Binance stakepools choking the SPO Ecosystem

I have a governance topic that I would like to raise. It’s my belief that Binance represents a threat to the Cardano SPO ecosystem from a decentralization standpoint. It’s creating economic pressure on smaller stakepools to survive. Binance has at least 38 stakepools accounting for approximately 2,432,000,000 (2 Billion 432 Million) 6.5% of total Ada. I believe that this is very damaging to the SPO community. IOG also holds a similar monopolistic position, but they are going to be distributing their Ada and addressing this issue.

I propose that we implement a governance restriction policy in order to facilitate the breakup of any concentrated power from a single entity and especially to force the breakup of any monopolistic positions such as Binance currently holds. We need to implement some upper boundary that prevents any single entity from deploying stakepool(s) that exceeds a maximum amount of Ada. For example, no single entity should be permitted to monopolize the SPO ecosystem either through staking or controlling an amount of Ada in circulation (or more restrictive vs total Ada staked) greater than 0.0075%. I calculate this to be approximately 285,000,000 Ada that could be distributed across 8 fully saturated stakepools at a K factor of 1000. Any entity controlling 8 stakepools can certainly be profitable.

Note that Binance holds a monopolistic position on their platform preventing any of their customer from selecting stakepools from outside of the Binance pools. This is anti-competitive for independent SPO’s and creates unfair advantages for Binance over the rest of the smaller SPO ecosystem. Even if Binance is the owner of all the Ada, then we still need to dissolve their monopolistic position of the SPO ecosystem. They need to disperse their Ada across all SPO’s. Binance has very deep pockets and can afford to take a portfolio approach to staking their Ada across all stakepools.

In order to implement this governance policy it will require significant support from the Cardano Community. I know that this may be controversial to the community, but we need to have a discussion about this topic.

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Binance and other exchanges cannot be blamed for staking on behalf of their customers. Of course an exchange could offer the customer the choice to which pool they wish to delegate, but why would it do so? The exchange could also outsource the staking operation to some external pool operator but again: why would it do so?

The reason why exchanges hold large amounts of crypto is that customers choose to use exchanges as custodians of their funds. If we want to change that we need to look at the reasons people choose exchanges over self-custody. I believe the main reasons are convenience and security. What offerings can SPOs develop in their local market that are more attractive to customers than storing funds on a foreign exchange?

This is the question to answer for SPOs instead of calling for policy changes that are impossible. We can’t have a decentral organisation of autonomous actors and at the same time somehow control who can or cannot open a stake pool. At least I have a hard time imagining how this could be accomplished. What policy change do you propose? Elect a regulatory body to hand out stake pool license for a fee? I would vote no to such a proposal for many reasons.

As to your initial concern of small stake pools being under economic pressure. Every SPO already made an economic decision before they even opened a pool: Do I have enough ADA to make running my own stake pool more profitable than delegating my funds to someone else’s? If your answer to that question is no and you still open a pool you are gambling on delegators to come to you and make you profitable. That might work to an extent while we are still in an early phase but it will cease to work before long.

On the other hand nobody is preventing smaller players from pooling their capital and creating a profitable pool. In fact that is the whole point of having stake pools in the first place.

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I strongly disagree with your response. Binance currently holds a monopolist position by not allowing the option for customer to be able to choose other external stakepools. The evidence for their abusive monopolist position is that they are charging 6% variable fee which is significantly higher by 500% than what customers can obtain in the independent stakepool market as a whole.

The reason why exchanges hold large amounts of crypto is that customers choose to use exchanges as custodians of their funds. If we want to change that we need to look at the reasons people choose exchanges over self-custody.

Most new users of crypto do not have, and will not have the sophistication in knowing how to self-custody their Ada. Many will not even know that they have other options for staking their Ada because they are not part the larger community. Furthermore, Binance does not provide them with any education or options of staking outside of Binance.

Binance has a captive customer base and they are using their monopolistic position to gain advantage over all other SPO’s and taking advantage of their customers captive position by charging 6%. By all definitions, this is predatory, anti-competitive and monopolistic. It’s the same legal argument for why Microsoft was guilty of engaging in monopolistic practices by not offering other internet browsers within the MS Windows O/S platform.

We can’t have a decentral organisation of autonomous actors and at the same time somehow control who can or cannot open a stake pool.

First, I am not trying to define who can control a stakepool. I am talking about the amount of control and number of pools.

