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Contingent Staking is a beneficial extension for Cardano

Published 17.2.2023

Contingent Staking (CS) is a proposal to extend the delegation process. SPOs would be able to request information from potential delegators and decide whether to accept or reject the delegation based on provided data. This functionality is misinterpreted as introducing a KYC process at the first layer. This is a misconception as it is only an extension of the existing process and SPOs will not be forced to use it. Contingent Staking can be a win for Cardano as it will extend its functionality with a capability that can bring greater adoption, liquidity, and usage. All of Cardano's key characteristics such as decentralization, censorship resistance, openness, and accessibility to everyone on the planet without third-party consent will be preserved.

TLDR

  • ADA holders will probably not delegate to pools requiring KYC. They have to arrange delegations differently.
  • Fiat money and the internet serve both good and bad people. Cardano should be the same.
  • More versatility will bring more ways to use Cardano.
  • Cardano is not a tool of one group to fight fiat currencies or states.
  • Contingent Staking does not disrupt the key characteristics of Cardano.
  • If there is a demand to delegate coins to a pool that does not require KYC, such pools will arise.
  • ADA holders will decide on the implementation of Contingent Staking through a vote.

Contingent Staking

Delegation of ADA to a chosen pool is done via a delegation certificate. Currently, anyone can delegate ADA to any pool without restriction. Staking Pool Operators (SPOs) cannot refuse the delegation and have no way of knowing who delegated the ADA.

Contingent Staking is intended to extend the delegation certificate to allow the insertion of extra information. This can be contact details, KYC information, or whatever. If the SPO takes advantage of this option, the delegation will go through the multi-signature process. Both delegators and SPOs must sign the transaction for the delegation of coins to the pool to occur.

SPOs can define their terms of use. There may be a cooperation contract between the SPO and the delegator.

SPOs will be given the opportunity to comply with regulations. Staking pools can be operated by regulated entities. SPOs get a way to expand their business. They can, for example, ask delegators to use staking rewards for investment purposes. They can thus promise a higher return than regular staking can generate. SPOs thus become custodians of the ADA. This may require regulatory oversight and compliance in a given jurisdiction. The ISPO becomes a more credible mechanism for rising funds for a project.

Contingent Staking should and, according to Charles' proposal, will be optional. No one will force SPOs to require KYC from delegators. SPOs are economically motivated to accept all delegations. A significant number of SPOs have publicly declared that they will never use CS. It is to be expected that only SPOs who have a business reason for doing so or are required to do so by the regulator will request KYC information. SPOs may comply with the requirements or relocate their business to another jurisdiction.

ADA holders can voluntarily decide which pool they will delegate to. They will usually look for pools that do not require the provision of KYC information. Pools that will require delegator information may not be profitable. Alternatively, SPOs will have to secure delegates in some other way. We can imagine a pool being run by, say, a bank and delegating the ADA coins that belong to its clients.

Let us add that if users provide information to SPOs, the data will be transmitted in an encrypted manner. It will probably be possible to use Decentralised Identity (DID).

Contingent Staking expands the possibilities and the market will decide what form of delegation will prevail. If some jurisdictions require delegators' information for staking, SPOs will have a way to legally maintain their business. SPOs cannot force delegators to remain loyal to them. Thus, regulations can destroy an operator's business. However, there may be delegators who will be willing to provide KYC information. This option should exist.

Running a pool is a business. SPOs should have the right to decide who they want to do business with. If a regulated entity has an obligation not to provide financial services to a certain group of entities, there must be a way to do so. Therefore, SPOs must have a way to refuse delegation.

Who is Cardano supposed to serve?

What fiat money and the Internet have in common is that they serve the good guys and the bad guys. Money and protocols don't care who they serve. People are the ones who choose the tools to achieve their goals. Most people want to obey the law, but a small group breaks it. Blockchain technology can be seen as distributed network protocols for creating better money and financial services. Therefore, we believe that blockchain should have the same properties as current money and the Internet.

Cardano should enable privacy right alongside the ability to use KYC services. Cardano should remain a universal tool available to all without restrictions.

Cardano is a decentralized network. This means that no one has the exclusive right to decide what it will be. The community should decide. It should be the case that Cardano will be what the majority of users want it to be.

Part of the cryptocurrency community believes that providing KYC information goes against the principles of decentralization and is a concession to regulators. It must be understood that Cardano is not a tool of one group fighting against fiat money and the states. Technology should serve this purpose, but at the same time, it should also serve those who do not object to the existence of the state. No minority group should be able to usurp technology for their own goals and ignore the interests of others.

Regulated services are a common part of today's financial world. Should Cardano be a part of this world or purposefully avoid it? From our point of view, we need to look for connections between decentralized protocols and existing services. If the use and adoption of Cardano, or liquidity in DeFi, is to increase, it is necessary to move towards this and not blindly cling to impossible requirements. The financial world can move to the blockchain, but this requires concessions from both sides. That is, from both the cryptocurrency community and the regulators.

Regulators will not change key features of blockchain protocols. For example, self-custody is an immutable property. Similarly, the protocol, and by extension teams together with the community, will not change the way the current world works. Cryptocurrency adoption will be a slow gradual process, not a leapfrog revolution.

I'm convinced that more versatility will bring more ways to use Cardano. We live in dynamic times and adapting to the environment is one of the key qualities for survival. Cardano is not meant to be a rigid and unchangeable protocol. Rather, it is a living mechanism that is meant to be capable of changes that will be decided by ADA holders. There will be a CIP on Contingent Staking and the community will decide whether to implement this feature or not.

Contingent Staking does not affect the key characteristics of the protocol

What we should really be interested in is whether the introduction of Contingent Staking disrupts the key characteristics of Cardano. We believe that it does not. After the eventual introduction of CS, Cardano will remain decentralized, censorship-resistant, and accessible to everyone on the planet without having to get anyone's consent.

Cardano owns ADA holders, not SPOs. If SPOs request KYC information from delegators, it does not make Cardano less decentralized, as it has no effect on ADA distribution. CS will not affect the basic operation of the protocol in terms of transaction processing, or the ability to install a wallet and use the protocol to send tokens. The individual SPOs do not know each other and are essentially in competition with each other.

No agency or regulatory body will gain control of Cardano through several SPOs requesting KYC information. It is a mistake to believe that CS is introducing or enforcing KYC requirements for staking.

Staking will remain open to all ADA holders. The only limitation is that some SPOs will request information and potentially refuse delegations. ADA holders will have to be more careful about what pool they delegate to and provide the requested information if the SPO requires it. One could say that this partially undermines the principle of openness. Stakers, however, will not be forced to provide information unless they want to. They must find a pool that does not require it. This may be more laborious.

Of course, we would not like it if all SPOs started requiring KYC information. We are not afraid of this happening. Anyone can create a pool. If there is a demand to delegate coins to a pool that does not require KYC, such pools will arise. The market will decide which option takes hold and rightly so. Decentralization will win.

Conclusion

An unnecessarily heated debate has developed around Contingent Staking. From our point of view, CS is a very good proposal and should be implemented. Cardano will not lose any key features and can only gain. Every change brings something and takes something away. As a community, we should think carefully about all the details of the proposal and realize what our main goal is. Cardano is designed from the outset to be a global social and financial operating system. CS is one of the small steps that can help us achieve this goal. Vote smart on the proposal.

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