Tezos Foundation Delegation Strategy

Philosophy and Economics
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We would very much like to continue the discussion of a Tezos Foundation Delegation Strategy on Tezos Agora. As already mentioned in our medium article, the Solana Foundation has published its foundation delegation strategy last week.

The following goals are to be achieved through this strategy:

  • Improve the network’s censorship resistance and security by incentivizing an even stake distribution to avoid a small number of nodes accumulating a large majority of delegations
  • Encourage growth in the number of validators by providing a baseline delegation, the size of which is inversely related to the size of the number of nodes on the network, to lower-staked nodes to help make running a well-performing validator a financially feasible operation for new entrants to the network.

That these goals should be consistent with those of the TF probably needs no mention. Unfortunately, there is no foundation charter published on the website of TF.

At the latest with the potential upgrade to Edo, the TF’s view must be fundamentally reconsidered from our perspective.

Consideration 1: Lower Return for TF
When the Foundation first started baking, it was an important factor to ensure the stability of the chain. We believe that this goal has now been achieved. According to the biannual report, TF owned approximately 92 Mio. XTZ as of 31 July 2020 (VWAP $2.85 per XTZ). A total of 8 Foundation Baker are operated on AWS. Deducting inflation, these bakers generate approximately 1.07 % (6.03 %-4.96 %) return p.a. This corresponds to a return of 82,000 XTZ per month, of which 5,000 XTZ are currently distributed as Community Reward Program. With an average baker fee of 10%, the return would still be remarkably high and would not endanger such programs by far.

Consideration 2: Loss of control of the votes
The Tezos Foundation abstains from voting on any proposed protocol upgrades. It was discussed that with Delphi (now probably Edo), votes can be overridden by the delegators as long as they have at least one roll. In our opinion, there is no loss of control here either.

Consideration 3: Increased effort on the side of TF
We believe that one full-time position should be enough to track the rewards and votes. However, the monthly AWS costs for eight bakers and the costs for Blockscale should allow a salary for this person, even in Switzerland.

From a rational point of view, there is no counter-argument for us and the potential benefit is much higher.
More Bakers -> Better Tooling -> More Testing -> Bigger Community -> Efficient Software to lower hardware requirements -> Bakers advertising is basically Tezos advertising, etc.*
Without wanting to criticize the strategy of professionalizing the validator set (i.e. corporate bakers like Sword Group, Sygnum, or EDF), we must not forget who develops and maintains the current tooling (Giganode, TRD, BCD/BB, Beacon, and so forth) - it is the community and nobody else!

Furthermore, we think that if you can integrate technology from others, then you can do that with strategies as well. Other foundations show us that it is possible and we could easily copy&paste the delegation strategy from Solana. What was frightening (in a positive sense) for us was how much this fits right away.

We would like to invite everyone to participate in this discussion and to hear the opinion of the community and the Tezos Foundation!

*We have copied this causal chain from Johann Tanzer

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This is an absolutely phenomenal proposal.

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We need something like this! It would be nice to start making moves that will see Tezos as an entity and a set of technologies be a decentralization leader on all fronts including how the TF operates within the ecosystem.

Thank you for working with utility companies, small towns and future money forges but don’t forget about your own bakers and your own community and the reason decentralization and transparency are amazing and very much expected as step #0!

Open up your kimono, we have already done the same. Let’s flip Ethereum on market cap and let’s flip Decred on openness and ecosystem funding! Let’s change the world together, let’s not just exist in it somewhere in the damn background!

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This proposal would basically mean free money for bakers?

Who is going to oppose this?

While I’m not sure if it’s the correct move, I would applaude any move to lower the TF Tezos Balance sheet.

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While having to admit that I’m not yet sure I grasp all the potential consequences of this proposal, I must say that I find it very intriguing.

If I understand it correctly, the TF would close down approx. 80% of its baking operation (so maybe one or two of the 8 TF bakers would remain operational) and delegate the freed-up XTZ to various bakers following some rule-set yet to be determined. Based on the rule-set, this delegation could be automated and redistributed according to the rule-set whenever “baker-concentration” changes.

