Governance Centralization Risk from Liquid Staking Design

SNS DAO SNS Project Governance
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@infu even with rising prices, small and mid size investors are getting squeezed by large holder. it’s by design their relative stake grows simply faster eating away yield if small and mid size neuron holder.

BTW. They even ban user from OpenChat Community Channel raising valid concerns and aiming to enhnace the protocol by lowering the bar for new entrants (to long term stake) from other jurisdictions. They have artificial barriers in place causing tax liability risk vor neuron holder receving non-controllable auto-rewards preventing many holder from non tax heavens from increasing their stake (due to increased risk of not being able to meet tax obligations).

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I’d like to raise some concerns regarding the current dynamics within the Internet Computer Protocol (ICP) ecosystem, specifically focusing on stake distribution, governance participation, and the role of the WaterNeuron DAO (hoax).

Stake Concentration and Yield Dilution: There’s a growing perception that the current protocol design disproportionately benefits large WTN holders, leading to a dilution of yields for small and mid-sized neuron holders. This dynamic effectively squeezes smaller investors, as their relative stake diminishes over time.

Community Engagement and Censorship: Reports of users being banned from the OpenChat Community Channel for raising valid concerns and proposing protocol enhancements are troubling. This suppression of dissenting voices hinders constructive dialogue and potentially stifles innovation.

Tax Implications of Auto-Rewards: The automatic distribution of rewards to neuron holders, while intended to incentivize participation, may create unintended tax liabilities, particularly for holders in jurisdictions with complex tax regulations. This could act as a barrier to entry and participation for a significant segment of potential stakers.

WaterNeuron DAO Governance Risks: The WaterNeuron DAO, despite being advertised as a decentralizing force in IC governance, is perceived by some as creating significant governance risks. There are concerns that it may be concentrating power rather than distributing it, potentially leading to a less equitable and transparent governance process.

(See: Allegations of “Leo” and “Enzo” potentially not only sneaking in IC rouge stake via WTN but also running rouge nodes via shell companies which if true can be seen as sophisticated attack on the protocol undermining perceived or even actual decentralization actively killing trust.)

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This comming from @Zarathustra as known active supporter of ICP is very valid concern . Waterneuron consortium should be reviewed and this potential attack circumvented

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@borovan @darwin @infu you might establish a working group or start collaborating on this?

Evaluate the governance implementation of the WaterNeuron DAO to ensure it does not concentrate power in the hands of a few, but rather distributes decision-making and oversight in a more equitable manner.

The official WTN tokenomic breakdown shows that 52.2 % of all WTN is held in the Treasury, 24.7 % was allocated to the SNS sale, 19.3 % went to early contributors, and only 3.9 % was airdropped to nICP stakers.

By default, WaterNeuron mirrors NNS’s mechanism: voting power and staking rewards scale linearly with the amount staked (quantity × maturity × dissolve delay × age). This proportional model inherently advantages large holders (“whales”), since they receive a larger slice of any fixed reward pool.

As whales compound rewards and reinvest, their share of total staked WTN grows faster than that of smaller participants. Over time, this exacerbates centralization and squeezes out mid-sized and retail stakers.

While don’t know exact on-chain yield formulas, the parallels to NNS governance and observed forum concerns (e.g., accusations of pyramid-like dilution) underscore the urgency to audit and recalibrate.

To preserve broad participation and decentralization, the DAO must introduce non-linear reward mechanisms that dampen marginal gains for the largest addresses and boost relative yields for smaller stakes.

You might have more information on the second sale? You might consolidate information spread across this forum into a single thread? As we need to implement checks and balances, as well as transparency measures, to mitigate the risks of the DAO becoming a centralized force within the ICP ecosystem.

@1eo, I understand the solution you’re building has significant ecosystem implications. Rather than demands, I propose we collaborate to ensure it promotes transparency, accountability, and decentralization - the core principles we both value.

I suggest the following measures:

Encourage large neuron holders to voluntarily disclose their stake and identity, if they are comfortable doing so, to demonstrate their commitment to transparency.
Develop a transparent, decentralized dashboard that allows the community to view aggregated metrics on neuron distribution, voting activity, and governance processes.
E.g. publish regular reports on the overall distribution of stake, showing the percentage of total supply held by different tiers of neuron holders (e.g., top 10%, top 50, bottom 50%). This would provide visibility into concentration levels without compromising privacy.
Explore ways to abolish or mitigate entry barriers, such as the tax implications of auto-reward distributions, that prevent a broader base of participants from increasing their stake. Lowering these barriers could encourage greater participation and decentralization of the network.
E.g. implement lock-in multipliers for small stakes: Offer a small multiplier on yields for stakes below a certain threshold that commit to a minimum dissolve delay (e.g., 2 years).
This encourages long-term commitment from retail and mid-sized stakers, deepening decentralization.

Let’s collaborate on a formal community proposal outlining this and other measures to strengthen decentralization. Increased visibility into voting power distribution is crucial for fostering trust and preventing undue influence. I’m optimistic we can chart a path that upholds the Internet Computer’s core tenets.

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@1eo To address potential centralization tendencies within the WaterNeuron (WTN) DAO, I propose a modification to the reward structure. Specifically, as the total stake of the 6 month neuron increases, the DAO reward percentage should be reduced.

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Did you check our dashboard: WTN Dashboard?

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this is the best suggestion in this whole conversation. This is an obvious step towards a more “ethical” economic solution.

However, there is no monetary incentive for the DAO to implement this, it would have to be done out of purely “good” intentions of offering a more equitable service to future nICP stakers.

Here’s the harsh reality:

At the end of the day, the primary goal of this venture (WTN DAO) is clearly to maximize profitability and increased goveranance power of participants. And until there is a competing service, there is no incentive for the controllers of the DAO to change anything. I encourage those with the means to do so to compete, and win, or atleast give them a reason to offer a product that is more “fair.” Right now, they have no reason to do so, and I don’t believe they are going to change anything unless their hands are forced by competition.

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Yes, that’s a great example of incentive misalignment. When a DAO is primarily motivated by receiving rewards, rather than improving the protocol, it can lead to decisions that benefit the DAO itself, rather than the broader community.

In this case, the DAO’s interests are misaligned with the interests of the community, which may be focused on improving the protocol, increasing adoption, and creating a more equitable and sustainable ecosystem.

When a DAO is driven by reward-seeking behavior, it may prioritize short-term gains over long-term benefits, and make decisions that:

  • Maximize its own rewards, rather than optimizing the protocol for the benefit of all users
  • Favor the interests of a select group of stakeholders, rather than the broader community
  • Compromise the security, scalability, or usability of the protocol in pursuit of short-term gains

This can lead to a range of negative consequences, including:

  • Centralization of power and decision-making
  • Inequitable distribution of rewards and benefits
  • Lack of investment in protocol development and maintenance
  • Decreased user trust and adoption

Here, the lack of a central authority (e.g. Difinity) can make it challenging to implement changes that benefit the broader community.

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