Governance of DeFi protocols is often “token-weighted”, i.e., one dollar-one-vote.
In real life, this very non-democratic sort of voting is generally not used except in the very undemocratic world of corporate governance. This kind of governance obviously produces results that favor the wealthy. Which, frankly, is what they are designed to do. And, as we’ve seen in the corporate world, this kind of governance is open to abuse of many kinds.
So today’s “DeFi” systems that use “token-weighted” voting faithfully replicated the worst of corporate governance, except even more opaque, at lightning speed, and outside any legal framework. What could possibly go wrong?
Now, it’s also obvious that “weighted” voting is not exactly an “innovation” no matter what proponents may claim. But the cryptocommunity has actually invented at least one new thing: a new term, a “governance attack” on a cryptocurrency system [1].
If I understand correctly, this word refers to various ways to legally subvert weighted voting, to essentially buy the result you want.
In the specific case discussed by Thurman, the alleged technique was simple: borrow money to buy enough votes to secure the desired outcome. Presumably, the result would pay off to more than cover the borrowing.
This is sort of like a conventional proxy fight except that it is opaque and happening at light speed. It can be very difficult to prevent this sort of manipulation, and it may not be detectable until after the fact. And, obviously, there is no appeal or legal recourse. “The code is the law.”
It’s kind of a mystery to me why anyone would voluntarily put up with this stuff. It definitely isn’t democratic, in the sense of representing the interests of all stakeholders. It’s not fair, nor transparent. And I wouldn’t trust any “governance” that can be so easily and opaquely manipulated.
All of which is ironic, no? Because the whole point of Nakamotoan governance is to be democratic, fair, transparent, and “trustless”, i.e., trustworthy because there is no human in the loop.
But this mischief is innovative, so we needed a new word to describe it.
So, I’d say that “Governance Attack” is not only a good name for a band, it’s a candidate for CryptoTulip of the Year recognition.
In the last year, NFTs have become the flavor of the month, not only in Nakamoto’s happy kingdom, but rapidly spreading wherever people are trying to make money on the Internet. Which is everywhere, all the time, no?
The “big idea”of NFT’s is they are cryptographically signed certificates of authentication. More important, with executable contracts on a blockchain, they can be copy resistant, and tradable. Thus, the technology assures that you can “own” the digital token, and can buy, sell, and trade tokens.
Blockchain-based services make it really easy for anyone to generate NFTs, and to put them up for sale. So, basically, the Internet is now host to a giant, world wide, “sale of work”.
All of this means that you can do anything with an NFT that you could do with a “certificate of authenticity”. So—collectables.
Some NFT’s are linked to digital “assets”, such as images, videos, animations, or interesting packages. Others are linked to analog “assets”, such as (physical) art works, designer fashions, or even real estate. Some of these NFTs may be linked to real world ownership, but many of them are essentially trading cards, representing affinity, not ownership.
So, what are you buying when you buy an NFT?
Well, you are buying a digital object that contains some kind of claim to be connected with something. You can be sure that the claim cannot be erased or changed. But is the claim itself valid?
Ah, there’s the rub.
The fact is, an NFT is exactly as authentic as whoever created it. Given that NFTs are created by “some guy on the Internet”, there’s gonna be problems.
Basically, NFT markets are pretty much unregulated. Notably, services such as Opensea profit mightily from user generated content, but do not police IP or much of anything.
“In fact, none of the 682,569 items listed when searching Squid Game on OpenSea have any relationship with the intellectual property (IP) holder as it has not licensed anyone to use the trademark for a digital blockchain asset.”
(From [1])
Of course, there is always murkiness about fair use and the bounds of infringement can be hazy. But a lot of NFTs are almost certainly infringing IP in ways that have little if any artistic merit and a lot of commercial exploitation.
This is, as Ewen says, a recapitulation of earlier Internet history. And, as in the case of music and videos, it is pretty clear that NFTs will be policed by IP lawyers and take down orders.