What would be the consequences?

  • Under the assumption that the rule-set would favour smaller bakers (which it would have to do to achieve the goal of a roughly even stake distribution in order to avoid overpowerful bakers), this would indeed lower market entry barriers for new bakers, which would be a good thing for the network’s health.

  • Depending on the size of the TF’s delegation to a baker and a potential threshold of non-TF stakes, where the baker in question would lose the TF’s delegation (or parts therof), this baker’s economic incentive to compete with other bakers along the dimensions of fees, payout frequencies, reliability and reputation might decrease. The rule-set would have to take this into account and find a smart solution with smooth transitions from this kind of “subsidy” to a non-subsidized operation.

  • The TF would loose a substantial part of its ability to generate an income which can be used to further the TF’s proclaimed goals of fostering the ecosystem and driving adoption. The TF’s treasury might hold a very large sum today, but long-term funding has to be considered. Interestingly, if the TF sticks to its mission, its ultimate goal might be to make itself obsolete by enabling the decentral ecosystem to carry out its mission (though this probably cannot be in the interest of the actual people working for the TF)…

  • As stated in the original contribution, the loss of votes shouldn’t concern the TF since it abstains from actively influencing the governance process anyways.

  • One thing I am not sure about though, is whether this scheme might actually open up an attack vector for a Sybil attack (which might be directed at block generation or the governance process) by someone creating a lot of bakers (just putting in the minimum amount of one roll) but gaining disproportionate power by receiving TF delegations that are allocated to exactly those small bakers. The attacker would have to come up with considerable resources but at the bottom line, the required amount would be lower when compared to the status quo?

I think the proposal is worth a serious discussion - I would like to read more opinions…

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The TF would loose a substantial part of its ability to generate an income

Why? They would lose 5-10% in baker fees.
It could actually be a part of their delegation policy, a baker has to keep a 5% fee in order to be delegated.
Any entity would resist losing money but 5% of rewards for the sake of decentralization and community love looks like a win win

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A good start would be for TF to move some of their Tezos to non baking accounts as that way they are not picking winners and losers. We would all benefit evenly as we would all get a rise in rewards. This may cause some bakers to get over delegated but this will also encourage smaller bakers to open up as the returns would be more attractive. The first goal is for TF to move enough XTZ so their returns are below the inflation rate and therefore they get smaller over time (as a percentage of the total eco system) rather than the current situation where they are growing, resulting in a more centralised chain.

So I don’t understand why we need complex strategies that benefit some and not others. By moving some of the funds to non baking accounts we all immediately benefit from higher rewards. TF just need to be cautious not to do too much at once in order to avoid too much over delegation.

Simpler the better and extremely fair. Such a move would not only mean more rewards but would also drive the price higher because we start to become less centralised. Win win for everyone.

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Good point - last night, I actually overlooked the rewards that would be returned to the TF from the various bakers and that these are the larger part of the total XTZ generated through baking - but you’re absolutely right!

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That’s not a win for TF because they get diluted this way and can’t participate in governance
Whereas if they delegate they only lose baker fees

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TF represents the community and currently we are become more centralised as TF has gone from 20% of the ecosystem to 27%. The more centralised we become the more the price will drop and that is definitely not good for TF. A centralised chain is worth zero. The point of the foundation is to get smaller and smaller and eventually disappear and the eco system should stand on its own two feet.

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TF represents the community and currently we are become more centralised as TF has gone from 20% of the ecosystem to 27%. The more centralised we become the more the price will drop and that is definitely not good for TF. A centralised chain is worth zero. The point of the foundation is to get smaller and smaller and eventually disappear and the eco system should stand on its own two feet.

TF represents itself and is one of the many centralized entities in the decentralized ecosystem
The price doesn’t drop because of the centralization, it drops if there’s selling pressure.
Bakers sell and TF doesn’t
I’d rather see TF pay for the research and development with this money
Decentralization is a goal but right now the development is not self-sufficient and independent, no one comes in and builds without a grant

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We sold half of our Tezos 6 months ago because it was getting too centralised. I’m pretty sure we were not the only ones.

