Rent-Seeking Protocols – Drew Mealey

How account keys and balances need to be stored in RAM and accessed very quickly every time they are called upon is an excellent example of this behavior.

Example: 1GB of RAM = 1GB of storage on the EOS cloud computing platform. If you want to store a 4GB movie on EOS, you need to buy and own 4GB of RAM. DApp developers and users need RAM, CPU, and NET to perform actions on the EOS main net. These resources are provided to them via the hardware block producers (BP’s) ensure. Block producers act as 21producer-based network hubs that produce reactionary consensus security results for the EOS mainnet. The EOSIO software dictates that each EOS token held by a token holder corresponds to an (X) amount of CPU, network, and/or RAM, CPU, bandwidth, and other resources were implemented by pledging (staking) EOS — this pledging model has obvious rent-seeking drawbacks.

Since RAM is scarce, its price increases with a decrease in supply. When the ratio value of RAM is higher than the token, individuals become reluctant to pay off the balance.

Via (HackerNoon) “ The liquidity of the EOS token decreases when tokens are locked up in rent-based contracts. With lower liquidity, price discovery for the EOS token (and ultimately, the underlying assets of bandwidth and computation) becomes more difficult.

Second, the rent-model opens up the resources markets to rent-seeking by large holders (whale accounts) and dominate BP’s. Given the concentration of vast majority of EOS tokens is concentrated in a very small number of accounts, market prices of the resources can be controlled by a few actors in the system.

The problem of speculation and market manipulation has been especially pronounced in the RAM market. We have already seen BP’s drive the price of RAM up through hoarding for their profit without network benefit. By hoarding RAM, token holders can push the price up to extract money from those trying to access this resource. This speculation around the RAM market has made the price of RAM unaffordable in many cases, making it difficult for decentralized applications to operate.

To address this problem, the EOSIO team implemented a Bancor style pricing algorithm. The Bancor Relay tokens are a type of smart contract that ensures that the exchange rate of two assets never reaches zero; when the supply of one asset is decreased, the exchange rate concerning that asset increases.

Block.One and the EOS development team implemented this algorithm pricing system effectively curbs speculation as to the dynamics around the speculation still exist. If the exchange rate of the Bancor Relay is low, then token holders will hold on to the RAM they have already purchased until the price of RAM goes up. This behavior is again more pronounced when a few token holders can buy up as much RAM as possible when the price is low.

While the 1% fee theoretically limits speculation, this shifts the balance of power in the market even more towards the dominate BP’s, as they are the ones who can afford to pay the 1% fee because they are earning EOS tokens as a reward.”

This mechanism was designed to ensure that RAM, as a relatively scarce resource, is priced to meet the economic principles of supply and demand, avoiding the impact of speculators…

… however, the update did not change the underlying rent-seeking mechanisms inherent in the network.

+99% of protocols will fail

99percent of the digital asset space is either:

• centralized ecosystems with rent-seekers
• a pyramid scheme
• “vaporware”
• redundant software/technology

Nearly all coins and tokens that fall into one of these (4) above categories will ultimately fail to achieve the necessary network effects needed for broad enough adoption.

Software is a winner take all marketplace.

Software has near-zero marginal costs — the protocol ecosystem that generates the most revenue can re-invest it into making a better product, giving it more income.

Banking-based industrial software will be no different.

“The interesting thing about software is that it tends to be a winner take all game. If you look at industries like the desktop, nobody will compete with Microsoft today… software is nearly always a winner, takes all game with very little space for second or third place players because the biggest player dominates the markets, they sell more software… and once you’ve emerged in that leadership position, it’s very difficult to catch up.”

David Arnott, Temenos CEO

The market capitalization of a few dominant networks will own a vast majority of total market capitalization in similar ways the FAANG companies dominate Big Tech. There are currently roughly 2200 different digital assets listed on major digital asset market capitalization sites…

≈2200 x .01 = 22 (2%) = 44 protocols/applications

… if 99 percent of current projects do indeed fail — this leaves us with about 11–44 long term networks that have any real-world value and strong network effect-based adoption.