Yes we can, and we must. That is the primary purpose for having a governance structure. We can easily implement a governance policy to control this behavior through the protocol and other governance oversight.

We need to implement governance practices that discourage centralization or the concentration of control. We can mitigate this and determine what is reasonable. Binance having 38 stakepools is not reasonable and is damaging to the larger SPO ecosystem and decentralization. With the next K factor change, we can probably also safely assume Binance will have 76 pools.

You need to think about the big picture. Binance is just one of many large institutional players who are going to want a big piece of the Cardano Ecosystem. Once the big financial institutions start to understand that Cardano is the operating system of the worlds Future Economic Financial System. Then they are going enter the market and start purchasing up large amounts of Ada and then will try to take control in an attempt to start dominating the ecosystem.

There are hundreds of large financial institutions that could easily purchase $1 billion dollars of Ada without even a second thought. Because they understand the implication of power and control. Large institutional players including Binance could easily drop their variable fees down to 0% and maintain this rate indefinitely (forever) to push out the smaller SPO’s. We need to be proactive against this type of consolidation of power before it even has a chance to take root. We need to take action before the large institutions gain a strong foot hold and have the ability to control the vote to their advantage.

I would like other SPO’s and all Cardano community members to provide their input on this topic.

I’m confused. Are you saying Binance would be wrong charging nothing and that they are wrong charging 6% at the same time? Is there a margin you would be comfortable with?

Also, what is the specific policy you would like us to adopt? Some kind of entity that grants stake pool licenses? If so, what would be the criteria and how would those be enforced?

Hi Waldmops,

I understand that what I’ve presented seems like a contradiction and / or is counter intuitive. But its not. There are two different serious economic attack vectors which are being presented. Both are related to the primary concepts of a game theoretical adversarial opponent, for which Binance is a real world example.

First concept (Monopolistic Barriers of Entry): Binance, is garnering an unfair advantage over their customers captive position by charging 6%. Which I have already stated is predatory, anti-competitive and monopolistic in its current structure. Binance customers are paying much higher rates than perhaps what they might freely otherwise choose because they are restricted from any other options / choices. The Binance platform is not inclusive of the full SPO market which would provide the Binance customer the ability to make a more fully optimized economic decision. They would possible choose lower cost SPO’s if they were permitted to be able to select from the larger free market stakepool ecosystem as a whole.

Binance has an anti-competitive advantage over all other independent SPO’s, because they are able to extract a 6% rate of return as a result of their Monopolistic position. While, the free market SPO community are earning much less than 6% because we are competing within the broader open SPO free market against each other (i.e. non-monopolistic, competitive market). The unconstrained market forces create an equilibrium. The Binance platform and its 38 stakepools is interfering with this free market mechanism and economically damaging the ecosystem.

The Binance stakepools are artificially insulated from direct competition and the free market mechanism and therefore are able to profit at a much higher rate because of their captive customers base while at the same time harming their customers. They have created an anti-competitive barrier to entry against all other SPO’s from being able to receive staking rewards from the Binance customer base.

My stakepool as well as many other SPO’s would be very happy to host the Binance customers Ada staking for much less than 6%. Therefore, having the opportunity of benefiting the Binance customer as well as the SPO ecosystem. But neither the Binance customers, nor the independent SPO’s have this opportunity because of the barriers to entry created by the Binance monopolistic position of their platform.

Second concept (Dominating Control): Let’s now assume that the Cardano community was able to force Binance to open up their platform to all other SPO’s, and they are an available option to the Binance customer base. This would solve the above Monopolistic Barriers of Entry problem. The Binance customers would be able to stake with any existing SPO on the Binance platform.

The next adversarial action that Binance would take, would be to drop their rates down to 0%. This is known as a “Price Dumping Strategy” and is not legal within most trading partnerships. They would do this because this would obviously attract the flow of Ada into their stakepools and away from any other independent stakepools. Customers would naturally gravitate towards the highest personal rates of returns when earning rewards. This benefits the customer, but harms the SPO competition.

Binance can afford to do this indefinitely because they can subsidize and absorb these “lost costs” since they have institutional economies of scale and deep pockets. Technically they would be artificially subsidizing their stakepool operations. Why would they do this, the answer is simple. This is another monopolistic mechanism to choke out competition.

Slowly but surely, all small independent SPO’s would loose money and eventually go out of business. As more and more customers onboard with Binance and purchase Ada through Binance, those Ada would flow into the Binance stakepools. Binance can just simply continue to increase the total number of stakepools that they would need in order to support all the new customers that adopt Ada.