I’ll note that this will be a big issue in formerly-Facebook’s “metaverse”. What exactly will the rules be? How will formerly-Facebook police their world? How will they walk the tightrope of encouraging creators to contribute and protecting creators from exploitation? We’ll have to see.
One thing that is different with NFTs compared to earlier Internet technologies is that the blockchain technology assures that unauthorized copies and uses can be traced to the buyer, not just the creator and distributor. So, the lawyers can and surely will come and take away your illegal NFTs.
“it is not only the creators who may pay the price but the collectors as well.”
(from [1])
So, basically, you need to make sure that before you buy and NFT, you know that the seller has the right to sell it to you. And it it seems too good to be true, well, you know. Don’t buy it.
NFT’s have been the flavor of the month this year in Nakamotoland. This Nth order crypto technology is built on top of “smart contracts”, which are built on top of blockchains, and enables anyone to buy and—more important—sell cryptograpically unique digital tokens. Basically, these are Internet enabled box tops.
As I have remarked before, this is hardly groundbreaking economics. The main “innovation” is that pretty much anyone can do it. And pretty much anyone is doing it.
It turns out that this is not illegal, and apparently not against company policy until he was caught. It couldn’t be illegal because NFT’s are basically unregulated, and NFT market places are completely unregulated. They may look like conventional commodity trading, but they differ in one crucial respect: securities laws do not currently apply. You’re on your own. Good luck.
This has been a bit of a black eye for Openseas and NFTs overall. I mean, if the punters realize that they are being ripped off, they might walk away. Or they might sue. Or the gendarmes might move in.
This goes to show, you can’t trust Openseas, or any other NFT marketplace.
What? Wait! Nakamotoland is specifically and fundamentally about making finance trustworthy via “trustless”, decentralized technology. NFT’s use Ethereum (in the case of Openseas), so they are decentralized and “trustless”, no?
The problem is, of course, that the marketplace (Openseas in this case) is not decentralized, nor is it “trustless” in the Nakamotoan sense. Trading on Openseas or similar platform uses cryptocurrency and blockchain-based executable contracts, but the actual transactions are done on a perfectly conventional on line system. An online system run be a company, with a handful of Carbon-based units including a “head of product”.
NFT Market (e.g. OpenSeas)
Centralized X
NFT
Decentralized
“Smart Contract”
Decentralized
Cryptocurrency
Decentralized
Blockchain
Decentralized
Public Key Cryptography
Decentralized
Oops. Openseas is very non-Nakamotoan
If NFT markets operate pretty much the same as any other online market, shouldn’t they be regulated to assure fair play for customers? That’s certainly a good question.
As Will Gottsegen comments, regulatory oversite would be a good thing for customers and for the industry itself [2]. Needless to say, the brilliant innovators who run NFT markets are strongly opposed to making them follow the same rules as everybody else. Who wants government agents and lawyers sticking their noses in this gazillion dollar bonanza? But, as Gottsegen says, “To help build that trust, oversight may be a price companies are willing to pay”.
“The crypto industry has a notoriously antagonistic relationship with regulation, but if NFTs are going to take off in a more mainstream way, buyers need to know they’ve got a fair shot.”
(From [2])
I’d say that regulation is coming, probably pretty soon, like it or not.
However, I have to wonder just how well the NFT craze will fare if they become more like conventional assets. Carefully accounted, audited. Taxed. Etc. If the overheads get too high, why bother with NFTs? Why not just buy and sell conventional assets?
At least some, and possibly a lot, of the interest in NFTs is the DIY simplicity, that lets anyone do it. If the bar for trading gets too high, then it will price out the millions of little people who make NFTs different and interesting. If NFTs become something that only celebrities and corporations can do, they are nearly pointless because celebrities and corporations already can do this stuff without NFTs.
It’s a dilemma. Unregulated NFTs let anyone (including me) play the game. But regulation is necessary to make the game fair for the little guy (like me). But regulation may well push little guys (like me) out.
