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.