Contingent Staking (Part 2)

Hi, this is Charles Hoskinson broadcasting live from warm, sunny Colorado. Today is February 16, 2023, and I'm making yet another video on contingent staking. Let's share my screen a bit. I've been reading some of the comments from the community, and I figured it would be good to address a few of them. I sent out a poll, and it looks the overwhelming majority of you want me to do a Twitter space so we can have a live debate over Twitter.

I'll work with a moderator, probably have Rick or someone else who’s available. I’ll announce a date, but hopefully, we can get it done this week. I really want to understand what’s going on here. One of the reasons why I think this has become so frustrating is that the worst parts of argumentation are being deployed. You have this slippery slope argument, straw men, and a lot of drama for the sake of drama.

These are not productive; they don’t benefit anyone in our ecosystem. Frankly, if this is how we debate when SIP 1694 comes in, we’re not going to get anywhere. This is why I’m taking this particular issue, which is a minor issue by the way, very seriously. This is a teachable moment for all of us about how we are going to get things done. If we can’t get past something like this, then how are we going to address post-quantum issues or how to get input endorsers in?

If we want to change the incentive model to accommodate new things in Cardano, how would we go about that? Cardano is a living organism, and it requires proper debate, but that debate has to be fact-based. It’s always strange how a light touch can cause things to zoom so far out. It has to be fact-based and fair. The problem is that a lot of people, and I don’t blame them, have been influenced by the media and modern politics.

They’ve turned debates into basically a death match. It’s not about the facts; it’s not about being fair; it’s not about understanding what we are trying to accomplish. It’s not about acknowledging that differences of opinion can exist; it’s about winning. Any dissent from a person’s viewpoint is seen as acknowledging defeat and loss. So, it’s okay to lie, it’s okay to mislead, it’s okay to play the victim, and it’s okay to manipulate power dynamics.

It’s unreasonable to assume that when this is happening at a multi-billion dollar level for nation-states and every Western democracy, we’re somehow going to be immune to it. At the core, what happens when you invent something is you invent a concept. We have this idea of staking, peer staking, which dates back to 2016. Then we said, “Yeah, we need to reduce variance and get consistency,” and so we introduced the idea of staking plus the optional stake pool. That’s 2017.

Now, here we are in 2023, and what we’ve discovered is that you have your normal stake pools, but then all of a sudden, you also have some not-so-normal stake pools that are doing different things. For example, the University of Wyoming is running a stake pool through the Blockchain Technology Center. You have Shoshone high schoolers, who are technically a state institution, running a stake pool. There’s been some discussion about political candidates running stake pools. We have not-for-profits that are running stake pools as charity pools, and some people are trying to figure out how to build regulated products with a stake pool.

For example, yield enhancement: they create a stake pool, you delegate to them, they take the money, do some DeFi magic, and you get a higher-than-protocol yield, similar to what a lot of exchanges were trying to do. You have normal everyday pools that operate the way we thought they would in 2017, and then you have this different class of actors. Nation-states at some point may run pools and say only their citizens can participate. At the same time, we invented the concept of the Cardano native asset. We have ADA, World Mobile Token, your favorite NFT, tokens for Sunday Swap, and tokens for all these hundreds of Cardano projects.

What CNA basically says is that we’re going to treat these the same way. There’s this thought process of reusing the staking mechanics in part or whole for native assets. Now, all these tokens have radically different ideas. For example, if you’re part of the Ape Society and there’s a DAO, and you have these ape tokens or an ape NFT, that’s a club. It’s a closed ecosystem that you have to buy your way into.

Holding ADA doesn’t make you an Ape Society member; you have to be part of that. Maybe there’s some sort of governance layer or staking layer. If there was a reuse of the staking mechanic, that would be another one of these red flags of non-standard staking. What we try to do is think of a design pattern that can accommodate both sides of this and say, “Right now, it’s a push transaction,” and we add the capability for a multi-sig transaction, allowing both sides to determine their signing conditions and add the metadata payload. That’s probably the minimum viable design pattern that would accommodate all of these use cases.

Yes, of course, it will also accommodate some notion of regulation if desired. Here’s what the opponents are arguing: the mere existence of this would somehow mean that the U.S. government or some other government agency would come in and completely eliminate the normal staking option. I’m trying to understand their argument, but this is one of the things they’re saying—that slippery slope.

The minute we have this capability, it will be forced upon us all. Let’s go through that scenario. If you’re going to make a slippery slope argument, how do you get this feature implemented? We’re assuming that it exists post-SIP 1694, which means that you, the ADA holder, have to vote for that. The engineers have to hard fork the protocol and remove that capability, removing the normal stake certificate without somehow forking the ecosystem.