Non-fungible tokens (NFTs) are far and away the flavor of the year in Nakamoto’s happy kingdom. I think that there is tremendous synergy, because the psychology of collectibles and collecting meshes so well with the psychology of Nakamoto land. In NFT land, anything is possible and wealth falls from the sky without effort (or even a plausible plan).
Like many successful inventions, NFTs take an existing technology and invert one of its features. The key feature of Bitcoin and other Nakamotoan cryptocurrencies is that they are like “coins”—every Bitcoin is interchangeable with any other Bitcoin. They are fungible (substitutable).
NFTs are, in contrast, each unique and, importantly, only one person (entity?) can “own” a given token at one time. They are essentially signed certificates of authenticity.
This technology has been mashed up with “collecting”, to digitize the business of dealing in collectables, especially “collectable” digital objects.
Being digital means the certificates can tie into other digital technology including executable contracts (for buying and selling NFTs, but also for royalty schemes), as well as linking to other code to create complicated multimedia objects (e.g., Berkeley’s patent disclosures).
Cool! Interesting twists on old business models, plus some people making zillions! No wonder this is hot stuff this year.
This summer Logan Kugle discusses the impact of this technology on “art”, i.e., art markets [1]. The big news, he says, is that this technology makes it possible to prove ownership of a specific digital object, e.g., a bit of digital art. You may be able to endlessly copy the bits, but you can’t forge the NFT that proves who owns it.
This technolgy is changing how artists are paid, especially for digital art. One interesting thing that NFTs can do is implement royalty schemes. E.g., the original creator might automatically receive a cut of each subsequent sale of his or her work. Even better, blockchain apps are low overhead and potentially available to every creator. You don’t have to work through galleries or get “representation” to sell your art. You just need a computer and the Internet.
Kugle notes that these digital certificates also make buying and trading easier. It is relatively easy to reliably validate ownership without special access or technology. Buyers don’t need to go to galleries in order to authenticate the art. And, of course, digital trading can be low overhead and borderless.
So this is all good.
What can possibly go wrong?
First of all, NFTs may make is possible to buy and sell art, but they don’t make art, good art, or even salable art. Creators still have to create stuff that people want. Which is still hard, no matter how you actually sell it.
Second, the value of “art”, digital or not, NFT or other, is subjective. Worse, markets are competitive. On the Internet, there is one giant, planetary scale art sale. Your stuff has to compete for attention and buyers with all the artists in the world. That’s hard, and NFTs have leveled the playing field and made things even harder in this way. The Internet is one giant sidewalk sale–huge, chaotic, and crowded.
Third, NFT markets generally operate via Nakamotoan cryptocurrencies. Royalties likely are paid in Ethereum or some other cryptocoin. Kugler comments that, to date, these tokens aren’t terribly useful without converting to real world assets and/or conventional currency. It isn’t always easy to convert, and the exchange rates have been insanely volatile.
At the moment, NFTs are a notable, and I’d say “unexpected”, success story for blockchain technology. They have created a big “bump” in the digital art market. And, Kugler says, this has in turn created a bump in the use of blockchains.
And if this is one of the few truly successful use cases for Nakamotoan blockchains I know of; I have to say that neither Satoshi Nakamoto or Vitalik Buterin anticipated it. This is not what Bitcoin or Ethereum or anything was created to do.
Which makes the NFT art scene even more interesting, no?
Logan Kugler, Non-fungible tokens and the future of art. Communications of the ACM, 64 (9):19–20, 2021. https://doi.org/10.1145/3474355
Back in the day, before the WWW, we had the first networks (barely). What did we want to build? The World Computer.
When the WWW booted up, what did we want to build on top of HTTP? The Internet Computer.
And we actually have built things kind of like A World Computer. SETI@home. Condor. Clouds.
So it’s no surprise to an old gray hair like me that when people see a blockchain, they want to build: The World Computer.
And, indeed, “smart contracts” a la Ethereum are sort of, kind of, a global computing facility.
But like all previous World Computer concepts, blockchains haven’t delivered yet.
