Mathematical proof that LB hides a redistribution of wealth TAX & new proposal with baker reimbursement

Philosophy and Economics
1

I will prove in the following example, that I can calculate exactly how much wealth transfer is going to happen at my bakery due to this new LB policy, putting my bakery as example, which is at full capacity

Baker share of the whole staking capacity is 9.31%, delegators have the rest of 90.69% share. Meaning that only 9.31% of the block reward is mine and 90.69% of the block reward is for my delegators.

Here is my baker share if you need proof

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Without liquidity baking (current status quo):

thirty-seconds block reward of 40 TEZ (100% of the block reward)

Taking my 9.31% share, 40 * 0.0931 = 3.724 TEZ from that is mine WITHOUT a baking fee, because I don’t charge to myself a baking fee.

Now 40 - 3.724 = 36.276

Now, I subtract the 10% baker fee: 36.276 * 0.10 = 3.6276 (this is what I earn due to the baker fee).

Now, 36.276 - 3.6276 = 32.6484, this is what I will distribute to the rest of my delegators with the baker fee subtracted already.

My total earning from the 30-second 40 TEZ block are = 3.724 + 3.6276 = 7.3516.

The earnings of my delegators to be distributed are = 32.6484

Now with liquidity baking

For the 40 TEZ (94% now of the TEZ printing machine) it all stay the same.

I earn 7.3516 and my delegators earns 32.6484 with the fee substracted already.

Now let’s see what happens with the 2.5 extra printed TEZ.

Subsidy of 2.5 TEZ → LP’s

Note: lp’s will either stake it right after they earn it, or dump it, buyers of that dump will also probably stake it

Scenario 1)

Traders recover 2.5 TEZ → Burn = means redistribution of 2.5 TEZ to all hodlers.

Note: this is something everyone can’t grasp in their minds, burn means redistribution of a quantity evenly to all hodlers*

My previous earnings of the 40 TEZ block were 7.3516

2.5 * 0.0931 (my staking share) = 0.23275

7.3516 + 0.23275 = 7.58435

The previous earnings of my delegators of the 40 TEZ block were 32.6484

2.5 * 0.9069 (their staking share) = 2.26725 TEZ

32.6484 + 2.26725 = 34.91565

So my total earnings and the earnings of my delegators in this scenario are:

7.58435 vs 34.91565

Scenario 2)

Traders recover 2.5 TEZ → Reimburse to bakers

2.5 * 0.0931 (my staking share) = 0.23275 (I don’t apply a baking fee to myself obviously)

Now, 2.5 - 0.23275 = 2.26725

Then I subtract a baker fee of 10% to that amount, so, 2.26725 * 0.10 = 0.226725

So, now that I subtracted the baker fee, I need to rest it from the 2.26725 - 0.226725 = 2.040525

2.040525 with the 10% baker fee already subtracted that I will distribute to my delegators.

My total earnings of that 2.5 block would be 0.23275 + 0.226725 = 0.459475

2.040525 of the 2.5 TEZ will be distributed to my delegators.

OKEY, now let’s sum up all the profits of scenario 1) and compare them to scenario 2)

Scenario 1) profits

My baker: 7.3516 of the original 40 TEZ block + 0.23275 (of 2.5 TEZ of scenario 1) = 7.58435

Delegators: 32.6484 of the original 40 TEZ block + 2.26725 (of 2.5 TEZ of scenario 1 ) = 34.91565

Scenario 2) profits.

My baker: 7.3516 of the original 40 TEZ block + 0.459475 (of 2.5 TEZ of scenario 2) = 7.811075

Delegators: 32.6484 of the original 40 TEZ block + 2.040525 (of 2.5 TEZ of scenario 2 ) = 34.688925

THE END RESULT IS:

Scenario 1 where the trading fee is burned, I earn 7.58435 and delegators earn 34.91565.

Scenario 2 where the trading fee is reimbursed to bakers, I earn 7.811075 and delegators earns 34.688925.

The result is that there will be a WEALTH TRANSFER of 0.226725 XTZ from baker to delegators due to this LB policy happening EVERY BLOCK. That’s 2.9% of FORCED wealth transfer every block to delegators.

Delegators are not stealing anything either, is the result of bakers forcing other bakers to redistribute wealth due to this hidden TAX, they are reducing their own incentives.

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2

The ones that know this is true, stands behind you and support you. Thanks for exposing this wealth tax. Math is sound.

Please, let’s do LB with reimburse instead of burning the trading fee. It is very clear that liquidity providers are still going to be funded by the subsidy regardless if the trading fee is burned or reimbursed.

This is serious, Wake n Bake has been ignored, accused of trolling, spamming, and he’s just yelling very high to expose this, he genuinely cares about not reducing bakers incentives. Reducing incentives of bakers is a terrible idea, when it can be avoided and still fund LP’s. Bakers, wake up. You are being taxed for something else that is not to provide liquidity, you are being tax to redistribute your block reward revenues, skipping your bakery fee.

This should not be accepted. The purpose of LB is to provide liquidity to XTZ, not to redistribute wealth. LB is doing both.