You, the staker, in this peer-to-peer ecosystem, can have a personal choice of whether you delegate to one of these pools or not. We’re assuming that all these pools will be pushed in a particular direction. So then I ask a very simple question to the people arguing the slippery slope: why would the existence of this capability mean anything to a regulator if they’re already going to go down the road and say that staking must be done this way? The fact that this capability is missing from Cardano would mean that 100% of the stake pool operators would be in non-compliance. Effectively, what they would do is go to all the exchanges listed in Cardano and delist it, saying it’s now a blacklisted protocol.

This feature has no bearing on what a regulator would do and how that reality works. Your slippery slope argument says that just because we put this thing in and now there’s a capability for certain entities, like let’s say Bob is running for the U.S. Senate and the Federal Elections Commission requires him to know who his donors are—he can’t have dark money—and he wants to use a stake pool as an innovative way of raising money. Giving Bob, the Senate candidate, this option somehow is magically going to make the U.

S. government blacklist the entire protocol. By the way, you as an ADA holder have to vote for that. You have to do that; the U.S.

government has no say in that. You, the ADA holder, would have to actually remove this capability. You would have to make a decision to delegate only to contingent pools and not to non-contingent pools. So where did you lose your voice here? Where did you lose control?

How will, in practice, this slippery slope be accomplished? I don’t know. In the Twitter space, I would love a coherent argument of a step-by-step, fact-based way that introducing this mechanism, which benefits lots of people, is going to result in that outcome. This is not hypothetical. Millions, if not tens of millions of dollars, have been raised.

Regulated entities and government actors are running stake pools. Political candidates have expressed desire. We have not-for-profits that do have compliance for tax reasons running stake pools at the moment. As we grow and become more sophisticated, people are going to build regulated products. We have a diverse and large ecosystem of native assets, and some iteration of the protocol later on will involve using staking mechanics.

Now, why did we not introduce this as a layer 2 solution? Because then you lose trust, you lose automation, and you also lose universality. The Cardano protocol cannot enforce rules in layer 2. If this is some sort of patched-up layer 2 solution to do that, you will be completely at the mercy of the stake pool operator, and you lose all ability to have a say in it. Also, that cannot necessarily be applied universally to all of these things.

I’m sure somebody can come up with some sort of a wonky, bizarre thing, but it’s significantly simpler and better to put this on layer one. Second, it’s much more difficult for Plutus to interact with a layer 2 solution. If you wanted to build a collection of smart contracts, like potentially using this as an example for some sort of future version of Conclave for small stake pool operators to bind together under specific logic, it would be substantially harder to do this as a layer 2. But, let’s just slippery slope it and straw man it. I’ve seen a lot of comments saying, “Well, this automatically means that now Cardano is KYC-ing everything.

” By what mechanism? If you are a Cardano user, you have a choice: you can delegate to normal pools or contingent pools. A contingent pool doesn’t necessarily mean KYC, for example. It’s any condition that the business owner, the pool operator, wants. That condition could be as simple as signing a terms and service agreement.

That condition can be assertions like, “I’m over a certain age.” I’m going to use zero-knowledge proofs to prove that without revealing any personally identifiable information. Zero-knowledge cryptography could be used. It could be as simple as providing an address. For example, if they say, “If you stake with me, I’m going to give you an NFT, and I need to know what address you want me to send that NFT to.

” So, contingent staking does not equal KYC; it is a subset of a massive universe of discourse. It’s not equal to saying there are going to be hundreds, if not thousands, of use cases built on it that have nothing to do with KYC. But I guess we’re just going to say it automatically equals KYC. Again, I’m very much looking forward to this Twitter space because I want the people who are spreading this nonsense to make an argument that is fact-based, fair, and acknowledges that they’re lying. I’m sorry; it’s not about having a difference of opinion.

A difference of opinion is, “Should we have a tax rate of 25% or 35%?” Fair arguments can be made on both sides, and they’re deeply philosophical. When people say, “I don’t support contingent staking because it will force every single person to comply with U.S. regulation,” and they provide no supporting evidence of a step-by-step process of how that’s going to happen outside of a hypothetical slippery slope, that doesn’t connect to anything.

That’s a lie, or at the very least, it’s succumbing to the current politics that we have. Then there’s drama—just tweet, tweet, read it, read it—all these things. So, let’s go to a critic and actually read verbatim the critique on Reddit because I’m a fair guy. I try to understand what’s going on, and I want to read it. I’m going to go line by line through this person’s comments to do that.

Let me scroll down and find the particular thread. I read it this morning because I’m trying to understand. Let’s see here... Cardinal 360. I hope the moderators didn’t take it down.

here we go. I did a tweet—ten tweets yesterday—and a person took my tweets one by one and wrote them down. He said, “I did read his thread, and I don’t think he responded to the actual complaints. I think he responded to his emotions about the complaints.” Okay, well allow me to respond to his points.