Personally, I’m not holding my breath. Operating a large-scale computing system is really complicated and hard. (I helped do this for many years, so I know what I’m talking about. )
And, honestly, the Internet is a terrible platform to try to build on. Heterogeneous. Buggy. Unreliable. Out of control. Weird economics. Unknown and unknowable legalities.
A blockchain is layered atop the Internet, adding complicated decentralized and asynchronous protocols. All of the above plus more latency, opacity, and unmodifiable write-once processes.
Yeah, that sounds promising.
So I read this summer of yet another shot at this concept, Dfinity [2]. Actually, the first I heard of this project was a troubling headline, “The Dramatic Crash of a Buzzy Cryptocurrency Raises Eyebrows”, referring to the sudden implosion of their token just weeks after launch [3].
“Even in the famously volatile crypto market, [Dfinity] stands out”
(from [3])
It’s over before I even heard of it, and certainly before it had a chance to prove itself.
Obviously, there has been plenty of chit chat about this billion dollar swan dive. Many people note that there was suspicious trading that favored insiders, combined with restrictions on small investments (i.e., ‘outsiders’), and some Reddit mischief to help things along [1].
But what did they think they were doing, and why was this supposed to be different this time?
Looking at the technology, Dfinity gets full marks for complexity. One of the big ideas is to try to reproduce the concept of virtual machines in the form of essentially virtual blockchains. This is kind of interesting, letting different organizations and projects have their own “sub net”, a blockchain with parameters that work for them. Eliminate the “one size fits all” problem, and potentially improve performance by keeping the relevant network to reasonable scale and locality.
Now, all these little domains are supposed to be part of a larger tapestry, potentially interacting in sensible ways. I don’t fully grok this part, but they seem to be dreaming of possibly composing specialized chunks into larger applications.
How would all this happen? Dfinity works like an operating system, specifically, like a cloud management system. It manages these virtual sub groups, assigns work, and apparently manages the physical resources that run the virtual blockchain nodes.
This is pretty much what a big cloud does, except Dfinity doesn’t “own” the hardware, it negotiates with independent nodes via Nakamoto-style protocols. Computing resources run Defnity, and are assigned to some sub net. Dfinity oversees the behavior of nodes, detecting dropouts, reassigning work, and otherwise running the show.
This is standard stuff for distributed operating systems, except Dfinity is doing it Nakamoto-style. Decentralized. (“Damn your eyes! I said decentralize!”)
It’s all crazy complicated, to the point that I seriously doubt that anyone has any idea how it would really work.
For example, a classic Nakamotoan blockchain has one synchronization / consensus protocol, for better or worse. Dfinity lets you use one of three (I think).
So, if one unicycle is hard to ride, let’s ride three unicycles. That will be much easier!
For me, the “technical” documentation was revealing because it has extremely detailed description of the funding rounds, and moderately detailed explanation of the economic model (i.e., the ‘coins’), and extremely shallow description of the actual technology. And, as usual, there is no refereed publication or independent verification of the software.
But there definitely are interesting unverified claims such as:
“At genesis, the IC will have a block rate of one block per second (bps), then move up to ~1,000bps by this year-end. According to Williams, there is theoretically no upper limit to blocks per second.”
(from [2])
Hmm. Infinite speed? On top of Etherum running on the regular Internet?
Right.
(By the way, the “no upper bound” assertion is supported by a citation—to a tweet.)
I also love statements like, “The ecosystem will find a natural balance of how many rewards are required to achieve an optimum amount of participation.” [2]. (Insert animation of a hand wildly waving here.)
Wanna bet? (Judging by the 95% loss in value [3], apparently a lot of people wanted to bet “no”.)
All in all, I would predict that, should it ever fly at all, Dfinity will have trouble getting enough users to be stable and secure. It will probably experience that particular hell of being too expensive for users, but at the same time losing money for operators. Everybody loses. (Except the insiders who already cashed out, of course.)
