Cardano - A sustainable and democratic cryptocurrency needs an inbuild counterweight to compensate for the dominance of the rich
In nature, there are mechanisms that reduce the growth speed of plants after they reach a certain size by starting to give nutrients back to the smaller plants. In POS cryptocurrencies like Cardano were the number of coins is a limited resource, a similar system needs to be employed if they pretend to be democratic and sustainable. Cardano claims to create a democratic system, but I see huge problems arising if the amount of ADA coins is the only measure of the weight of your vote.
To stress the problem, I make up some numbers: Would you believe in a democracy where 90% of the votes belongs to 100 people? This example is not made up out of thin air. The ICO made sure that most of ADA coins are in the hands of a few. Now (Byron), there is a period were coins are distributed since the staking mechanism is not yet introduced. However, once Shelly starts people will try to hold the largest possible amount of ADA to increase their staking award, and the coin distribution will potentially stop or even reverse. The holder of large amounts of ADA or staking pools will quickly become irreversibly dominant, and the chance of a fair democratic decision is lost forever. If there will be no mechanism that ensures that coins are given back to the majority of the community, dominant players will act like black holes continuously reducing the number of circulating coins since they will accumulate the largest portion of the network fees and rewards. All this might be a process of many years, but I clearly see this coming if no counterweight mechanisms are introduced before the democratic system is implemented.
There are a few possible mechanisms that I can think of:
- The stake that is used to create a staking pools cannot be used in the voting system or at least weights significantly less. The same would need to be implemented for large stakes. This way, the holder of large stakes have less dominance in the voting system. A lock-up time of staked ADA coins would need to ensure that holder of large stakes cannot withdraw their stake within a short period to avoid cheating of this control mechanism. Giving the voting power to about 80% of the participants (yellow area in the diagram) ensures that enough Cardano holder with larger stakes can participate in the voting procedure.
- On the other hand, there should be a mechanism that ensures that there is an incentive to hold ADA coins up to a healthy level and to reduce the incentive for extremely large amounts. The total amount of ADA coins per person should never be limited but there needs to be a cap that limits the staking reward for the extremely rich upper 1-5%. This capped reward can be given back to the 80% of the community (yellow area) and would thus ensure the liquidity cycle of the system and would help to stabilize the coin price. In my opinion, a mechanism like this is needed in a system with a fixed amount of coins (45,000,000,000) since otherwise, all coins will eventually belong to only a few large holders that are not interested in spending their coins.
Enjoy this and think about how we can create a sustainable system for Cardano and other cryptocurrencies where everybody can profit and make a difference: https://youtu.be/w8HdOHrc3OQ
Figure: A power-law graph as an example to demonstrate the coin distribution among the holders. To the right is the long tail, and to the left are the few that dominate (also known as the 80–20 rule, see Wikipedia). A favorable mechanism should ensure that the 20 % of the coin holders that hold most coins and receive the largest portion of the rewards, have not the voting rights to dominate the rest of the holders. Also, there should be a mechanism that ensures the circulation of the coins by distributing a portion of the staking reward from the upper 1-5% in the system to the rest of the system.