Thread by @technologypoet

Contingent Staking on Cardano.

This is going to be a decent sized thread as I collect my thoughts from many discussions we've had over the last few days.

Before I begin I think it's important to recognize that both those who are for CS and those who are against CS...

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...are arguing from a place of conviction, with good intentions for the future of Cardano and the Cardano ecosystem.

Name calling and labelling others as drama queens or engagement farmers does not further discussion.

Decentralized governance is the final boss.

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While there isn't yet a CIP for #ContigentStaking on Cardano, as described by @IOHK_Charles it is a mechanism that would allow stake pool operators to selectively approve who is able to stake with their stake pool.

Lots of potential use cases have been floated, however

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many of the use cases seem contrived (e.g. politician using a stake pool to fund raise) or hypothetical. To ground this conversation I think it's important to understand the primary use case driving the discussion on contingent staking.

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I believe it likely has to do with potential incoming regulations related to KYC and reporting, though there are currently no regulatory rules that would compel contingent staking.

Clarity on problem statement is missing.

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Articulating a clear problem statement / requirement is the best place to start ideating a solution. We should start here and spend most of our time agreeing on the problem being solved.

We haven't thus far, so I will comment on the concerns I have with the proposed solution

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1. Framing of SPOs and businesses and not public infrastructure.

A similar battle was fought and won earlier in the Web's history around net neutrality. Net neutrality ensures that ISPs should enable access to all content and applications without favoring or blocking any.

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In a proof of stake blockchain stake pools act in a very similar way as core infrastructure. Producing blocks and allowing people to participate in the network by securing it, doing transactions, etc.

There is no PoS blockchain without stake pools.

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While the individual SPOs may view their efforts as a business, both the stake pool and user delegating to the stake pool are paid by the protocol. They do not have a direct business relationship.

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In fact the relationship between an SPO and delegator is more akin to a tax payer and a construction company hired by the government to make a public road.

The construction company doesn't decide who can and can't use the road.

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2. CS threatens the permissionless nature of the blockchain

Staking is a core operation of a PoS network, and with Voltaire will also play a role in governance. By allowing SPOs to reject stake you permission a key part of the network based on unknowable criteria.

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In the extreme case certain users may never be able to participate given the intersection of various criteria used by stake pools. (More on this in a bit).

Running a private pool is not an option for any but the wealthiest given the current network parameters ensure small

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pools are unlikely to produce a block with any regularity, even if you ignore the technical expertise required to setup and maintain a pool.

Lets talk about the primary problem I believe CS is intended to address, KYC.

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3. KYC requirements could create 'illegal rewards' and 'compliant rewards'

If future regulation requires US SPOs to KYC US users it would create a situation where certain utxos have rewards that are compliant, and others illegal.

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The best case is there's a slight price differential for compliant vs illegal coins, similar to how freshly minted Bitcoin holds a slight premium.

In the worst case this could lead to further regulation requiring US SPOs to only handle compliant coins.

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4. KYC requirements could force every SPO to use CS

If US jurisdiction applies to entities who take stake from a US user (Charles mentioned this, I'm not clear whether this is the case), then international SPOs would also be forced to KYC to exclude US users.

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This turns contingent staking from an optional to required feature and effectively makes KYC mandatory on the L1.

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5. Contingent staking will likely lead to contingent transactions

If CS is done to placate regulators I believe it's only a matter of time before they also require contingent transactions. We have already seen this play out on Ethereum with the majority of transactions

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already OFAC compliant. Wallets that engaged with Tornado cash have been limited at the dapp and offramp level, but the possibilities exists to do the same at the protocol level.

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The Ethereum community's response to ensure their chain remains permissionless is to use 'social consensus' and slash validators that censor transactions.

Cardano does not have this capability, and thus not this deterrent.

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6. SPOs will censor transactions on a number of criteria

We already have SPOs saying they would like to disallow stake based on NFTs in someone's wallet if CS is available. If contingent transactions are available do you believe they will also not censor transactions?

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And what else do you believe people would like to censor on?
Traditional banking has specific reporting laws based on transaction size, would SPOs refuse to process transactions over $10k if AML regulations are introduced on the blockchain?

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Some of the scenarios mentioned above are likely, others are projections from what I've seen transpire in other ecosystems. If some of these come to pass Cardano would have lost one core reason why blockchains are a better financial operating system than banks.

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It's worth well remembering that the cypherpunks of the 90s fought hard to ensure that we are able to use cryptography for privacy and security.

If not for them every cryptographic algorithm would have contained a back door for the US government.

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I think @cardano_whale does a good job outlining a potential sequence of events. These second order effects need to be seriously considered.

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https://twitter.com/cardano_whale/status/1625005101625782272

@cardano_whale Thanks for reading this far.

Please feel free to share, add your thoughts, disagree, expand on any points you think are valuable.

https://twitter.com/125101068/status/1626320064801562624

Another great thread by @MatthewPlomin outlining how the scenario could play out with contingent staking.

https://twitter.com/MatthewPlomin/status/1626283978004078595?s=20

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