From the complexity and opacity of the technology, I’d say there is a reasonable probability of a serious bug or security flaw. For that matter, there is a reasonable possibility that it would crash in response to an unexpected event, e.g., a big Earthquake somewhere, or a regulatory change.
As my hoard of Ethereum looses half it’s value in a week (the story of that hoard is for another), we read of catastrophic bugs and daylight robbery. What a wonderful world Nakamoto has created!
We are used to hackers stealing passwords or exploiting bugs to make off with millions in a few seconds. But this month we have seen a blatant fraud make off with millions, with a sneering insult for good measure.
As Keven Reynolds reports, “People Behind Crypto Protocol DeFi100 May Have Absconded With $32M in Investor Funds” [2]. If I read this right, basically “some guys” on the Internet booted up yet another Decentralized Finance platform, and got people to buy their tokens and otherwise give them money. Then they skipped town with the cash, leaving behind an insulting note.
This scam is daring, but it certainly isn’t innovative.
Nakamotoan philosophers tout the blockchain as “trustless”, solving the problem of having to trust your government regulated bank. Somehow trusting “some guys on the Internet” is supposed to be better than trusting your own government and institutions.
Right.
On the Ethereum front, the EF has reported that they finally fixed a bug that is said to have been a “clear and present danger” to the whole system [3].
I don’t totally grok the details, but I gather that there was a bug that let hackers force the innards of the system to spin, chewing up time and work, disastrously slowing down transactions. In the case of Ethereum, you are also burning “gas”, and potentially losing work as transactions time out. Basically, some serious sand in the gears.
After several years, this bug has been fixed. Why did this take so long? For one thing, crypto protocols are getting insanely complicated, and Ethereum’s executable contracts are even more complex. There are many features, and everything happens in a decentralized environment with lots of players and economic forces as well. So it’s hard to know exactly how things are going to work. The bug in question was a wrinkle in the code, but the damage was due to the economic ramifications of certain ways the code could be made to work.
Even when a bug is identified, Ethereum’s engineering makes it difficult to respond. Ethereum follows the general Nakamotoan philosophy adopted from the open source software community: changes are proposed, implemented as a “fork”, and then voted on by the users. If the fork is adopted by most users, the change is accepted. Otherwise, the change is rejected.
Ethereum is a benevolent dictatorship, so changes can be forced through without waiting for overwhelming consensus. Indeed, Ethereum 2.0 is edging nearer to reality after many years of development, even though most users really don’t care enough to support the work. But First Citizen Buterin insists, and it is happening, so it is happening.
The result of this bass-ackwards engineering process was that developers worked for three years to develop patches to address the bug. These fixes were included in a recent update, code named ‘Berlin’. Only after the fork was executed was the bug disclosed officially [3].
“With this blog post, the intention is to officially disclose a severe threat against the Ethereum platform, which was a clear and present danger up until the Berlin hardfork.”
From [3]
OK, this kind of security by obscurity is not ideal. But it’s also hardly unusual. Developers often prefer to keep problems quiet until a fix is available and in place, for obvious reasons. It’s a risk, but often the best of bad options.
This particular incident actually keeps my confidence in the Ethereum folks. This was a difficult situation, and the fix was non-trivial. And they appear to have acted in the interests of everyone, as best they could. (As usual, President-For-Life Buterin was personally involved, too.)
But it does once again show that these cryptocurrencies are no more bulletproof than any other software heavy enterprise. It also shows, once again, the difficulty of engineering this stuff, once it is in the field with millions of dollars riding on it. How long can these projects keep dodging bullets?
I’m still trying to grok Decentralized Finance, AKA DeFi, the hot trend in cryptocurrency circles. Basically, anything a bank or shadow bank does can be recreated digitally. Operating at light speed, without brakes. No grownups involved.
As I have said, this may be “disruptive”, but it isn’t especially “innovative”.
What can possibly go wrong?
This month saw thefts that are so common they have a generic name: a flash loan attack [2].
How does this work?
As far as I understand, there are services that not only offer anonymous high interest cryptocurrency loans, but in some cases offer unsecured anonymous high interest loans. And, in the magical spirit of the internet, some “flash” loans are contracted to be paid back instantly [1].
