Legal issue and potential benefit of such

English General Discussions
1

Hello

I brought up an issue in around 2017 - 2018 with regards to proof of stake on Cardano.

My opinion (not professional) was that delegating Ada and receiving stake pool rewards is essentially the same as receiving winnings in a raffle/lottery.

Using this principle it would make receiving stake rewards participation in an illegal lottery as there is no license to operate a lottery within Cardano (although it is a decentralised system).

Flipping this problem and providing a solution may be beneficial, regardless of legal requirement.

Assuming POS is illegal eg operating an illegal lottery, how do we get around that?

There are two options : 1 - ensure skill is used to participate or 2 allow free entries alongside paid entries.

  • A skill based requirement is cumbersome and would require active and ongoing participation from delegators.

  • Free entries can simply resolve this and would require a sort of digital free entry with an attached processing fee.

How does a free entry work?

A free entry can be a postcard with a stamp on it, an SMS or similar, as long as the operator of the “lottery” does not profit from it, the entry is treated equally to a paid entry etc

Whats the benefit of this?

If we assume all the above and resolve the problem using a free entry system alongside paid entries, then stake pool rewards become a tax free event in many countries (including Germany).

This could provide a gigantic incentive to delegators to start delegating with Cardano.

I’m happy to answer any questions about this to the best of my knowledge.

For reference I am participating in fund 4 and 5

https://cardano.ideascale.com/a/dtd/Synthesis-Hybrid-Crowdfunding/340707-48088

&

https://cardano.ideascale.com/a/dtd/Raffly-io-the-simple-way-to-raffle/352180-48088

2

Can you elaborate the parallel between a cryptography rewarding system, PoS in this case, with a raffle/lottery?

One point I can stand out already is that a PoS system isn’t, in any way, the same as a fortune/luck system.

cheers

2 Likes
3

My basis for PoS being a potentially illegal lottery is simply that the token holder has Ada, the token holder then delegates these Ada and then potentially receives Ada by chance (RNG). The actual token holder does no actual work - this looks very similar to buying a raffle ticket and putting it in a pool and splitting the rewards - regardless of how complex the backend system providing the random number generation is or what its other function is, or what the function provided by staking is.

My main point though, is that in taking this point of view and running with it has actual real world benefits to Cardano which would help to secure the network, perhaps more so than it is now.

4

Ok, I now understand what you mean.

The preponderance here is the chance factor, which isn’t in what Cardano PoS is based.

The only parallel I can think of is that both are rewarding systems; nonetheless thats the only factor they have in common.

cheers

1 Like
5

Thanks for the reply. Absolutely, it’s about the element of chance that I’m basing this upon.

If not based on chance what is happening in POS? Surely a slot leader is selected at random?

6

I think I’m not wrong in assuming that chance and randomness are two different things.

I’ll leave you a great article explaining Ouroboros, which is the protocol in what this PoS system is based.

No problem.

cheers

2 Likes
7

Thanks for the feedback.

In this usecase and context I think chance and randomness both pass a requirement that they can’t be manipulated or “gamed” to the benefit of any participant.

Do you have any thoughts on the impact of tax free stake rewards at all?

Cheers

8

Chance is the factor of raffles/lotterys while randomness is the factor in Ouroboros; let’s get that straight. :wink:

Furthermore, I do not think Ouroboros can be as easly manipulated, or meddled with, like a lottery/raffle system can.

We could extend the context requirements and anothers factors that do differenciate both systems.

I can tell you that the conception, concept, application and motive of taxes doesn’t make the slightest sense to me, and boggles my mind how we live just in order to fill the IRS form; but thats something for another time!

So, ATM, we are navigating in uncharted waters regarding the cryptoeconomie itself; what I can tell you is that I’m in the process of searching the laws governing Portugal regarding crypto, I’ll let you know what I find out, it will weigh in my response. =)

cheers

9

Thanks for all the feedback and yeah I can see your point entirely there.

One point though is that a raffle can become not about chance if you require a level of skill to participate or if you allow free entries (technically, free entries still rely entirely upon chance but do not require any purchase to participate).

Re taxes :

I think it would be interesting if Cardano could function differently per user location to accommodate for different laws.

Eg in Germany I believe that many are reluctant to stake due to laws and taxes.

If Cardano allowed free entries for German participants they could potentially encourage German citizens to stake and receive tax free rewards (please note free entries can be “throttled” in different ways).

I think the impact globally could be huge.

10

Even with a high degree of skill, the chance factor is still in play. And in IMHO nobody with a high degree of skill would concort with raffles/lotterys in any way besides for fun, hence, degrading the image and status of the system.

Even though I live in a, supposed, “community”, EU is all about other matters rather than community; again, another time! :wink:

Cardano doesn’t need to accommodate noone, the person of interest need to accommodate itself.

Cardano is already posed to have a huge global impact with Atala PRISM.

It’s up to us to now develop what Hoskinson and the team put front.

cheers

P.S. Tomorrow I will post what are the laws regarding crypto in Portugal, and I will tell you whats my position on taxes/taxation; if you want a heads up watch:

Falcianis Tax Bomb: The Man Behind the Swiss Leaks

along with

The Panama papers

11

Yeah I would be interested to hear the laws in Portugal.

With regards to skill, it’s not meant to overtake the element of chance, it’s role is to actually limit those who participate. In fact the skill element is meant to be significant enough to deter the majority of entrants.

In practise this skill element is ambiguous at best and can be met quite easily by using a spot the ball game, which in fact has no real element of skill.

This is why a free entry is enticing, if used properly it can have little impact upon an existing system whilst providing a legal framework to operate around and associated benefits.

12

@jellylo I doubt if you can compare cardano’s pos with (illegal) gambling. I think there is one big difference. In a lottery/gambling/chance play you put in funds and you have the following possible results:

  1. you get more than you put in
  2. you get your funds back
  3. you get less back than you put in
  4. you fully lose your funds

Gambling law and permits are there to protect consumers. That protection is because of above points 3 and 4. Not because of points 1 and 2.

Now it happens that with cardano staking points 3 and 4 are not possible. Worst that can happen to you is that you chose a bad pool that doesn’t give you rewards. You never risk losing your funds. Furthermore, with illegal gambling, often the chances of winning and the amount withheld is unclear or incorrect. With Cardano pos this is publicly known (open source) and can be very precisely calculated.

Not being a legal expert, this is my view.

2 Likes
13

Thanks for the feedback.

It totally makes sense, and highlights the interesting part -

In prize draw / lottery laws there is no stipulation on the utility of a ticket above and beyond being an entry method, so essentially this allows us to imagine lottery/raffle tickets as tokens and therefore with potential utility and potentially multiple use cases, including multiple or even infinite entries per ticket, resale, trading, metadata etc.

This in my opinion allows a raft of new and diverse products that can find safe harbour within competition law, whilst borrowing from the utility of crypto and blockchain systems.

Please note, I do think it’s a real stretch to see a regulator attempt to halt PoS or to attempt to govern within Cardano. I do however really think it’s an interesting area that can legally connect blockchain and other systems in new and interesting ways.

Note 2 - skill based gaming and free entry prize draws are legally not classified as gambling but are shaped in part by gambling laws, it is the very nature of adding a skill element or a free entry route that distinguishes these as not gambling.

14

Side note, I just found this about games of chance. I haven’t seen this posted in relation to Cardano before, it looks like a hell of a read!