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Who should get ADA rewards for voting in the Voltaire era?

Published 13.3.2023

Delegation Representatives (DReps) will decide on important issues concerning the future of Cardano. Should they be rewarded for this work? And what about the ADA holders who delegated their decision-making authority to the DReps, should they be rewarded as well? Let's think about this and look for answers.

TLDR

  • CIP-1694 has elements of direct and representative democracy.
  • We should honor the principle of 1 ADA = 1 vote, but this does not necessarily apply to the size of the reward.
  • All DReps should be rewarded fairly, even those with a smaller stake, but at the same time, we need to consider the size of the stake.
  • If all ADA holders are not rewarded, but only DReps, the system relies on ADA holders not being greedy and behaving responsibly.
  • Most people will behave rationally when voting because they are making decisions about their own wealth.

How democracy works

We can take inspiration from voting in democratic systems. Direct democracy and representative democracy are two forms of democratic systems that differ in how citizens participate in decision-making.

Direct democracy is a system in which citizens directly participate in making decisions. In this system, citizens have the power to propose, vote on, and make decisions on public policy issues. Direct democracy is usually used in small communities or in small groups where it is easy for all members to participate and share their views.

Representative democracy, on the other hand, is a system in which citizens elect representatives who make decisions on their behalf. In this system, citizens vote for representatives who will represent their interests and make decisions on public policy issues. The representatives are accountable to the citizens and can be voted out of office if they fail to represent their interests.

The first question is? Do we want a direct democracy for Cardano or a representative one? Cardano is a global project and the number of ADA holders will tend to grow. Each new protocol change will impact all users. Dreps, as the name implies, are people that can be voted by ADA holders as their representatives.

On the other hand, in a representative democracy, people vote on a given number of politicians. Some succeed and some fail. CIP-1694 proposes that any ADA holder can register as a DRep. This principle is closer to direct democracy.

Who is paid in these systems?

In a direct democracy system, voters and individuals who propose new rules typically do not receive payment for their participation in the decision-making process. This is because direct democracy is based on the principle of citizen participation and engagement, where individuals are motivated by a sense of civic duty to contribute to the democratic process. In some cases, there may be financial incentives or compensation provided to individuals who are required to take time off work or face other financial burdens in order to participate in direct democracy processes.

In a representative democracy, elected representatives are typically paid for their work. This is because the role of an elected representative involves a significant amount of time, effort, and responsibility. It is important to note that the salaries and benefits of elected representatives are paid for by taxpayers.

CIP-1694 contains elements of both types of democracy. ADA holders have the right to elect DReps, but at the same time, they can register themselves as a DRep and potentially qualify for a reward. There is no limit to the number of DReps, unlike how it is usual in a representative democracy. The advantage is that there is no defined hierarchical structure with the number of representatives and the CIP is free in what can potentially emerge. The emphasis is on keeping the power in the hands of ADA holders. They can decide to vote for themselves at any time.

Who to give rewards to?

From what we have written above, there should be no reward for electing a DRep. If the ADA holders delegate decision-making power to the DRep, they are essentially expressing confidence in the DRep's abilities and are unwilling to take the time needed to make the best decision themselves.

Only DReps should be rewarded for their work. The question is whether in proportion to the size of the delegation or all equally, as the time and effort of their work may be similar.

The problem is that the right to vote is not and cannot be tied to a person but to an ADA coin (1 ADA = 1 vote). One person can split their stake into multiple accounts and pretend it is multiple people.

If the mechanism were to work with specific people and give it some weight in voting, they would have to be willing to be publicly visible (not necessarily provide KYC, but have DID). Not everyone will be interested in being publicly known and the desire to remain anonymous should not be a limitation. It seems that in the first phase of on-chain governance, we will have to base voting solely on ADA and the ability to delegate coins to DReps.

The community should care about the rich not getting richer, so from our perspective, the reward package should be split equally among all DReps. Note that we are talking about the size of the reward, not the size of the voting power. The voting power should respect the stake size.