Huh? What?
This takes the idea of leveraged speculation to the logical extreme*, letting people deploy huge amounts of cash without ever actually having any cash.
The idea is that the borrower shows evidence that he has 100% collateral, but doesn’t transfer it unless he defaults. This evidence isin records on a blockchain. So the lender knows he or she will be paid, because they can see the assets right there and the “smart contract” will deliver it automatically. Guaranteed.
So what can possibly go wrong?
The problem is that the record on the blockchain may be more fool proof or less fool proof, depending on exactly what assets it records.
The “flash loan attack” is generally done by manipulating the collateral. If a digital asset can be temporarily puffed up, it can be used as collateral to borrow more of other assets. Then, the instant loan can be repaid in the un-puffed collateral, making a profit.
This kind of puffing happens especially easily for little used assets (no one puff up Bitcoin very easily), and most especially when the lender relies on relatively few (or just one) source of price information.
Remember, this is done by “smart contracts”, which are computer programs. The contract is told to believe specific data streams reflect asset prices. So if it relies on only one stream, and you can manipulated that stream, you can fiddle the loan contract.
Oh, and since this is in Nokamotoland, the borrowers are anonymous and the stolen tokens are whisked away in seconds, never to be seen again.
* Sooner or later, someone will come up with a “time travel” loan, that lets me somehow get money before the loan exists. You give me money today that you will loan me tomorrow….
In my neverending quest to understand DeFi, I encountered a new “valuecoin”.
I know that one of the hot topics in Nakamotoland are “stablecoins”, which are implemented with a blockchain and other Nakamotoan technology, but are pegged to other assets. Pegging is generally done via executable “smart contracts”, i.e., with software. The simplest form is pegged to a fixed asset, e.g., a Bahamian Dollar. But there are a lot of possible variations that might be called a ‘stablecoin’, depending on exactly what the peg is and how it is implemented.
We should note in passing that this entire concept is pretty dramatic heresy as far as strict, fundamentalist Nakamotoism would say. Bitcoin is “digital gold”, it has its own intrinsic value (if any), not depending on any other asset, especially the hated ‘fiat currency’. Linking a cryptocoin to other assets is, well, just wrong.
This winter William Foxley writes about a variation on this theme, which the developers call a “valuecoin”. As the website puts it, ARTHCoin is “World’s first non-depreciating currency” [1]. The idea appears to be to have the crypto tokens be redeemable for a fixed, inflation adjusted value in whatever the pegged assets are.
So, ARTHcoin is both pegged to an external asset, and indexed against the fluctuation of that asset.
Frankly, I don’t really understand how this stability is supposed to be done. This being Nakamotoland, this balancing act is supposed to be completely automatic, with a fancy algorithm that magically keeps everything working. It looks to me like human interventions are available in the form of “buying bonds”. Is this some kind of (heretical) human backup, escape hatch for the inevitable face plant of the algorithms?
As Foxley notes, this approach “hasn’t really panned out” for earlier incarnations of the idea. I know nothing about those specific systems, but I do know that efforts to peg assets are fragile and fraught. It is difficult to imagine an algorithm that will do this.
But MahaDAO is sure that this time is different, because they have just the right sauce.
We’ll see.
In the end, I have so many questions.
When the website says “non-depreciating”, who exactly stands behind that promise? And what does that promise even mean? Is it a promise, or more of a “goal”?
What is the business model here? Is MahaDAO taking a rake off? If so, how much and how is this covered? (There seem to be some kind of “fees”.)
Above all, what is this coin even for? Why is it better to have a digital token opaquely linked to a basket of assets than to simply own the assets? This looks like it wants to mash up indexed bonds with the liquidity of “cash”. How is that supposed to even make sense?
And, of course, nasty skeptical people could ask if you need a blockchain for this?
