benefits him at the expense of the client. For that reason, financial industry regulatory bodies require that financial agents commit to a Code of Ethics in order to make decisions that will benefit their clients.

On the Cosmos chains, the validators are governance agents. They can vote instead of their stakers. Yet they have no such Code of Ethics and they are not required to vote on governance proposals for the financial benefit of their stakers. Whether some proposal is for or against the benefit of stakers can be difficult to determine and that would be too much regulation over the validators.

4 days into Prop 848 we have a clear cut case where some big validators are clearly voting against the wishes/interest of the stakers and small validators.

42 validators have voted YES on this proposal and only 15 have voted against NO, yet 2 of the validators that voted NO (Allnodes and Dokia Capital) are so big that they are overriding all the other validators that voted YES. Percentage wise here we have 73% of the validators voting YES and their vote is being overridden by just 2 very large professional validators. 73% is well over what is considered a “super majority” decision (2/3rds).

The situation is even more lopsided where individual accounts have voted. There 72K accounts have voted YES vs 4K that have voted NO. 94% of accounts have voted YES.

Yet, the NO vote is currently winning.

I would say that this is not a governance system that is working well because validators are misusing voting power for which they never paid. I want to suggest a different way to perform voting that will minimize the misuse of the voting power of passive (non-voting) stakers by validators.

Quadratic Voting for Passive Stakers
I suggest using quadratic voting only for passive stakers.

• For the self-bonded validator stake, the validator will get 1 vote for each of his ATOMs.
• Each staker who votes will also get 1 vote each of his ATOMs.
• For passive stakers though, the validators will get a smaller amount of votes according to this simple rule: in each passive staker account, the amount of votes will be equal to the number of ATOMS divided by the amount of digits of the ATOM amount. For example, if a passive staker has 10,400 ATOMs in his account that number will be divided by 5 (the number of digits in 10400) to get 2080 votes for that account.

With this rule, passive stakers voting power is still being used but in much smaller doses. The active stakers who vote in the proposal will get to have more say over the passive stakers. Validators still vote with their financial stake but they don’t get to dominate the active stakers the way they currently do.

[effortcapital]

we actually recommended a similar mechanism and reference quadratic voting in this post.

We tried to extend it further by actually making validator governance power a function of the ratio to validator self-bond to total delegated amount to not make it solely quadratic voting, but I do think a form of quadratic-type voting for passive stakers is 100% the right direction

Cosmos Hub Tokenomics - Fiscal and Governance Policy (Blockworks Research)

TL:DR - As a follow-up post to our Cosmos Hub Fiscal Policy post here, where we introduce a Dynamic Liquid Staking Tax, Blockworks Research is proposing to change ATOM’s fiscal policy from a static 10% community pool tax to a multi-pronged tax approach that includes a (in addition to the LST tax): 1. Vote Power Tax 2. Dynamic Community Pool Tax Although outside of our scope for fixing ATOM tokenomics, Blockworks Research also proposes the idea of “Cubic Delegation”, which we go into more deta…

[Noam]

I’m quite a fan of this idea. I think it quantifies engagement and skin-in-the-game quite well and should reward desired behaviour.

A couple things to think about:

• Dividing by number of digits is not the right approach. You get these kind of situations where 9999 ATOM is more powerful than 10000 ATOM. A better way to handle this is to simply take the root multiplied by a specific governance controller parameter, and apply that to passive votes. If that parameter was set to 0.05, 10040 ATOM would have 10040 / √(10040) * 0.05 = ~2004. While 9999 ATOM would be 9999 / √(9999) * 0.05 = ~2000

• Another concern here is the calculation of total voting power, and as such, quorum. Every delegator is a passive voter until they vote. This means that the total voting power will fluctuate as more accounts override their validator’s vote. This doesn’t necessarily have to be an issue, but it does make the vote outcome more unpredictable and warrants further investigation wrt its potential impact.

Edit: another way to approach this is to set a desired “active voter” ratio (expressed in ATOM, not in number of accounts) and have the parameter slowly increase or decrease based on how much ATOM is actively voting compared to passive voting over a certain period of time. This would function similarly to how the bonding ratio affects the inflation rate. I.e. if less people actively vote, passive voting power would get nerfed more. If more people actively vote, passive voting power increases (although it will always remain below active voting power of course). This helps us in having to avoid “guessing” the ideal parameter to incentivize active voting.

[Govmos]

We are awaiting a comprehensive review and feedback for @effortcapital’s extensive report on tokenomics. The set of propositions presented goes beyond initial perceptions.

While we typically employ the “context, analysis, conclusion” framework for our posts, in this instance, the parallels between @Noam’s proposition and @effortcapital’s are so significant that we find it fitting to assert that, at Govmos, we believe the version put forth by Effort Capital provides more context, notably incorporating the ratio of self-delegation into the formula. In brief, this factor holds significant importance within the broader context of their comprehensive proposition. Consequently, we wholeheartedly support both propositions, emphasizing that governance attention should be directed towards the expansive scope introduced by the complete tokenomics revision proposed by BlockWorks Research.

[vixcontango]

I like the formula adjustment. Makes sense.

On the quorum issue, currently we have passive stakers who are not voting being counted (because their validator voted) as if they have voted to reach quorum. We have been fooling ourselves that we have been reaching quorums. I think the better way to do it is to maybe lower the quorum threshold to 30% (or some other number) but then only count “real” votes (validators stake only + active stakers) towards the quorum.

Minimum Balance for Eligible Accounts - Spam Prevention
I have seen a couple of posters talking about spam bot activity during the Prop 848. Having a minimum of 1 ATOM for it to be an account eligible for voting makes sense to me. I might even be open to a 10 ATOM threshold. An account needs to have a minimum amount of economic interest to be eligible for voting. 50 cent accounts do not display sufficiently large economic interest. We could also make that configurable setting so that it can be adjusted if the ATOM price changes a lot.

[VK_S16]

Agree that the governance needs some improvements.

[r_2]

@vixcontango

ave seen a couple of posters talking about spam bot activity during the Prop 848. Having a minimum of 1 ATOM for it to be an account eligible for voting makes sense to me. I might even be open to a 10 ATOM threshold. An

It’s no different than joining a political party, you pay a fee to be a member , so as a bot deterrent it makes sense to have a minimum stake amount required, also if you join a staked rewards pool its much like joining a party, reward payout should not be the only item incentivizing you to join the pool, when these pools vote on a prop, it should be obligatory for the pool operator to notify all stakeholders in the pool directly, with an immediate option to unsubscribe from the pool’s vote position yes/no, followed by a choice of abstain or take the opposite position. so no different than a modified email unsubscribe, then subscribe where verification is done say via wallet address+ email & password.

[DavidLoyal]

Hey hi everyone. I really appreciated those of you that Support my Regulation Vote. And those who against with hate mind set. Next year 2024 my industry would start roll trading. Actually my own Regulation isn’t a broken guys. everything has a plan. And nothing gonna happen. Because am still a charge power Control as Financial institution. Thank you all.

[BlocksUnited]

Wallet providers need to be prohibited from running validator nodes. It’s a total conflict of interest. Look how much power Cosmostation has to vote in their own self interest. They should only be allowed to run pools that stake with 25+ validators and charge 50bps-100bps for managing the pool. They can create their own token too, to give token holders a say in which validators receive the pool’s stake.

Wallet providers should also be forced to display validators lowest stake to highest to encourage decentralization, not highest to lowest as they currently do.

If they want more revenue, aggregate DEXs and charge a percentage for in-wallet swaps.