There's a catch. Anyone who wanted to take a bite out of the bounty could register as a DRep. Theoretically, they wouldn't have to put any effort into the problem and vote randomly. Unfortunately, this cannot theoretically be prevented if only ADA coins are used for voting. If greedy people registered as DReps just to get a reward for free, they would reduce the rewards for those who spent more time and effort studying the issues.

Imagine if a reward of 1,00,000 ADA was distributed among all DReps and each registrant was entitled to a portion of the reward despite holding say only 1 ADA. Does such a person have the right to be a DRep, make decisions, and get a reward theoretically higher than his stake? Should there be some requirement for the number of ADA coins in order to register as a DRep? A DRep with 1 ADA has very little weight in the voting, so the reward should be appropriate, i.e. low.

This brings us back and perhaps the stake size of individual DReps should be taken into account in some way. Perhaps the first part of the reward package should be split evenly and the second part of the reward package should reflect the size of the stake. The size of the stake could be taken into account when calculating rewards within the first part, but not proportionally. Some levels could be defined, say for example 3, where the lower limit would be for example 10,000 ADA. A DRep with 9,000 ADA would not be entitled to the reward from the first part, but would only get the reward from the second part of the reward package (the proportional part).

We are certainly not saying that this is the best possible solution. The goal is to reward all DReps fairly, even those with a smaller stake, but at the same time take into account the size of the stake.

Whales have the right to vote as they have a large skin in the game and can be expected to vote in favor of the Cardano ecosystem. Through voting, however, their stakes should not grow too much. Reflecting the size of the stake only partially would reduce the whales' rewards.

In general, we should think about how to reward the work of Dreps and not just the voting itself. This is very difficult unless we want to evaluate the quality of the work of individual DReps, or introduce some more complex structure resembling an employee-employer relationship.

If all ADA holders are not rewarded, but only DReps, the system relies on ADA holders not being greedy and behaving responsibly. That is, they will make their own responsible decisions or delegate voting power to DReps. We believe that this system can work, as it is unlikely that people would hold ADA coins and vote to intentionally harm the Cardano ecosystem. The overall stake of such people will always be low. Everyone who holds ADA coins has an interest in growing their own wealth, and that will only happen if Cardano thrives. Most people will behave rationally and adjust their voting accordingly.

Just as it is rational to delegate ADA to a pool that mints at least one block in every epoch, it is similarly rational to make good decisions or delegate voting power to DReps.

Why not actually reward all ADA holders even if they delegated voting power to DReps? Like any government, we should be budget responsible. In Cardano's case, we're talking about ADA in the project's treasury. ADA in the treasury will be used to pay for more expenses, especially for protocol and ecosystem development. ADA holders get paid for staking and it doesn't make sense for them to have an additional regular income for governance. Rewards should only be given to those who volunteer to be active in governance and whose work benefits the community.

A fair reward from the reward package should go to DReps, including those with a small stake, not those who elected them. This is consistent with how representative democracy works. However, the voting strength will reflect the stake, that is, the strength of the votes of all ADA holders who elected representatives. There will be DReps with large voting power and those with small voting power side by side.

Linking representative and direct democracy makes sense as it does not restrict community members from becoming DRep and seeking delegations. Active and visible DReps will eventually gain a large enough number of delegations and their power will be significant but not unlimited.

Conclusion

CIP-1694 is not yet final and is subject to comment. Opinions vary on how to reward ADA holders for voting in Voltaire. It is said that democracy is not ideal, but it is the best possible solution we have. The important thing is to start and then adjust the process as needed. There are bound to be greedy individuals who will want to abuse the system to their advantage. They are found in all systems and it is important that the rational voice of the majority always prevails. The majority of people will behave rationally because it is in their own interests. With respect to project treasury, it makes sense to reward DReps for their work and not ADA holders for holding the coin. Whoever wants a reward, let her become DReps and deserve it.

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