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3

Just a quick question: If burning is:

then why is the act of subsidy creation not:

means distribution of 2.5 TEZ FROM all hodlers?

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4

Because the subsidy creation of 2.5 is not from ALL HODLERS, is from BAKERS. The money printing machine is in possession of bakers, not all hodlers. There is a reason bakers have control via governance of the TEZ printing machine, there is no argument that you can say that will make what you say true, the reality, unless you deny reality, is that bakers own the TEZ printing because they have absolute control of it.

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5

Exactly, is like saying Americans owns the money printing machine, and in reality, we all know is the FED.

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6

Not exactly, the FED print money for themselves, they distribute almost none back to the participants in the economy, the TEZ printing machine distributes 90% of what is being printed assuming a baker with a 10% baker fee. Other bakers like you distributes 94.9% because you are one of the lowest fee bakers (5.9% baker fee). Awesome :ok_hand:

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7

Arthur you’re wrong, in this statement and I proved it mathematically, if subsidy creation doesn’t pass through us, so we can apply baking fee and is instead burned, we lose TEZ and delegators earns more. So yes, is taken from us.

This is another fallacy when I asked him what could happen if the trading fee is reimbursed instead of burned:

And the wealth tax with the purpose of redistribution doesn’t affect the agreement between bakers and delegators @murbard. I had an agreement with them of 5.9% baker fee, then you come with your wealth tax to affect that agreement. See how I caught you? Why you just don’t recognize that you are wrong? You in favor of redistributing wealth with hidden taxes, and you are affecting my voluntary agreement between my delegators and me. That is the biggest reason I’m so mad with this. Now, i will have to be a dick and tell my delegators that I might need to raise fees. There is nothing wrong in being wrong, just say it, oops, I’m not that good at economics, and let’s get over with it.

I’m salty, yes, I accept it, but at least I’m very passionate about Tezos, and I’m honest, and I never keep anything to myself. You decide not to debate me, not because you don’t like me, or I’m salty, is because you are just arrogant to accept you are wrong, many people told you about your arrogance with the tzbtc issue. I may not know anything about coding, but I do know my stuff about economics. Honestly, I would have no problem with experimenting with tzBTC if that tax wasn’t present. But it is, is right there. Come here and debate this with me, let’s have a conversation of 10 pages at least. Your answer is always, “I already told you why” yes Arthur and your answers were pure fallacies everywhere. Let’s discuss your fallacies, each one here.

Another fallacy, if you print, 1,000,000 tez per block and reward immediately to bakers that charges a 10% baker fee, it will also be around 0% net diluting inflation, simply because 90% of that million tez, 900,000 will be distributed to delegators, so in reality delegators will have some dilutive inflation which will be offset by bakers distributing also transaction fees to them, you explained to me once that a baker charging 10% fee, also share transaction fees to his delegators, so the NET inflation of delegators is in fact deflationary by 0.15% a year due to transaction fees and for a baker charging 10% baker fee, deflation is about 0.5%

So yes, increasing the block reward immediately sent to bakers would remain neutral, doesn’t matter if you increase it 2.5 TEZ or 1,000 TEZ, it will remain neutral NET 0 dilutive inflation as it is today. The only thing that will not remain neutral anymore if the 2.5 TEZ is instead burned because it will affect bakers earnings and the personal agreement between the baker and his delegators, because now baker will have to adjust the baking fees.

It is about protecting bakers incentives, not fooling them into maintaining steady their baking fee with this hidden wealth redistributive TAX.

You want to make TEZ a SoV currency, well then BURN all the transaction fees of bakers, burn the block rewards, Boom you will have a SoV currency with only a few baking nodes of the foundation active, let’s see how that works for descentralization. That’s the only reason you put this hidden tax, so it “gets us closer” to your beloved SoV. The only way to make TEZ a true SoV is too drastically increase on-chain transaction volumes due to transaction fees creating deflation, not with a magical redistributive wealth tax to bakers, that will only decrease bakers nodes, I mean you can do it, but expect just the TF foundation running :rofl: Don’t take shortcuts man, don’t tax us.

Let’s do LB with reimbursed trading fee to bakers. We get liquidity benefits and 0 reduction of bakers incentives.

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8

I don’t understand why you see a dissymmetry between minting and burning. Who is in possession of the money burning machine?

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9

So, do I understand you correctly that you think you are entitled to a bakers fee in proposal A?

And proposal A would also be wealth redistribution since tez are being created without bakers involvement and then burned?

10

I see. You are fighting for your right to take a cut of EVERY AND ALL tez created anywhere, regardless if those tez would be destroyed instantly right after. It is a fight for a monopoly on tez creation. LB in its current form would violate that monopoly.

How quaint.

11

If those two are symmetric he is not owed a cut.
If those two are not symmetric he is owed a cut.
He wants a cut, so these two are not symmetric.

12

Until an equilibrium is reached, the incentive to provide liquidity will be higher than the incentive to bake. That’s the point of this proposal.

