On the subject of staking rewards for eCash

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There’s been a lot of recent talk in the eCash community on the subject of staking. Or to be more precise, staking rewards.

For those who may not know, the eCash project is a Bitcoin fork that is working on adding a new consensus mechanism called Avalanche. This will enhance Bitcoin’s existing security model based on Nakamoto consensus as well as enable other benefits such as instant confirmations and fork free upgrades.

By adding Avalanche, the eCash network will still maintain all the benefits of Nakamoto proof of work while also making 51% attacks and double-spends a thing of the past. Once completed, no longer will XEC users have to wait for block confirmations, because eCash transactions will have instant finality.

The aim of the eCash project is to create the best money the world has ever known. A new form of electronic cash that can scale to fulfill the needs of every human on the planet while maintaining censorship resistance by not having to rely on a central authority.

While it’s clear that Avalanche is a key component for delivering on that promise, questions have come up regarding how Avalanche will be implemented with regard to potential staking rewards.

Nakamoto consensus relies on proof of work as a sybil resistance mechanism, but Avalanche will rely on proof of stake to defend against sybil attacks. By requiring validators to lock up XEC, the only way someone can spin up enough Avalanche nodes to attack the network is by acquiring XEC to do so. This would not only drive up the price of XEC and make existing holders wealthier, but it will also mean the attacker “ought to find it more profitable to play by the rules […] than to undermine the system and the validity of his own wealth.”

Of course this will only work if there are enough honest nodes to make it expensive for an attacker to overpower the network. So the question is, how do you incentivize people to lock up their coins and run validating nodes? Will people who hold XEC run a node because it’s in their best interest to do so even without being rewarded for it? Or should they be given a portion of the block reward because there is an opportunity cost related to locking up their capital? How much should that reward be?

I’m afraid I don’t have the answers to these questions. The one thing I do know is that I can count myself among those who prematurely jumped the gun on this issue. Instead of performing the necessary due diligence to find the best possible solution, I seem to have let my greed get the best of me.

For example, I entertained the idea of a 50/50 split between validators and miners, which would mean the 6.25M XEC block reward would be allocated 8% to development, 46% to stakers, and 46% to miners. Depending on the number of coins that are staked, I estimated an annual yield of somewhere between 5-10% for stakers. Who doesn’t want to earn a 10% return for doing almost nothing?

But the fact is there was no basis for this allocation. It only sounded good because I saw it as an easy way to pump the price and increase my holdings, which might be fine in the short term, but could be disastrous in the long term.

As Amaury pointed out to me, why would miners bother wasting their electricity cost if they could earn the same reward simply by buying the coins and holding them? He also told me while someone running Avalanche is arguably contributing value to the network, the act of staking by itself doesn’t provide any value. So how do you offer an incentive to people for doing something, rather than for doing nothing?

These are obviously questions that need to be answered before any final decisions are made.

Despite some of the consternation this issue has created, I see it as a good sign. It shows people care about the eCash project and have a vested interest in seeing it succeed. I also think of this as the first real test for the eCash community, an opportunity to discover whether or not XEC stakeholders have the ability to reach consensus on what could otherwise be a divisive issue.

Throughout the history of Bitcoin there have been several major disagreements that led to a split in the network. There was the block size debate that resulted in Bitcoin Cash splitting off from Bitcoin in August 2017. There was the disagreement around self-funding that resulted in Bitcoin ABC splitting off from Bitcoin Cash in November 2020 and creating eCash.

I don’t think the debate around staking rewards will be as contentious as either of those, and I’m confident a rational and pragmatic solution will be found. One that is supported by logic while taking into account all the potential risks and externalities.

Why am I so optimistic? Because I believe the eCash community is built on a solid foundation of supporters who invested in XEC not because they were looking to get rich quick, but because they understand the mission. They want to help build sound money that can serve as an alternative to central bank digital currencies and as a way to defend ourselves against totalitarian regimes.

Unlike state backed currencies, remember that none of us are forced to use XEC. Our participation is completely voluntary. If you don’t like the direction the project is heading, you can sell your coins, or even fork the code to create a version of the chain with a different incentive structure.

I don’t know how the financial system of the future will ultimately be created, but I imagine it will be something like what we are seeing now with eCash. Passionate and capable people working to come up with the best solutions and sometimes having to course correct when necessary. Because the fact is, this is brand new technology we are dealing with. There are no experts you can just call and ask to tell you the right answer. The only way to find the right solution is to put in the work and to think deeply about the problem in order to solve it in the best way possible.

Maybe you are disappointed that staking on eCash may not end up being what you hoped it would be, but here’s my perspective. For me, the goal of the eCash project is to deliver a peer-to-peer electronic cash system that increases the amount of economic freedom in the world. That is what interested me in this project from the start, and whether or not that includes staking rewards is unimportant compared to the overall goal.

If you are frustrated by the situation, remember that only you can decide what’s best for yourself. No one is forcing you to buy or hold eCash. I continue to do so because I believe it is in my best interest. Not only because I think my investment in XEC can one day make me wealthy, but because I think it can help make the world a better place.

The bottom line is I support this project because I trust the people leading it. Just as I wouldn’t buy Tesla stock thinking I can tell Elon Musk how to run his business, I didn’t buy XEC expecting to tell Bitcoin ABC what to do.

With that said, I also think it’s important to remember that eCash is an open source project, and its success will depend on finding as many people as possible who are willing to make positive contributions in any way they can. As such, I hope the project continues to clearly communicate its long-term plans and any potential changes to those plans in order to engender trust and attract others to join the cause.

If you are an experienced computer scientist, cryptographer, or economist who is interested in cutting edge technology, take a look and see what they’re building at e.cash.