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.