There is no upper limit for the number of stakepools that Binance or any other large institutional player could deploy (Coinbase, Fidelity, Others). Right now, Binance has 38 stakepools, when the K factor goes to 1000, then there is a high probability they will increase that to 76 SPO’s, therefore fully maintaining their concentration of control, while the rest of the SPO’s get diluted. Binance can and will continue to add stakepools, if left unchecked. What is to prevent Binance or any other large institution from having 100, or 200 stakepools charging 0%.

(Hostile Takeover): Another adversarial scenario that I have not discussed but that is a very strong future possibility is for large institutional players purchasing the whole Stakepool Operation. The fastest way to take / gain control over Cardano would be to buy up the Stakepools that are already at peak saturation.

The next step would be to start identifying customers who own the staked Ada using KYC practices. They could then offer the Ada owners a large premium to purchase their Ada that is staked within the stakepool. This is how a very covert hostile takeover of Cardano could occur. These purchases would be outside the market a therefore would not directly impact the price of Ada on the open market as they slowly start buying up all the SPO real estate. The above recommended governance policy would also limit this scenario.

Governance Policy: The only viable governance solution that we have available is that we must limit the amount of stakepools that any single entity is permitted to control / operate. This can be facilitated through several different mechanisms. We can limit the amount of Ada controlled by a single entity through stakepool registration. We can combine the stakepool control limit with a required minimum variable rate fee amount, similar to the fixed fee amount. This can be used to discourage any anti-competitive behavior from large adversaries.

We do not want to exclude anyone or any specific entity from being able to create stakepools, we just need to implement some governance parameters limiting the amount of control that any single entity can gain. If all entities including Binance were limited to hypothetically only being able to directly control 8 stakepools, then they would have no choice but to open their platform up to all other SPO’s in order to provide these services to their customers. If they wanted to operate the 8 SPO’s at the 0% rate, then their impact would still be constrained. I don’t know the best answer, but we need the Cardano community to weigh in on this discussion.

Hopefully this make some sense. We need to take action and start having and open discussion about this topic while we still have the ability to control this.

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Your analysis would have some merit if Binance in fact had a monopoly on staking. In fact they don’t, not even close, and I believe you are trying to solve the wrong problem.

Nobody is forced to stake with Binance, so they don’t “extract” anything more than any other stake pool. Instead, whether you like it or not, they get away with 6% margin because their customers chose to stake with them rather than with some other pool. So the question to ask is: why would someone be willing to pay more for a service than the market demands?

The answer to that question, I argue, has nothing to do with economic coercion and everything with convenience. Can you put yourself in the shoes of someone who wants to invest some money in ADA? The easy way has four steps already:

  1. Open exchange account
  2. Wire some money
  3. Buy ADA
  4. Stake

Suppose the same person wanted to do it the “right” (self-sovereign, decentralized, …) way. Then the process becomes a lot more involved. I know that first hand because I have been there many times.

  1. Find a trusted friend who can explain how everything works
  2. Open exchange account
  3. Wire some money
  4. Buy ADA
  5. Buy hardware wallet
  6. Set up hardware wallet
  7. Decide how to protect the card with the seed words
  8. Download and install Daedalus after having found the right website
  9. Realize that Daedalus is a full node, downloading the whole chain would take hours and I don’t have the 7 GB free disk space I need. Decide to use Yoroi instead
  10. Download Chrome
  11. Install Yoroi and connect hardware wallet
  12. Withdraw ADA from exchange (generate address, find confirmation email, initiate withdrawal)
  13. Wait for the ADA to arrive
  14. Find a good pool to delegate to. What are the criteria? Ask the trusted friend vor advice
  15. Delegate. Wait - how many things do I have to check on the hardware wallet again for this step alone?
  16. Check periodically whether the pool is still a good pool. Is it still producing blocks? Did the costs change?
  17. Still wonder how to safely keep the hardware wallet, seed phrase, passwords, PINs etc.
  18. Wonder whether you would be able to identify all the right steps if you ever wish to sell some ADA.

For somebody who is not already “into crypto”, knowing what these steps even are is a nearly insurmountable barrier, let alone executing them correctly without shooting yourself in the foot.

This deplorable user experience is the real problem we need to solve. And fast!
With that in mind, keeping the ADA on the exchange and let them take 6% of what is essentially seen as free money does not seem that unattractive after all.

