POS Question

From my understand of Ouroboros, POS functions based on a lottery based system and random number generation.

My question is, how will this avoid legal issues of being an unlicensed lottery? If this wasn’t based on a financial system I could see how this wouldn’t be relevant, but in the case of ADA isn’t this an area that would bring regulatory issues to the system?

Typically to avoid such regulatory issues a lottery system would involve an element of skill required by an individual to participate thus becoming a skill based game rather than a lottery. I cannot see that an element of skill is part of Ouroboros and therefore (although possibly a stretch) participating in staking would mean we are participating in an illegal and unregulated lottery eg Gambling.

Another method in some jurisdictions is to allow a free entry method, again I do not see this in Ouroboros.

Perhaps this element of the law hasn’t been considered? Is this something Cardano should be concerned about? Does Ouroboros need an equivalent skill based or free entry route to avoid such potential issues?

I’d say staking is free. Are you thinking of the delegation transaction cost? I believe that will be negligible.

The problem with free entry is this only prevents a lottery from being an illegal one in certain geo’s, the rest would still deem this as based on chance and therefore as an illegal lottery. Additionally a free entry cannot generate any form of profit, which it potentially could be argued that any incurred transaction fees generated when allocating stake via transactions to a wallet or pool mean that a profit is created but I imagine this is not too problematic in the bigger picture.

In order to be truly compliant it seems that a skill based requirement is needed in order to stake each time the dice is rolled, this also would mean that a pool could not manage your stake as they would not be able to conduct a skill based activity on your behalf.

There’s no way a skill requirement could be incorporated, I’d say that’s absolutely impossible. I’d be interested in other opinions on the basic issue though: could staking really be viewed as a lottery?

I think there would be a way to actually involve an element of skill per role.

The ADA holder would have to automate this and the authorities wouldn’t be able to prove that the individual hadn’t acted without skill.

I may lose some technical know how in this so please bare with me.

One skill based game typically used is spot the ball. The users wallet could have a spot the ball scenario in which the user places a position that they think the ball would most likely be, this could be automated within a wallet with a manual option available.

Spot the ball then traditionally requires a committee of judges to decide the position of the ball and then to allocate the win to the closest position marked.

This stage could potentially use an algorithmic committee of sorts that finds consensus on the most likely position of the ball to select a winner.

Therefore we would have a skill based POS in legal terms.

There may be other similar routes but thats the first method that comes to mind.

Also, it could be viable for a user to select a single position for multiple games as a skill based decision on where the “ball” is most likely to appear on average. This would be an alternate route to an automated bet.

I would think the general answer is that the formal analysis of the protocol should take any of these factors into account. In other words, if there is a real issue/risk here, then the point must be made in a way that it can be addressed by the protocol.

I’m pretty sure they are already thinking about these issue.

I think thats exactly the point that the protocol cannot act on behalf of the user to conduct a skill based task on their behalf, and without this legally allocating money by chance that someone has staked in makes POS an illegal lottery.

The question is more likely, does a decentralised blockchain need to adhere to laws of every jurisdiction?

The answer is of course not that’s impossible. However, in the case of perceived gambling and illegal lotteries it is a huge legal issue, especially in terms of payment providers, gateways and banking : which ADA also happens to function as.

I’m not a lawyer, and I don’t know the details of those laws, but this doesn’t seem like a situation of gambling. The randomness is a distribution mechanism that is designed to spread out rewards evenly in proportion to stake. In the long run, it should net to even because there is no “house” taking a cut. It doesn’t meet the definition of gambling in my thinking, but the legalism may be different.

I’m not certain if they have thought about this, but I would think so. If not, we can’t fix it here.

If I was to run one raffle without a skill based element or free entry and not being a charity it would be illegal, the fact that I automate it and run thousands a day doesn’t excuse me.

I’m also not sure if it has been considered at IOHK, hence why I thought it might be worth a discussion prior to going to live and perhaps a chance to offer some potential solutions from the community.

There’s skill involved. People run Stake pools. They secure network, create blocks and execute smart contracts. It’s an actual job/hobby, which requires some sysadmin skills.
The act of delegation itself is not a lottery, you delegate your staking permissions to a pool, which runs staking pool software for you and take some percent of your potential reward.
Without doing something (Running a pool / Delegating to a pool), you don’t get any reward, it’s not an automated lottery, like Neo and Gas.

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Just as an example, being from the following countries -

Belgium, Brazil, Canada, China, Czech Republic, Finland, Hong Kong, Hungary, India, Indonesia, Latvia, Netherlands, Norway, Pakistan, Poland, Portugal, Russia, Singapore, Sweden, Switzerland, Turkey, United Arab Emirates, United States of America

If I was to automate my online gambling to a gambling pool, I would still be gambling online regardless of how much skill my gambling operative used.

It’s kind of weird for me to compare the rewards of PoS with a gain from a lottery.
In a PoS setting, what matters is that the lottery scheme prevents nodes from knowing who created the block. The reward itself (or gain in your terminology) is perfectly deterministic and depends on staked coins. Hence the gamble-like nature is not here. In a gamble-like lottery, the very appeal of it is to win a gain that surpasses the initial bet. This is not what happens in a PoS protocol …

You get a reward for creating a block and doing computation, it’s not gambling.


I was under the assumption that is the case in POW but not in POS

It’s not a lottery. The stake pool is providing a service. If the pool does not create a block they do not get paid.

There is randomness regarding who get assigned to do the work but the work must be preformed to get paid.

Well, who do you think runs the network :slight_smile: It can’t exist without actual infrustructure behind it, and people get rewarded for maintaining that infrustructure and being good actors.

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@Evgeny_S and @Donnybaseball are right here. Rewards only comes if you work. The “lottery” only determine if you have to work, and when. Again, it is just as a node obfuscation method.

So the pool does the work, but the user uses no skill and stakes coins to get rewards. My main concern is that this sounds very much like a form of gambling as it in itself provides an incentive to invest to gain rewards.

I personally don’t disagree with your comments, but it isn’t me that we should be worried about, if the US GOV determined POS to be illegal automated gambling, regardless of its technical function and elegance, then this could cause a lot of negativity.

In POW the method of selecting the next block producer is a race to solve a complex math problem. The pool that solves the problem first gets the right to make the next block and get the reward. That is why they need so many high powered machines they are racing to solve the problem. POS bypasses all that by randomly selecting a coin that is staked in one of the stake pools. All the computation and machines needed to race to solve the problems are not needed.