The U.S. Securities and Exchange Commission (SEC) has approved the first leveraged Bitcoin futures exchange-traded fund (ETF). As the biggest financial institutions have started to enter the world of cryptocurrencies, it's only a matter of time before we see Ethereum ETFs and maybe we'll see Cardano ETFs. As positive as this may seem, it also brings many new questions. Especially with regard to on-chain governance.
Institutions as a threat
Some are hailing the approved Bitcoin ETF as a big win as Bitcoin becomes a legitimate investment asset. Not everyone is celebrating, however. Some have begun to point out the potential risks associated with the institutions, which could have an (expected positive) effect not only on the market value of the coins but also on the project itself.
One of those not cheering is cryptocurrency expert Chris Blec. He believes that BlackRock may gain control of Bitcoin through development funding. BlackRock may reportedly try to force the transition of Bitcoin to PoS and economically push this version as dominant. There was information in the BlackRock ETF filing that in the case of a hard fork, BlackRock reserves the right to decide what version of the chain is deemed appropriate for the Trust. BlackRock can choose the Bitcoin chain that will not be the most valuable (and make the most valuable).
Let's leave aside speculation about what BlackRock does or doesn't intend to do, or what a possible effort to take control would look like. What we have to wonder is if Cardano is at risk of something similar.
Block production is based on ownership of ADA coins. Once on-chain governance is activated, the ownership of ADA coins will have the right to decide the development and future of the project. If BlackRock and other institutions were to acquire a significant portion of the coins, they would simultaneously gain control of the network.
First of all, it is important to note that BlackRock may not be interested in taking control of cryptocurrency projects. In fact, doing so could destroy them from a reputational perspective. Therefore, we can assume that institutions will only buy the amount of coins they need for their business. This assumption puts the topic on a theoretical plane. However, let's assume that cryptocurrencies will be very successful and it may be in the interest of a large player to gain some power over project management or block production.
In order for someone to gain dominant control of Cardano, they would have to own more than half of the ADA coins. Is that realistic? In theory, yes; in practice, it could drive the market value of the coins so high that a buyer would abandon the plan.
Is there any other measure that would effectively prevent a takeover? Let's think about it.
How to keep Cardano decentralized?
Even if BlackRock held say 10 or 20% of the ADA coins, we should be concerned if the coins were used for voting in governance. BlackRock would be able to decide on Catalyst projects that get funding (it could even propose projects themselves). In the future, it could decide on CIPs that will be implemented.
One possible measure that works quite well in the governance of other projects like Polkadot is coin locking. If the owner of the coins wanted to have a stronger voting power, he could decide to lock the coins for a certain period of time (the longer the stronger the voting power). The coins would not be liquid during the lock-in period, which may discourage institutions (or perhaps the law may prohibit them from doing so). We can assume that smaller ADA holders might be more willing to lock coins for longer periods of time than institutions. If economic incentives were added, the effect would be magnified.
One other option is to create a system that is not dependent on or influenced by money. The ideal would be to create a voting system in which one person has one vote, something similar to what works in democratic states where people elect their representatives. The problem is that someone would have to verify people's identities to prevent Sybil's attacks. It would be desirable to devise some hybrid system. Maybe decentralized identity and Zero Knowledge cryptography can help. I imagine that in the future it will be possible to create a guaranteed unique digital identity. This could be used to create some form of reputation system. People could get stronger voting rights on merit.
Maybe some governance tokens could be given to SPOs (and stakers) for every block they mint in history. The tokens would be linked to the SPOs keys and could not be sold (they would lose any rights once sold). This would leave some of the power in the hands of the current SPOs, and their status would grow over time.
Education and people's desire to maintain a decentralized infrastructure can help. Until people sell ADA, no one can gain dominance in the Cardano ecosystem. Time is playing in Cardano's favor. The more stakers and fans there are, and the later institutions start to take an interest in Cardano, the better in terms of greater distribution of ADA coins. Some people see cryptocurrencies as a new form of money. While I doubt this will happen in the next decade or two due to high volatility, the possibility cannot be ruled out. If ADA were used by a billion people worldwide, it would be economically very difficult for one institution to gain a significant share of ownership of the coins.
Cardano is not currently in danger and we don't think that will happen anytime soon. However, the large number of coins that are on the exchanges should be a concern. So far we have not heard of the exchanges participating in the Catalyst vote. It is important to monitor their behavior.
In the context of decentralization, many people overestimate the importance of block production and underestimate the role of teams and governance. Some projects have no governance and do not want to implement it. Little is said about the fact that only a negligible number of people run their own full node. If cryptocurrencies grow in importance, the pressure on teams will grow as well. Hash rate and coins of PoS projects can be bought with money. We should take this into account and prepare for it.
It would be interesting to think about what chain people would choose if some form of the fork were to occur. Would it be the new "institutional" chain or the old "original" chain? This is very hard to predict and very likely economic incentives would be the deciding factor.