Metcalfe’s Law

I am looking for leading indicators and patterns associated with specific financial metrics. About (5) of these 11–44 will likely end up dominating roughly 80 percent of the entire market because the dominant basis for software-based network economic effects — Metcalfe’s Law, will take over. Metcalfe’s Law states the first protocols to get to this critical mass crossover point generally secure a monopoly. Soon after, they begin to develop a supermajority — it becomes increasingly more difficult for second place to catch up with them.

A simple majority refers to the gap between first and second place. A supermajority is a point at which the distance/gap between first and second place is always expanding — first place is continually becoming more dominant to the position that second place can never catch up. Many cite the phenomenon that explains how Facebook overtook MySpace.

Which protocols will win?

(1) the Bitcoin network
(2) the dominant dApp network
(3) the dominant privacy-based network
(4) the dominant governance network
(5) the dominant cross-border option

*** Eighty percent may eventually be entirely captured by the Bitcoin network. ***

… Twenty percent for every other protocol. I expect the same very well-defined digital asset tiers we see in the Big Tech FAANG stocks today to represent how the ‘New Software Wars’ will be won.

The EOS token does not have a supply limit. In the EOS DPOS model — the five percent inflation created within the system is used to fund transactions and pay BP’s. There is an agreed-upon cap on inflation — BP’s must vote to change the inflation rate. The POW model Bitcoin takes transaction fees and uses them to pay the miners who approve the transactions and create blocks.

Many have heavily scrutinized the EOS network for the high level of collusion and vote-buying that takes place between exchanges, whale accounts, and BP’s — this behavior is an inherent side effect consequence of all POS and DPOS-based consensus systems.

How Block Producers Produce Blocks

Twenty-one unique block producers are selected each ‘round.’ These block producers are selected via ‘votes.’

Each unit of $EOS counts as a vote (i.e., if you have 50 $EOS coins, you have 50 votes).

Each ‘round’ has 126 blocks.

A block is created every 0.5 seconds.

To vote for a BP or buy EOS-based resources like RAM — you need to both own and then stake EOS tokens to the EOSIO network.

If a user leaves their tokens on an exchange, the exchange technically has the ownership of private key property data…

“Not your keys, not your bitcoin”.

… and thus, can vote for various BP’s on the individuals’ behalf.

DPOS is a system where you stake funds with some third-party (BP’s) within the network on your behalf. BP’s do all the checking and validating of the rules for me — we share in the reward. EOS is a fiat-based digital asset token, not a cryptocurrency.

Open blockchain cryptocurrencies operate on public networks that anyone can join without permission. Cryptocurrencies (open-blockchains) like Bitcoin all have five inherent characteristics:

Open Access

Public

Neutral

Borderless

Censorship-resistant

EOS is NOT a censorship-resistant blockchain. The system practices ‘reactionary-security’ protocols. What does this mean?

Via HackerNoon “Malicious actors are able to send transactions that are fraudulent as long as they act before BP’s can come to. a social agreement to blacklist their account and unanimously update their blacklist. It is important to note that in order to update the blacklist, it is necessary to shut down the <nodeOS> and then restart the system while re-entering the network with the updated <(config.in)> file.

A skilled adversary is able to create multiple accounts at minimal cost, much faster than all the BP’s coming to a social agreement on a blacklist, update their <(config.ini)> file, and reinitiating their <nodeOS> instance. Within the timeframe needed to conduct that process, malicious actors can already execute multiple subsequent spam attacks, bypassing any blacklist.

This exposes EOS to a Sybil attack. A Sybil attack in computer security is an attack wherein a reputation system is subverted by forging identities in peer-to-peer networks — it is named after the subject of the book Sybil, a case study of a woman diagnosed with a dissociative identity disorder.