Sorry for the length. My first tweet: “I’m still at a loss reading some of the comments on contingent staking. It’s incredible how polarized some people have become to the extent that they cannot understand a basic concept and continue to misrepresent it.” Maybe he’s not understanding the complainers. I don’t feel he’s answering the complaints.

Okay, well Wilbur, it’s your chance to actually tell me: contingent staking does not implement a KYC regime on Cardano, which is a true statement. It does not replace normal staking—a true statement. It does not remove private pools—a true statement. A marketplace of SPOs would still exist and allow people to continue to delegate their preferences, including normal stake pools. Those are all facts.

His reply to this is, “It doesn’t immediately stop normal staking. The concern is if we add this, we don’t know what else may be enforced by regulation later on. Local government pressure—business should not be put on the main layer.” Again, you are making a slippery slope argument here. You’re telling me that every single ADA holder is going to vote to remove, at the behest of the U.

S. government, a current capability in Cardano. If that’s going to happen, why wouldn’t they do it with or without contingent staking? You’re now disregarding all those other people. Let’s get to it.

Later on, opponents of this concept offer no solution for how actors like governments, universities, regulated entities, not-for-profits, and others who could and sometimes actually do run stake pools can do so and stay in compliance with local regulations. I guess they don’t matter. here we go. Let’s read his reply: “It’s not that they don’t matter; it’s that they don’t matter as much as maintaining what complainers believe crypto is about.” No, what you believe crypto is about.

What you’re saying is your viewpoint is the only one that matters, and we should not make provisions for anyone else outside of your philosophy. Here’s the thing: crypto is about giving everybody freedom, everybody control, everybody the ability to do something. So, you believe crypto should be completely anonymous, no KYC, no oversight. That’s fine; your values are reflected in the normal stake pool certificate, which is not being removed. But what you’re doing is saying your values are the only ones that matter.

So, we need to prevent any other participant from being involved. He goes on, “If U.S. universities can’t run a stake pool until the U.S.

is forced to tow the line and catch up with Africa’s financial progress, the complainers are fine with that.” So, in other words, your opinion is the only one that matters. Or, “But not to the base layer.” We’ve just gone over that it reduces security, it relies upon trust, and it reduces the ability of Plutus to interact with it. You can’t use it with Cardano native assets as easily.

You’re a solutions guy. We’re here supporting your dream. What other solutions have you got? You’ve come up with 50 in the time to come up with none. Well, the SIP process is here for a reason.

We can certainly talk about it, but right now, talking about a hypothetical is not productive. This kind of pattern is a natural iteration that reflects the real use cases that people today are using Cardano for. That’s why it’s being proposed. Opponents of contingent staking don’t seem to understand how dangerous an ISPO is without entry conditions and contracts prior to getting customer funds. They also want to remove all agency of SPOs, claiming they’re apparently a public good.

Maybe they do understand, but they have a different priority. Okay, that’s fair. So, let’s vote about it then because I do not want—I don’t think any reasonable person wants—people to work for free or be asserted that they have an obligation to perform a service without their consent or compensation. SPOs are businesses, and this is a philosophical thing. They’re not wanting to remove all agency; they just like how it currently is.

Well, that’s great. So how would this remove all those people who feel that way? They would continue delegating to normal stake pools, and those normal stake pools can only be removed if all of Cardano gets together and removes that through a hard fork. The slippery slope argument hasn’t provided any evidence of the actual process of what would be done there or how that’s any different from the government just compelling us to do it anyway. I’m not sure what a public good is in this context.

SPOs compete against each other and charge fees for your delegation. They are optional but valuable service providers, like mining pools in Bitcoin, to enhance the quality of the network and reduce reward variance. So, he replies back, “I think by public good they mean SPOs feel they’re part of the superior Cardano protocol and not the old American way of doing things. They prefer feeling part of this than they do feeling part of America.” I don’t even know what that means.

You asked me to reply to the comments and be fair in the representation of these things, but I’m talking about actual facts here. A person has to build hardware, either bare metal or rent it from Amazon or somewhere else. They have to do actual work; they have to advertise; they have to make a compelling case for why you should select them over someone else. That sounds a hell of a lot a business to me. There’s a capital investment being done, and there’s a marketing activity being done for the pursuit of profit.

They may philosophically love Cardano and agree with these things. Later in this video, we’re going to talk about the future of SPOs and how deep this rabbit hole goes. Apparently, they should have no say in who they do business with or the terms and conditions of business relationships. Even public utilities have contractual relationships with their customers, but SPOs apparently can’t. He said right here, “I for one like this.

” Yes, I like SPOs. They don’t get to choose who stakes at their pools. Okay, that’s fine. You want a business that can never refuse business? That’s great; delegate to a normal stake pool.

But what if you have an investment opportunity and you decide that’s a great idea? What if you want to delegate to a regulated pool? What if you support a politician and you want to use staking to support them? Do you understand that it’s a two-way relationship, not a one-way relationship?