The decentralized governance on many cryptocurrency networks can be advantageous. Especially, when compared to the centralized authority of the legacy banking and monetary systems. There is a caveat; blockchains have well-touted advantages outside of crypto circles, but what about the design of the consensus mechanism? How transactions are validated can have a litany of ramifications rippling outside of the bounds of the DAO (Decentralized Autonomous Organization). For example, the environmental impact of proof-of-work validation, the consensus protocol used most notably by Bitcoin. Because this consensus mechanism requires several crypto miners to utilize large amounts of electricity as they race to validate the transaction on the blockchain and create a new block in the chain, Bitcoin has naturally become a target environmentalist.
One solution to the energy consumption conundrum is to shift the consensus protocol from proof-of-work mining to proof-of-stake validation. Several sources have noted that proof-of-stake consensus reduces energy consumption. In proof-of-stake blockchain operations, validating the new block by the machines of token holders, their holdings function as collateral for the ability to confirm the transaction. The validator is randomly selected based, avoiding the competition to finalize the new block. Even the popular cryptocurrency Ethereum is looking to transition to a proof-of-stake protocol. Are there any potential drawbacks to this governance model? One major issue that can arise from the proof-of-stake method of transaction consensus; is highlighted in the Juno Network’s Proposition 16 controversy.
The incident occurred back in October 2021, when the Cosmos Network launched the new token Juno. Cosmos initiated a stakedrop, similar to a cryptocurrency airdrop where coins of a new digital currency are sent to “.. wallet addresses to promote awareness of the new..” digital assets. Except, a stakedrop entails awarding individuals a sum of new tokens for holding an existing cryptocurrency on the blockchain network. At the time, Cosmos had an original coin offering, ATOM; the network matched an individual’s ATOM holdings with Juno with a ceiling of 50,000 tokens. One of the “whales” or entities that hold a large amount of ATOM on the blockchain contrived a crafty remedy to game the asset drop limitations. The “Whale” portrayed itself as but an investment group, acting as multiple individuals, and divided wallet addresses across several users and funneled it back to a single coin wallet.
By voting yes on this proposal, you agree to reduce the gamed whale address to 50k (Whalecap set per entity before genesis).
Note: The facts are that the Juno genesis stakedrop was gamed by a single entity. Willingly or unwillingly is not relevant to this matter. The whale gamer poses a growing risk to the network and the stakedrop error may be corrected. Gamed funds were consolidated into 1 address right after genesis which proves that 1 entity had custody over all addresses (linked below). This considerably broke the stakedrop rules of having a max 50k ATOM: 50k JUNO per entity. At the time of the genesis stakedrop, there was no way for Core-1 to pro-actively counteract this behavior. If this information would have been known before launch, 51/52 of those addresses would have been removed entirely.
Effectively, the resolution aimed to confiscate all but 50,000 tokens of the Whale’s Juno tokens. The Whale’s holding exceeding the cap has three consequences: a concentration of on-chain voting power (proof-of-stake consensus mechanism the more you hold the decision-making authority you possess), the Whale can bribe other validators on the blockchain, and this entity can wipe out all the liquidity in the exchange. This has resulted in a Prisoner’s Dilemma. Instead of negotiating a compromise, both parties acted in their interests by defecting.
The Whale initially defected by attempting to violate the terms of the drop. The network defected by seizing the purported collectives’ coins. The results have been lackluster; this policy transgresses against one of the core pillars of blockchain currencies, the “immutability” of the blockchain. Some pundits have expressed that this move could shake the confidence of prospective investors. There is some fear that other networks adopting similar policies without any impartial due process. Madison’s “tyranny of the majority” problem assumes its most modern incarnation, perhaps? Aside from this issue, what if Whale acted as middleman holding assets for other investors? Is it just for innocent third parties to suffer? If this entity was a consortium or an investment firm, the commandeered funds did not even truly belong to the Whale.