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Contingent Staking does not violate any blockchain principles

Published 20.2.2023

Contingent Staking (CS) is like a red rag on a bull for many members of the community. These people are trying to defend the basic principles of public blockchain networks, of which Cardano is clearly one. Opponents believe that KYC required by some SPOs will lead to some principles being violated and Cardano could gradually become a centralized network. The heated debate about Contingent Staking is not so much about the technology as it is about the philosophy of the project and Satoshi's legacy. If you think about the very basic principles of blockchain technology, you will find that CS does not fundamentally violate any of them. I'll try to convince you of that.

TLDR

  • Contingent Staking mostly interferes with the definition of permissionless, as SPOs requesting delegatorā€™s data become gatekeepers.
  • No one can centrally dictate to SPOs how to manage their policies related to delegations. Cardano remains permissionless.
  • The delegatorsā€™ market demand for non-KYC pools will be stronger than the powers of the authority. The market will influence what kind of pools will emerge.
  • Authorities cannot gain control of Cardano through SPOs as control is held by ADA holders.
  • Preventing the introduction of a new feature on the basis of ideology or philosophy may lead to a violation of the principle of openness.
  • Contingent Staking is designed to be completely trustless.
  • We need to be smart in our fight against the current financial world. The CS feature can help us.

Definition of basic principles

Let's first look at the definition of the key principles of blockchain technology that might be involved in the debate about Contingent Staking. These would be openness, permissionless, trustless, and decentralization. You will see for yourself that the terms partially overlap each other.

The term openness generally refers to the transparency and accessibility of the technology and its underlying data. Blockchain is often described as an open platform because anyone can develop and deploy applications on top of it. All transactions that occur on the network are recorded on a public, distributed ledger that is accessible to anyone. The blockchain is not controlled by any centralized organization or group. Anyone can participate in the network and contribute to its development.

In the context of the CS debate, it must be ensured that staking on Cardano remains open and everyone can join. CS has no significant effect on access to the ledger, the source code of the project, or the ability to create and deploy an application. The term openness slightly overlaps with the term permissionless which also refers to the possibility of participation.

The term permissionless refers to the property of a blockchain network that allows anyone to participate in the network and perform actions such as sending transactions or contributing to the validation of blocks. This is in contrast to permissioned blockchain networks, where participation is restricted to a specific group of known entities.

There are no gatekeepers controlling who can join the network or what they can do once they are in the network. Anyone can participate in the network as a user, miner, or validator, and they can do so without requiring permission from any central authority.

This term directly relates to CS as SPOs will be in the role of providing permission for staking. They could be seen as gatekeepers. Stakers may be limited in their free will to delegate ADA to any pool.

The term trustless refers in particular to the functioning of the system in the context of the interaction of individual participants.

The term trustless means that the system is designed to function without requiring participants to trust each other. Instead of relying on trust, blockchain uses cryptography and consensus algorithms to secure and validate transactions and data. This means that there is no need for a trusted third party, such as a bank or government, to oversee and validate transactions. Instead, the system is built on a network of trustless nodes, where each participant can verify the validity of transactions and the integrity of the blockchain.

The CS feature will operate in a completely trustless manner, so even if stakers provide data to SPOs, they may not trust each other. The protocol will provide trust through cryptography. CS does not directly affect Cardano's PoS consensus or transaction validation. However, SPOs can theoretically misuse KYC data if they have access to it (which they don't necessarily have to).

Opponents of CS often worry that Cardano may lose its decentralization. Cardano's decentralization is based on the distribution of ADA coins.

The term decentralization refers to the distribution of power and decision-making across a network of nodes, rather than having a central authority controlling the network. The network participants work together to validate transactions, create new blocks, and enforce the network's rules. Because there is no single central authority, the network is less susceptible to attacks or manipulation and is more resistant to censorship.

If stakers provide SPOs with the required data (e.g. KYC), they certainly do not relinquish control of ADA coins. If SPO accepts the delegation, the pool will have a larger total stake. However, SPOs do not gain control of ADA coins and stakers can delegate ADA elsewhere at any time. ADA holders hold control of the network. Not SPOs.

Who exactly can be restricted by Contingent Staking?

The only potential limitation arising from CS is at the staking level, where stakers' efforts to delegate ADA to the pool may be rejected by the pool operator. This may be due to the failure to provide the requested data or the content of the data.

Staker is essentially asking the SPO for permission to delegate the ADA to his pool. As mentioned, the permissionless principle is violated. However, I believe that only partially, and that I consider quite crucial.

Despite the introduction of CS, Cardano will remain a decentralized and open network. From the stakers' point of view, it means they can choose any other pool. Letā€™s add that all other pools are available (the openness principle). No SPO or central authority has control over the other SPOs. Anyone in the world can create their own pool and define their own delegation terms at any time. No SPO is forced to use the CS feature. In other words, a pool can be created at any time that accepts all delegations without restriction (up to the point of pool saturation).