13

Yes, anything that comes from the TEZ printing machine should go straight to bakers, so we apply baker fee. Because if is not like that, there will be a discrepancy in earnings before and after BF. Do you know what a TAX with the purpose to distribute wealth is? The TAX will happen every time something from the TEZ printing machine goes to the burning trash.

Let’s change the numbers, instead of 6% that goes from the printing machine to the trash can, why stop at 6%? Let’s increase it to 99%, so bakers can only apply baker fee to the remaining 1%. You think that would be a good idea?

I’m in a fight to not reduce bakers incentives by applying them a TAX with the purpose of redistribution of wealth. This is why 100% of what comes from the TEZ printing machine should be subject to a baker fee. Like is done now, I just want the status quo, because after LB our earnings will be reduced, this is a fact that nobody can deny, I mathematically proved it. Unless you are against mathematics. And is not a monopoly, is a governmental organization governed by 450 bakers.A monopoly would be if only the TF could decide over the printing machine.

14

So, Arthur is obsessed with SoV? that might be the reason he put that wealth TAX there. I agree that the only way to make is a SoV is to increase number of on-chain transactions so more fees are earned by bakers and distributed to delegators.

This, it would be disastrous to our earnings.

They would NOT BE DESTROYED, they would be distributed to all TEZ HODLERS, what part of that you can’t understand? The only coins that can be valid to destroy are those unrelated to what the bakers earn (transaction fees and block rewards).

Create a project in Tezos that burns TEZ, that would be a valid burn.

1 Like
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:clap:t2: :clap:t2: :clap:t2: :clap:t2: :clap:t2: :clap:t2: :clap:t2: :clap:t2: :clap:t2:

Here is a good project I mentioned a month ago, completely unrelated to block rewards and transaction fees, that burns TEZ to increase deflation.

16

@tezoswakenbake @AlexDurden let me thank you for laying out your positions so clearly and explicitely in those last posts. That should enable every casual observer to come to his own conclusions regarding your gripes.

I agree i was somewhat sloppy in the use of the word monopoly.I will seek to improve in the future.

17

Too much noice around nothing. We should focus on the biggest picture and look how we can improve LB in future proposals .

The Tezos ecosystem will benefit from LB all in all. Nothing is set in stone, we can easily change details of current implementation in future proposals.

Actual LB implementation have been discussed since months. Resources were publicly accessible and everyone could do this math. Despite this, overall consensus was very positive towards it (and still is).

2 Likes
18

A decrease in rewards for validators is “nothing” for you? You treat centralization risks too lightly. How many times it has been mentioned that LP’s would still get the subsidy regardless if the trading fee is reimbursed to bakers instead of burned? It would not affect at all the funding of LP’s.

We can progress without sacrificing bakers incentives. Bakers were fooled with this wealth tax, I hope they see this post, so they know they will need to raise baker fees due to this egalitarian measure proposed by @murbard and @sophia

19

With liquidity baking activated:

So what i understand from your math is.

Your earnings with current status quo are 7.35516 (this is because you process 100% of the TEZ printing machine)

Then with liquidity baking with trading fee burned you have an increase from 7.35 reward to 7.58, but bakers only processing (applying baker fee) 94% of the TEZ printing machine.

And then, with LB with trading fee reimbursed you have an increase from 7.35 reward to 7.8, but with baker processing 100% again of the TEZ that is coming out of the TEX printing machine.

So the people that say that from 7.35 TEZ to 7.58 TEZ is still an “increase” are completely ignoring the fact that the whole pie of incentives is now smaller for bakers and bigger for delegators. While the 7.8 TEZ reward (but with bakers processing again 100% of the printing machine), bakers would have the whole pie again of reward compared to when you were earning 7.35 TEZ as with the current status quo.

20

First, let me thank you for your patience in explaining all this.
This is utterly fascinating and i think i am getting the hang of it at last.
Alas, there is a slight problem I encountered that I hope you can help me with.
“The TAX will happen every time something from the TEZ printing machine goes to the burning trash.”
Lets take the example above:
“A. Create an extra 1,000,000 tez per block, which are immediately burned.”
If we describe a model of this in an hypothetical Tezos VM, we are only talking about the data not the history:
State at (t0) = all adresses with contracts, values… = lets bind this to a name “Data”
so its:
S(t0) = Data
S(t1) = Data , mint n Tez
S(t2) = Data , n Tez , burn n Tez
S(t3) = Data

The first thing I struggle with is that by the state of the blockchain alone nobody would be able to know that there has been any wealth TAX Distribution done since nothing has changed from t0 to t3.
So unless anybody actively searches for and finds those operations in the history at t1 and t2 nobody would ever know about this dastardly deed.

Another slight hickup seems to me that a bigger n should lead to bigger wealth distribution.
Yet we see that S(t3) does not depend in any way or form on n and is always the same.
How will those poor souls know how much wealth has been distributed away if everybody still owns exactly the same?
How would you know how much you have to raise your fees to cover your costs if you still own the exact same amount of tez that are worth the same in fiat?
Thanks in advance for your help.