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I would also point out if they paid for grants and research with their XTZ what do you think would happen? Price would drop even further as the XTZ would have to be sold. I will certainly be getting out of Tezos completely if they do that.

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But isn’t that exactly the point? Isn’t the goal for them to gradually fade away from the governance process and make the Tezos ecosystem to be able to stand on its own, totally decentralized and censorship resistant?

This looks like a win for Tezos so it’s actually a win for TF’s alleged goals. Let’s not forget the last 2+ years their % ownership of the total supply has been growing and this problem has not been addressed or planned to be dealt with. Why? The more we keep this pace the more the problem grows.

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Distribution is good.
Create demand to counter the sell pressure.

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I didn’t mean to pay all the grants with tez, but some amount needed to give them skin in the game.
not talking about core development but about some smaller projects

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With a delegation strategy they can put they tokens to work to create more incentives to hold tez.

People go crazy for airdrops. A delegation airdrop would be great to stir up some positive interest.

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Plus they lose the costs of maintaining the aws bakers

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Hey, thanks for the suggestions.
In addition to contributing to the security of the Tezos network, TF baking helps to combat the risk posed to the network of exchanges (or any one actor) controlling an increasing share of total stake.
We have been developing a campaign to promote and encourage more self-baking (e.g. Kiln, MIDL.dev) and open delegation via wallets like Kukai. Initiatives like these will help to further decentralize Tezos and contribute to a more robust network.
Nonetheless, we understand the community’s concerns and have prioritized a formal plan for TF baking and delegation that we will share with the community once ready.

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I appreciate that TF is looking to address our concerns, but I just want to give an anecdotal example of what the current baking situation has caused. My current Baker, who I have been with since 2018 (they’re great) have stated that if there is no change in the baking regime from TF, they will shut down their baking operation. They’re not looking to grow as it is currently not profitable for them to do so considering that the 1% beat on inflation doesn’t cover their costs. They’re running negative because they have expensive security costs in an effort to secure their baker to the best of their abilities.

And one of their largest “competitors” cutting into their profitability is TF itself! I know a lot of people say that the only reason to bake is to not get diluted, but if you look at it rationally, people choose specific crypto networks based on profitability. And right now, the TF baking situation is making large baking operations in specific jurisdictions largely unprofitable.

This is aside from their concerns with the growing network centralization due to TF’s 1) large allocation and 2) TF’s beat of inflation (which given allocation size, is a HUGE chunk of XTZ). You guys have to do something to dilute your holdings for the betterment of the network. Stop baking with the +1% of XTZ you beat on inflation at the very least. Support private and public baking operations that don’t have holdings capable of competing with TF to bake blocks.

My suggestion: wind down TF Foundation Bakers in a step-wise fashion on a hard schedule. 1 Baker per 6 months, and move the XTZ to a time-locked smart contract (that will unlock 4 years after wind down) non-baking address. With 8 Bakers, it would take 4 years to unwind fully, and then TF could begin baking again after they’ve diluted a bit. If all 8 being wound down is just too much (for whatever reason …) then shut down half the bakers. Either way, it would boost the economical viability for both public, private, and solo bakers, and reduce the impact TF’s large XTZ holdings could have on the governance of the protocol. Decentralization is the goal, not building more and more assets over time in the Foundation’s Treasury.

TF has ample financial assets on hand to support the network, and the foundation could always turn their bakers back on (several years down the line) once their holdings are diluted to a reasonable amount compared to the rest of the network.

Please, do not sweep these concerns under the rug. They’re crucial to the long term health of the network. If TF’s main concern is making sure quorum is met, then make a push to get baker-vote-override implemented, allowing TF to delegate while still retaining their governance power.

And before anyone tries to say “I don’t understand the purpose of baking, its only to maintain network position” … how is it helpful for one centralized entity to maintain (AND GROW) their XTZ into infinity when they own over 10% of the network?

People mine Bitcoin because its profitable - people want to bake XTZ because its profitable.

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