If no one can centrally dictate to other pools how to manage their policies related to delegations then Cardano remains permissionless. When a staker's delegation is rejected by one pool, he can delegate to another pool and probably succeed.

So what we need to be interested in next is what would hypothetically happen if all SPOs started requiring KYC. Would some central authority gain control of Cardano?

Is it realistic that all SPOs would start requiring KYC information? Certainly not. Most SPOs, and this is evident in the current debate, will never use CS. They would rather take their business elsewhere than require KYC information from delegators.

Remember that ADA holders are the ones who have control over what pool they will delegate to. If an operator is forced by the regulator to request KYC, it may be that few or even no ADA stakers will delegate to his pool. What will the SPO do? Probably close the business thus opening the space for someone else. He may also move the business to another country that will not force him to require KYC from stakers.

Regulators can order SPOs to require KYC from stakers, but it is the stakers who decide whether to delegate to such a pool. The delegatorsā€™ market demand will be stronger than the powers of the authority. The market will influence what kind of pools will emerge. If ADA holders want to delegate to pools that place no restrictions on delegation, such pools will exist. Demand will win out over regulation and ADA holders are the decision makers, not the authority.

Authority can only have influence over SPOs, but if they don't hold ADA coins, they have no control over Cardano. They cannot gain control through SPOs, as SPOs have no way to dispose of ADA coins from delegators. This is a huge strength of Cardano as it leaves the power in the hands of the ADA holders.

Stakers may be limited in their free will to delegate to any pool, but they cannot be prevented from delegating to another pool. The market, or rather the demand of the stakers, will decide what kind of pools will be created. I, therefore, believe that stakers will not be fundamentally constrained by Contingent Staking.

What is the impact of Contingent Staking on other principles?

Opponents of CS consider KYC a betrayal of Satoshi's ideals. They may be partially right, and I certainly accept their worldview. However, it is important to note that preventing the introduction of a new feature on the basis of ideology or philosophy may lead to a violation of the principle of openness.

Cardano should be an open platform for all. This also means for SPOs who want to comply with regulations. They can therefore proceed to request KYC from delegators. Should the community resist this if there are delegators who are willing to provide KYC? Essentially, it means resisting wider adoption of the project. Is it fair to close off access to these people to the platform?

I believe the market can find the best way. Cardano should be as open as possible and let people choose the best way. Regulators cannot force all SPOs to require KYC. With a decentralized system, this is not possible. So we shouldn't resist expanding Cardano's capabilities.

Contingent Staking is designed to be completely trustless. This means that SPOs and delegators do not have to trust each other and yet cannot somehow cheat each other. Stakers can delegate to another pool at any time. SPOs cannot withhold rewards for delegators as they are distributed by protocol. This is very important from a regulatory perspective as SPOs are not custodians of the rewards.

In the case of Bitcoin, the pool operators are the custodians as the block rewards go to their addresses. Pool operators then reward miners according to the proportion they contributed to the block mining. So miners must trust pool operators to behave honestly and not cheat them. This system is not trustless and may be subject to regulation in the future.

If Cardano SPOs kept 100% of the rewards and then distributed them to stakers based on some agreement, they would become custodians. Stakers would have to trust them and the system would not be trustless similar to Bitcoin. This would be a violation of the trustless principle and we should not go down that road.

The quality of Cardano's decentralization will certainly not be affected in any major way by the introduction of CS. This could only happen if people could be prevented from creating a pool by anyone in the world and then delegating to that pool. Nothing like that is possible. The quality of decentralization goes hand in hand with the other principles, namely openness, and permissionless ness. As I wrote above, even the principle of permissionless will not be fundamentally violated by the eventual implementation of CS.

Conclusion

I am convinced that most users will not be affected by the existence of Contingent Staking. Many current SPOs have publicly declared that they will not use CS. Fans of Satoshi's ideals will not be forced to provide KYC and will always be able to find a pool that suits them. The more such stakers there are, the more such pools there will be. So why resist introducing a feature that will allow some people to use Cardano in a way that is acceptable to them?

Contingent Staking only affects the delegation process. The current form will remain and will only be expanded. CS has no effect on network consensus, Catalyst voting, coin distribution among users, censorship resistance, governance, and other important things. CS only affects the permissionless principle, but as we have already explained, even this principle is not restricted. If we are to honor the principle of openness, we should not, on the basis of ideology, prevent the widest possible number of users from using Cardano.

We need to be smart in our fight against the current financial world. The CS feature can rather help us if the adoption of the project is increased. Honoring 100% Satoshi's ideals is not necessarily the best way for Cardano which aims to become a global social and financial operating system. I understand those who are concerned about providing KYC but let's think in a broader context.

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