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I respectfully disagree. Please provide relevant support for your premise of why Binance does not hold a monopolistic position on their platform within the context of Cardano Staking.

The ease of use and technical complexity argument that you provide is not a “legally enforceable defense”, nor is it a logically consistent rebuttal against the claims of monopolistic powers. Furthermore, it also does not provide any justifications for the exclusion of other SPO’s from the Binance platform.

“Nobody is forced to stake with Binance, so they don’t “extract” anything more than any other stake pool. Instead, whether you like it or not, they get away with 6% margin because their customers chose to stake with them rather than with some other pool. So the question to ask is: why would someone be willing to pay more for a service than the market demands?”

Are you a StakePool Operator? Because it would appear from your above statement that you do not fully understand how staking works, or how the stakepool variable fee actually works. You contradict your main point within the same paragraph. "why would someone be willing to pay more for a service than the market demands?"

The average SPO variable fee rate is far below the 6% rate that Binance is charging, and therefore, a lower variable fee would be in general much more desirable to Binance Ada stakers. Binance Ada stakers would vote with their Ada, if they actually had a free choice to pick stakepools from outside the Binance platform.

The 17 step technical complexity that you define above for staking on Binance, directly supports the primary legal claims of why Microsoft was sued for monopolistic practices. Binance can and should make all Cardano stakepools available to their customers on their platform. They can facilitate the 4 step process that you defined above for the SPO ecosystem as a whole. Not doing so, places them in an advantages position that supports my main thesis of a monopolistic position. We can not expect Binance to resolve this issue as a result of some benevolent self interests.

This complexity problem can easily be solved by requiring Binance and all other exchanges to open up their platforms to all SPO’s within the Cardano ecosystem. Emergo could facilitate the integration.

It is still my position and your rebuttal has not disproved, that Binance holds and maintains a monopolistic position on their platform based on existing case law. Again I refer to the the United States v. Microsoft Corporation reference. Microsoft was found to hold a monopolistic position because they limited the options of other browsers on their platform, even though there were numerous other browsers available in the market that users could download and install.

US vs. Microsoft Legal Claims:

United States v. Microsoft Corporation** , 253 F.3d 34 (D.C. Cir. 2001),was a noted American case in which the U.S. government accused Microsoft of illegally maintaining its monopoly position in the PC market primarily through the legal and technical restrictions it put on the abilities of PC manufacturers and users to uninstall Internet Explorer and use other programs such as Netscape and Java.*

US vs. Microsoft Settlement:

On November 2, 2001, the DOJ reached an agreement with Microsoft to settle the case. The proposed settlement required Microsoft to share its application programming interfaces (API) with third-party companies…

Staking gives optimal rewards for saturated pools. Binance makes the most money when they don’t have to pay the 340 + pool fee % to others.
Binance cannot guarantee the uptime or quality of other pools.

Therefore, Binance is incentivized to stake their institutional ADA with themselves, ensure fully but not too saturated pools, and run their own pools.

If I had 64 million ADA + I probably wouldn’t stake to small pools either. It doesn’t make financial sense.

MS Windows is installed on almost 80% of desktop computers, maybe even more in some places. What percentage of ADA in circulation is held and staked on exchange by Binance customers? Is it even in the double digits? At what point would that begin to be a monopoly?

MtGox had a monopoly before Bitstamp and others entered the market. Today no exchange is even close to dominating the market.

To answer your question: yes, I’m running a pool and I set the margin to 0% to make the point that it is possible to run a pool profitably with the fixed fee alone.

That said, I agree that 6% is high, but not that high. Some “free” pools charge more. Most seem to cluster around 3 or 4%. So we are talking about a difference of 3% of maybe 5% APR, which amounts to about 25 USD per year if you stake 100’000 ADA. Not much for some convenience and peace of mind if you ask me.

Whether we like it or not we have to accept that some people prefer convenience over access to all options. There are good reasons for such a choice.

Bottom line: I’m not concerned about exchanges staking on behalf of their customers. Voting, however, is another issue and I wouldn’t want to allow an exchange to vote using their customer’s voting power.

Hi Gyther,

Thanks for your response and these are reasonable assumptions.

But I would counter argue that in the context of a stakepool that has 64 Million Ada staked, that the 340 ADA Fixed Fee Cost is trivial from a ROI benefits standpoint. It’s barely even measurable. Compared to the greater economic damage that is being caused to the whole Cardano SPO ecosystem as a result of Binance hosting 38 soon to be 76 SPO’s (StakePool Operations).