I read this week that JP Morgan has launched it’s own blockchain system, JPMCoin [2]. I gather that this system is based on “a private version of Ethereum”. It is a permissioned blockchain with some of the data on the blockchain and some of the data private. If I understand correctly, it uses trusted nodes as validators, not the peer-to-peer of Bitcoin or Ethereum 1.0, though possibly similar in spirit to Ethereum’s Proof of Stake, except no proof is needed.
The first big use case will be interbank transfers. The blockchain and related cryptographic protocols offers huge savings, perhaps hundreds of millions in this application. It could also eliminate tens of thousands of jobs.
Wow!
This is one of the most non-Nakamotoan blockchain projects ever!
First of all, JP Morgan is the very definition of “The Man”. When Nakamoto was thinking about freeing us from the tyranny of third parties, he was thinking about JPM.
And I’m pretty sure that saving JPM millions was not at the top of his goals for Bitcoin.
The project itself is definitely not Nakamotoan. It is not peer-to-peer, it is not transparent, and it is basically controlled by on, powerful, centralized organization.
I’ll note that the code is “based on” Ethereum, which is yet another case of wall street appropriating public code, and then claiming ownership of the derived product. Are they going to contribute back to the community that created the software? Don’t bet on it.
Bottom line: this is a perfectly reasonable use case for permissioned blockchains, in fact, a completely obvious use case. But this is really violates a lot of the original spirit of Nakamotoism: centralized, opaque, and benefiting only “The Man”.
Bitcoin is designed to be “decentralized” in every way he could manage, including a “consensus” protocol for approving changes to the protocol and code. Most Nakamotoan cryptocurrencies have some permutation on that theme, though some are “one-token-one-vote” rather than “one-cycle-one-vote” systems.
These governance processes have proved to be a major question mark for Nakamotoan technology. They have proved slow and awkward, and often deliver non-democratic if not outright fraudulent results. Worse, they have inhibited innovation and just plain bug fixing, because voting power is controlled by economic interests which can block necessary changes for their own short term profit.
(I have observed in the past that this “consensus” approach—which is not necessarily what most people mean by the word “consensus”—were modelled after the management of open source software projects. FLOSS software is usually small scale and economically unimportant. And, by the way, the vast majority of FLOSS projects are abandoned. But cryptocurrencies gather millions of users around the world, and involve large financial stakes. So the governance used by hobbyists is not necessarily the best match, when millions ride on the decision.)
Anyway.
This month saw yet another demonstration Nakamotoan, or at least school of Nakamoto, governance.
Uniswap is an Ethereum based system for swapping digital tokens. I don’t really understand what it is for, but as far as I can tell, it’s basically a robotic market, mimicking legal currency and commodity exchanges. Whatever it is for (and I suspect that grey and dark markets are the primary use case), it seems to be successful: they claim to have $2 billion worth of tokens in their slush funds liquidity pools.
The thing that interested me is that they have a governance protocol based on a one-token-one-vote rule, plus minimum support requirements. So, anyone with 1% or more of the tokens can propose a change, and the change must garner 40 million votes, which is near unanimity.
(In general, the reason for such rules it to prevent changes that “rewrite history”, changing already confirmed transactions.)
This month Uniswap held its first vote, and it was, as Sebastian Sinclair reports, an “Ironic Failure” [1]. Evidently realizing that the original rules make it almost impossible to pass any changes, one of the participants proposed new, lower limits.
The proposal garnered 98% of the vote, short of the 99% needed. As Sinclair notes, the result of the vote demonstrated the reason for the proposal.
In the short run, this result hardly matters. But this bodes ill for the future. Systems based on Ethereum “smart contracts” have experienced grievous bugs and massive losses. Ethereum itself had to fork, with the old, buggy “classic” still limping along becoming less and less viable with every day. Something like this could happen to Uniswap, and it would be impossible to fix it. Say goodbye to your $2billion.
Congratulations to Uniswap for demonstrating the inherent untrustworthiness of “trustless” systems, and the non-consensual nature of Nakamotoan “consensus” protocols.
Robert McGrath's Blog 