Intimately tied with the decentralization of any digital asset is the incentive process that underpins the confirmation and validation of transactions and governance. For XRP, the decentralization process has been carried out by replacing Ripple maintained validators with those run by independent entities. There have been some very interesting Twitter discussions on the incentive process that powers XRP validators. Some in the community expressed unease with the lack of incentives for individuals or organizations to run high-quality XRP validators.
As there is no financial reward for running a validator, an individual wishing to contribute to the consensus process essentially needs to eat the cost, both financially and in terms of time. Included in the above tweet is the suggestion that without an adequate incentive structure, the network’s ability to function effectively will be called into question once independent, high-quality validators leave.
In a recent presentation at the Stanford Blockchain Conference addressing this issue, David Schwartz indicated that the assumption underpinning the validators is that third parties who build and transact on the network will have a vested interest in running a validator to keep the network running efficiently and effectively. He refers to these entities as natural stakeholders, and argues that an incentive model like bitcoin mining, which is the very mechanism that was meant to keep the network secure, decentralized, and robust, has paradoxically led to the centralization of the bitcoin hash rate in the hands of a small group. Vitalik Buterin featured an illustration of this in his talk on the future incentive model of the Ethereum network:
The natural stakeholders, which would be the firms or entities that come to depend on the Ripple network, will be incentivized to run reliable validators to keep the network running effectively so they can use the network for commerce. In this way, as David Schwartz argues, the network decentralizes in a more robust fashion than an incentive model like mining would allow.
If you take Ripple’s crawl, walk, run model as a caricature of the progress of the institutional adoption of XRP, we haven’t yet breached into any major structural integration of Ripple tech into institutions that would depend on the reliability of Ripple’s tech for major commerce operations. As indicated above, some of the validators on the UNL don’t seem to be very reliable – like the entities responsible for them are begrudgingly running a validator. That’s not to say that Ripple’s decentralization model won’t work. Once, or if, the network becomes widely used, and firms start realizing profit through its use, any slowdown, performance, or security issues, will impact their profit model and should, at least in theory, motivate them to run and effectively maintain a validator. The model is predicated on use. But the current party most interested in the long-term health and reliability of the network is Ripple. That may someday change as more firms begin to adopt Ripple technology, but some in the community seem to feel that the decentralization process is accelerating too quickly and that these functional and reliable Ripple-run validators are being replaced by entities that are not reliable.
If the non-incentivized model seems self-evident, you’re more forward-thinking than most. It seems to fly in the face of some of the most basic assumptions of motivating self-interested individuals and entities to work. The models that we are exposed to societally are predicated on the exchange of a representation of wealth for labor or the completion of some task. But Schwartz’s model derives that profit motive from the value that the network provides when it, as he says, can make forward progress. During the question process, one of the attendees was so awestruck that he said, “I think if you are not crazy, then most other blockchain founders are crazy because they all come with incentives.”
But Schwartz may have a point, as we’ve tried proof of work, and it’s led to the centralization problems that we see with Bitcoin. As for staking models, he indicates that with the volatility of cryptocurrency, and the need to lock up crypto to stake, the risk for the miners is that the asset drops significantly while their coins are staked, and he seems to think that it’ll still lead to the kinds of centralization issues that we’ve seen with proof of work.
But there’s also an uglier possibility. It could be that decentralized models drift either towards tyranny or chaos over time. As the cracks in the assumptions that go into the fabrication of any particular model become apparent, people either manage to use those contradiction to concentrate power or the model falls apart. Then again, nothing is permanent. Even historically successful models fall apart over time. Ripple’s decentralization scheme, and by that I mean the validators that both verify our transactions and are the very structures of governance with which we can amend the functioning of the network are novel. Or at least, they are novel to me.
Managing incentives, people, and governance are problems civilizations and cultures have been grappling with since we first started forming organized bodies. It is a difficult ship to steer, and it seems doubly so with any attempt at decentralization. Consequences in governance make themselves apparent in the coming decades after the formation of a governing body and governance tradition. Like when Caesar crossed the Rubicon and the republic died, or when the conflagration of Tsarist Russia led to the formation of the Soviet super-state – all consequences of the assumptions that held together those societies, those governing bodies. A more relevant example would be the incentive structure of Bitcoin mining leading to the concentration of the majority of the hash rate of the network in China.
As to the question of whether decentralization is necessary for Ripple’s overall vision, especially when the cryptocurrency community levees the accusation of centralization at XRP despite successful attempts at decentralization, it’s an interesting philosophical question. Why be virtuous when no matter what actions you carry out, society views you in a negative light? Particularly when being virtuous could lead to temporary performance issues absent other major interested parties other than Ripple. Beyond moral opining, decentralization of the ledger is in the best interest of a firm that wishes to position itself as an intermediary between different digital-currency blocks run by major powers. A system where the validators are all controlled by an entity within reach of American state coercion would preclude widespread use and adoption as an intermediary bridge in China, or other nation-states that compete with American power on the world stage. And I suspect that it is for this reason that Ripple seems so keen on pushing through the decentralization of the validators and structures of governance of the XRPL. Decentralization guarantees an impartial bridge, and if Ripple’s no-incentive model works out, it could be very profitable for the company.
Header Photo by Robynne Hu