Your second point about Binance being incentivized to stake their own institutional ADA, is probably the strongest argument that Binance could make in defense of their practices. I can certainly agree with the logic, that if I privately owned 64 million Ada, that I would definitely create a private pool and manage it myself. Nobody would fault another for this type of behavior. It makes good economic sense.

But there is a significant difference between either you or I (Private Owners) being the owner of a 64 million ADA cache and managing a single stakepool, vs Binance currently having 38 stakepools hosting global customers ADA. We do not know what percentages of the 2.4 Billion plus ADA is Binance Owned ADA versus what is owned by customers. But regardless of who owns the 2.4 Billion ADA, this concentration of stakepool control is damaging the Cardano System.

This is very different than a private company / owner of a single stakepool that would have minimal impact on the larger SPO ecosystem. Whereas Binance is having a significantly detrimental impact on the SPO ecosystem. There are literally hundreds of small pools who could benefit and survive from having a minimal stake amount of 3 to 5 million from the Binance cache of 2.4 Billion ADA locked into the Binance pools.

There is a major difference between a Private hosted SPO and Binance who is a large public institutional participant who also has direct access to a global customer base and is also in a superior market position compared to other SPO’s.

Binance has “Asymmetric Advantages” that no other participants within the Cardano Ecosystem have, not even IOG has this this type of asymmetric leverage. This is a very unequal / skewed playing field that will only result in the consolidation and control into the larger institutions if this is not addressed early within the governance model.

A single entity controlling and hosting 38 SPO’s is not economically reasonable for the Cardano Ecosystem and Decentralization. At this time, there is no upper limits on how many SPO’s Binance can implement, and you can be certain that they will not stop increasing their number.

It’s currently 2.4 Billion representing 6.5% of all ADA in circulation. This will only continue to grow if there are no upper limits placed on the number of Stakepools permitted by a single entity.

“At what point would that begin to be a monopoly?”

Do we really want to take a wait and see approach, because by then it will be to late. The damage will already be done.

A large number of small ada holders using an exchange for custody and staking is not a threat. In fact I find it quite encouraging because a large holder base is necessary to have a large user base.

Of course I have no way of knowing how many ada holders are on Binance and how much they hold, but my assumption is reasonable because the more you hold the stronger the economic incentive becomes to delegate yourself or even solo-stake on your own pool.

You are correct in that rich individuals and institutions exist and they tend to become richer over time. That can become a problem and it’s not an economic but a social one.

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Good analysis throughout this thread. I agree we need to accept this is a free market (a good thing) and that the way we counter concentration on exchanges is to make it simpler for users to directly control their ADA.

Part of the solution I believe is to develop very simple and straightforward custodial services that stake
pools can offer. This is tricky in the short term as it requires some components that will allow secure cold storage options and these don’t currently exist in the node/wallet. It also has regulatory implications in some jurisdictions as an SPO essentially becomes a bank.

It should become easier as smart contracts become available since funds can be locked (and hence protected) for a period. We can also expect regulators to clarify rules over time.

ADAvault plan to offer this service this in the longer term.

Hi waldmops,

I appreciate your responses to my posts. Let me clarify that I am not proposing we prohibit exchanges from providing staking services. I am proposing that if they do, that they should open up their platform(s) to support staking within the larger SPO ecosystem as a whole. My position about Binance staking being a monopoly is within the context of their platform.

I still believe that we need to defend against any type of stakepool concentration by a single entity or a consortium of actors (monopolistic in nature). I don’t have any preferences for how this gets implemented or enforced either through governance or some type of economic game theory model.

I suggest a governance approach because I am not sure how we could implement an economic solution from a technology standpoint. Perhaps requiring exchanges to allow for all Stakepool Operations (SPO’s) to be available on their platforms is part of the economic solution and prevent any type of price dumping strategy.

The Binance stakepool position will continue to grow, inflating like a balloon, and Binance will maintain its concentration, while all other stakepools will become more diluted or decentralized. This will become very apparent at the next K factor adjustment.

The most important thing is that the community needs to recognize that this is a potential threat that needs to be addressed. How it best gets solved can be determined by the community as a whole.

I read the whole thread. IMHO this would require some sort of resolution from the community (which I would support). But, as IOG helped the exchanges clarify things and get up and running when switching to Shelley, it might be to late (for now) to add regulations and requirements afterwards…?

Interesting discussion but I don’t see this with Bitcoin

You don’t see what with Bitcoin?