Is a bond requirement a good idea?
|RHIZOME WIRE||Feb 28|
Welcome to this week’s edition of RHIZOME Wire!
The possibility of a bond requirement
About two weeks ago, Ben Lee - aka “Dr. ICON” posted a thread in the ICON Community forum dedicated to a discussion about possible changes to IISS. Listed first among possible ideas was the concept of a bond requirement:
Bond Requirement: Many voters are scared of being burned and we think this is an issue. We also think it is an issue that many P-Reps have nothing at stake themselves and voters are taking all the risk of holding ICX. We believe P-Reps should be accountable for their own actions and should also have “skin in the game”. We are still deciding on the size of the bond requirement, but it will be a percentage of total delegation received. This will also lower the advantage of vote buying because P-Reps will need to post a larger bond as they get more votes. If they can’t post the full bond they will not get full rewards. This will also incentivize P-Reps to not sell some of their ICX because they need to have it as a reserve to post bond as they get more votes.
This, as far as I can tell, is the first serious suggestion of moving toward this type of system. Accordingly, I’d like to examine what the possible pros and cons of this type of proposal could be.
As Ben Lee pointed out, by requiring P-Reps to hold a certain amount of ICX, it ensures they have more skin in the game. Here is a scenario that is currently the “worst case scenario:”
A P-Rep has been voted in entirely by the community, holding no ICX themselves.
Rather than utilizing the ICX they currently receive for the betterment of the project, they instead simply sell their P-Rep rewards each day for spot BTC, meaning that a declining ICX price over the long term has no impact on them.
Due to voter apathy, they continue to receive votes, despite their lack of contribution.
Is this currently happening? Not that I can tell. Are all three of these outcomes likely? Not really. Are some degree of them possible? Yes.
Accordingly, by requiring a bond, either this P-Rep would have to purchase ICX and hold it — thus making them true stakeholders — or, they’d have to dedicate a chunk of their rewards toward fulfilling their bond, rather than selling them on the market.
For P-Reps who aren’t acting maliciously (in the manner described immediately above), requiring a bond is, to a certain extent, almost like another layer of staking. By requiring X% of a vote to be bonded (ICON has stated that they don’t envision the requirement being higher than 10%), it’s essentially locking up more ICX, further reducing the true circulating supply.
I could envision a scenario in which the bond percentage required fluctuates based on the level of the network that’s staked overall. For instance, the closer we get to 100% staked, the less the bond requirement is. This would be a similar model to Tezos’ bond requirements.
Meanwhile, as teams received more votes, they’d be required to deposit more ICX into their bond. This will add another layer of disincentive to selling rewards — perhaps both their P-Rep rewards, as well as their staking rewards.
Finally, it could indeed serve as a disincentive to vote buying as well. If a P-Rep knows that they’ll have to not only give up a portion of the rewards (which costs resources), but they’d have to pony up more ICX as their votes as “bought,” the math starts to get a bit more complicated when it comes to whether or not it’s worth it to attempt vote buying (not including possible blowback from the community).
There may be other benefits to the bond idea, but these are what are the most obvious.
One of the most significant objections to the idea of a bond is that it would further enable self-staking whales while possibly penalizing (or at least disincentivizing) P-Reps who don’t hold enough ICX to self-stake.
A major factor in this possibility is what exactly the bond % will be. There is likely a formula where the bond requirement is low enough to where any growth in the bond requirement could be offset by simply retaining the increased P-Rep rewards that come with an increase in votes. That way, teams could grow their bond in direct correlation with the vote increase.
Meanwhile, there are also concerns that simply putting ICX aside where it does nothing except sit in a bond wallet will mean the ICX isn’t being put to use as a contribution to the system. This is more relevant as it relates to P-Rep rewards being bonded instead of spent on growth.
This is certainly a legitimate concern, and once again touches upon the ongoing debate about whether P-Rep rewards should be use to build on ICON or if they should be sold more sparingly to avoid pressure on the price. Like much of the bond proposal, the specific math would provide more clarity about whether or not a bond would lead to excessive “hoarding” of P-Rep rewards.
As mentioned in the section on benefits, there may be additional unintended consequences that are not explored here.
An idea for consideration…
While I have not seen this idea mentioned, the idea of creating a disincentive for voters to vote for P-Reps with insufficient bonds may be worth considering. Let’s assume a team has received 10m votes, and is atop the rankings. Let’s also pretend a 5% bonding requirement, equating to 500,000. Let’s say they are only able to provide 400,000. Not only will the P-Rep receive fewer rewards, but the voters will as well. The outcome would be that voters would be less inclined to vote for the team with “too many” votes, knowing they’d receive fewer rewards.
This would also require voters to remain “on their toes” and check their P-Reps bond balance frequently, in case they are leaving potential rewards on the table.
This would have the additional benefit of giving top P-Reps a bit more control over centralization concerns. For instance, it’s one thing for a top team to encourage vote movement vocally. It’s another for them to sacrifice some rewards by reducing their bond and thus generating a financial incentive for votes to shift to other teams.
Of course, the downside of this is that teams with sufficient ICX — let’s say, for example, the ICON Foundation — would still allow voters to receive 100% of the rewards, since they’d presumably be self-staked enough, meaning voters wouldn’t shift votes away from them. However, this is exactly how the system works now.
Could this have a negative effect on lower-ranked P-Rep teams? (Say, a team that has 2m votes, but doesn’t have 100,00 ICX) Possibly — but it’s a lot easier for a team to acquire 100,000 ICX than it is 500,000 ICX, so the impact would not be as significant.
Of course, there are more downsides I may not be considering, but this could be an idea worth considering.
As with most proposals, the details do matter; chief among them will be the bond requirement %, and whether or not it will fluctuate with either the percent of the total supply that is staked, the price of ICX, or a combination of both. I do hope the ICON team continues to explore this idea and put forth more specific numbers in the near future so the community can have a better assessment of the true impact of this type of proposal.
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