This is in fact a large vulnerability in the system as fraudulent users are able to create malicious accounts much faster than the block producers are able to come to the same consensus on the content of their blacklist…

… This further validates the high level of centralization that exists in the EOS network and the tremendous power BP’s possess and that there is not a true consensus algorithm in a BFT context as the system constantly susceptible to spam and DDoS attacks.”

Full HackerNoon Report: EOS: An Architectural, Performance, and Economic Analysis Whiteblock

Download a PDF of the complete report here.

… because BP’s have the technical ability to freeze transactional_output function — it is not a censorship-resistant network, it does not technically qualify as an open blockchain cryptocurrency. EOS is a centralized cloud computing database system, not an open blockchain or cryptocurrency.

Sybil Attack Research:

https://dl.acm.org/citation.cfm?id=687813
https://arxiv.org/pdf/1504.05522

The distinction between cryptocurrency v digital assets v stable coins is similar to money v currency v bond.

To participate and compete for new bitcoin, you HAVE to connect to a system that burns electricity. POW provides security through economics in a very organic and unique way — the investment of energy production and the opportunity costs of electricity price discovery. This cost is represented in the marginal cost of mining Bitcoin and is an extrinsic property of the system.

In POS and DPOS systems, instead of burning energy (electricity), you run a computer that checks the rules and validate the transactions for everybody else. Every (x) number of minutes you authorize the rules,% of your digital currency is locked up within the network — it stays locked for a previously agreed upon (programmed into) number of blocks. Over this period, your unit of accounts remain locked and are committed to using these resources to validate the rules.

• If you happen to validate them incorrectly or attempt to cheat — you lose that economic contribution to the network for failing to uphold your end of the agreement.
• If you verify transactions correctly — you get the money back and (x%) interest for performing (x) network functions.

The obvious problem with this model (many are trying to solve) is that individuals who have many units of account are nearly guaranteed to earn more coins. All POS and DPOS systems have inherent properties that naturally lead to a plutocratic structural design. The rich usually get richer. We’ve seen this before!

Ethereum co-founder Vitalik Buterin on his blog titled: Governance, Part 2: Plutocracy Is Still Bad — Mar 28, 2018.

NOTE: Annual inflation level is now 1%. This was recognized by Buterin.

The other obvious problem — the investment committed is part of the system, not separate from it, and the system itself determines its value. This situation creates strange conditions whereby cheating within the system you may lose some coins here, but you gained so many in other ways — you’ve more than made up for lost staked coins, and these compounds over time.

As Buterin also notes, “In DPOS, the reward is constant, and it’s the voters role to vote for pools that have good performance, but with the key flaw that there is no mechanism to actually encourage voters to vote in that way — instead of just voting for whoever gives them the most voters, so voters have no “skin in the game” (penalties in Casper pools, on the other hand, do get passed on to participants)… Penalties in DPOS do not exist.”

Whereas in bitcoin — you HAVE to burn electricity outside of the system, and you can never get that electricity back. POW is an extrinsic commitment system commitment. The energy you commit is outside the system — this actively acts against actors attempting rent-seekers behavior within the ecosystem.

The EOS network is an intrinsic commitment system. All POS and DPOS models are intrinsic systems; you’re committing the currency of the digital network, in the digital system, to validate the digital system.

As of today, the East dominates BP’s influence.

5 of the top 10 BP’s are Chinese
11 of the top 25 BP’s are Chinese
14 of the 21 BP’s are either located in China, Japan, Hong Kong or Singapore
17 of the top 25 BP’s are either located in China, Japan, Hong Kong or Singapore

This assessment does not mean I think EOS will fail. EOS.IO is an incredible piece of technology. Private chains that partly separate their ecosystem from the EOS token are being built right now. EOS is not a genuinely censorship-resistant environment, it is a very centralized network that was initially funded via an ICO, and it engages in clear rent-seeking economics, it is simply more likely to fail than Bitcoin is.

June 1st Block. One announcement did nothing to address the severe and inherent centralization concerns many have outlined with the EOS ecosystem.

This past week, Weiss Ratings moved EOS down its list and noted severe centralization issues as the main reason for the downgrade.