Exchanges are just crypto banks.
Steem was abandoned by this community and created a new brand under the banner of Hive during the start of the COVID 2020 fiasco. Using a WEB3 perspective and filter we can argue that a new network was not created. It was like the Ethereum DAO hack or other contentious hardforks like Bitcoin Cash. The Hive fork had incontestable dominance in terms of consensus. We didn't move networks or create a new network; it was just the continuation of the old platform, plus a big speed bump in the way.
From a WEB2 perspective (and subsequently legal perspective) Hive absolutely was a new network and a completely new token. This is precisely how Steemit was successfully sued after the theft of tokens as a direct result of the hardfork war. It's interesting to analyze these perspectives and see how a WEB3 vs WEB2 basis in perspective can rightfully conclude the exact opposite outcomes. Neither side is wrong, they just have different priorities and ways to judge information.
During this great time of adversity the core devs had to put a baidaid patch onto the way HivePower works. The attack against our network would not have succeeded if exchanges had been unable to [illegally] power up client stake and vote against their customer's own interests. In the wake of the attack we decided to limit the ability for newly powered up coins to vote on governance. They must now wait around 30 days to acquire their true governance power if I recall correctly.
This is a nice feature to have and literally no one complains about it. Essentially it's just a win/win type of utility, much like account recovery. It adds zero attack vectors to security and only makes the network stronger. However, exchanges powering up stake of client funds still remains a systemic threat to this network to this day.
SEC lawsuit vs Coinbase
Ironically for us the Security Exchange Commission's legal action against Coinbase actually helps Hive in this way. The SEC is telling Coinbase that they aren't allowed to stake user funds in exchange for yield (mostly on Ethereum/EVM). This is good for Hive; we don't want exchanges to be allowed to stake customer funds to generate yield. This gives exchanges all of the voting power of their clients (just like Blackrock gets all the voting power of their clients when voting with stock).
At the same time I'm 1000% convinced that the SEC is going to get absolutely thrashed in court by Coinbase once the dust settles. The precedence of that case very well may lead to the green light for every exchange to stake customer funds in exchange for yield (the exact reason why FTX became so popular before it collapsed).
But wait... it gets worse!
As the title of this post implies a centralized exchange (or even just a curation bot on Hive) can easily offer a better deal than what the Hive blockchain is offering itself. The liquidity of an exchange can be trivially leveraged to allow clients to instantly powerdown.
Takes money to make money.
Imagine a big exchange like Binance has 50M Hive on it or more. They don't need to keep 100% of that stake liquid. They could probably power up 25M and still never go insolvent. Even if they did go insolvent they'd be unlocking almost 2M coins every week so it wouldn't be a big deal: they'd just lie like they always do and say the wallet is "undergoing maintenance".
Allowing users to proxy their HP and power it up makes it even easier for them to stay solvent. If they have 25M powered up and their clients have chosen to power up 25M they can't go insolvent and clients know they have to wait by design. However the exchange can also allow the client to simply powerdown instantly because they have the liquidity to allow it. This is especially true if the exchange itself owns a couple million tokens and they can just loan the client their own stack immediately while the powerdown is active. Again there are many ways to go about this that are totally legal and mathematically cannot result in insolvency for any amount of time.
This creates a massive imbalance of financial incentives
How many people on Hive would transfer their tokens out of self-custody and into an exchange simply because that exchange is offering the same amount of yield PLUS the ability to powerdown the tokens instantly on demand? I'm guessing a feature like this would be highly popular and work against the security of the network.
Depending on how that stake is structured on chain it would almost certainly start out as a curation bot in which all the money is lumped into a single account with milions of HP. The 30 day delay on governance rights would have absolutely no mitigation affect on the ability for exchanges to once again manipulate the top 20 block producers.
It's also possible that once this type of system had enough users and demand: the exchange could create individual proxy accounts for bigger customers. These proxy accounts would still technically be owned by the exchange but they would represent individual clients and allow them to cast their own votes by proxy via the exchange's frontend login. This would be more ideal and lumping everything into one account but also it would take a long time to actually get to this point.
Exchanges allow us to do these things privately.
While exchanges are often criticized for being not private and giving their information to law enforcement and the IRS... Exchanges (and just corporations in general) protect the privacy of their users and data by default from anyone without a legal obligation.
You and I have no idea how much money a famous account on Hive has on the exchanges. We have no idea when they are buying and when they are selling, and there is no way to check as the public API doesn't allow unrestricted database access. With proxy features like this we'd have no idea what they were voting for either. This flavor of privacy could be yet another reason why users on Hive would want to stake their money on an exchange where it can't be nitpicked and dissected by public on-chain analysis.
One week powerdown
It would also be possible for big (custodial) curation bots to allow their users to powerdown their stake in one week rather than 13. If I control a bot with access to 13M Hive Power I can get 1M of that Hive unlocked every week. If someone wants to powerdown all their stake in 1 week the only requirement would be that the total amount is less than 1M, which is pretty much everyone. The smaller the account the easier they are to accommodate.
Conclusion
This isn't a problem now but it easily could be in the future. Liquidity providers and curation bot operators have the ability to create incentives that pool stake into centralized accounts. These incentives include instant/short powerdowns and privacy via asset pooling/obfuscation. Is this something we actually need to be worried about? Unclear, but it's always good to be thinking about potential threats before they actually happen.
Exchanges have a habit of keeping peoples deposits and never returning them.
Is that right?
I've never lost a deposit in this way.
Have you?
Everyone knows why they shouldn't hold crypto on exchanges.
They do it anyway.
That's the entire point.
Coinsbank for one and VaultOro. Suddenly my BTC balance reads zero. There was no explanation. You can see long lists of people basically depositing and then losing access to their account: https://www.trustpilot.com/review/vaultoro.com
It's pretty wide spread. People deposit for actual trade or perhaps interest and it only has to happen once for you to lose your principal. Exchanges are fractional reserve banks but far less honest than banks. Bank employees are probably the most honest people. I don't think it is the same over at most exchanges.
What I do to protect myself is firstly, to use decentralized exchanges as much as possible. This means Thorchain. Uniswap is something I don't often use because I am not interested in EVM chain tokens or coins. When using a CEx, trade less than $50.00 USD at a time. That means I may deposit 50 HBD, buy whatever and then withdraw. If the minimum deposit exceeds that $50, I just don't use the exchange.
I also tend to just leave value in each blockchain and perhaps spend within that blockchain for services rather than trading it. I feel comfortable trading within the Hive blockchain because it is always through a DEx.
Obviously that is all good advice. It very much is a fuck around and find out situation with exchanges. It only takes getting burned one time to have a lasting effect.
At the same time the spirit of the original post doesn't care about what you or I think or do. This is a global discussion about incentives and how users are going to act on aggregate.
Right now Hive gets a huge inflation benefit in that all this money sitting on exchanges can't earn yield and just gets constantly diluted by our inflation rate. The problem is that they have the power to not only change this but also provide instant powerdowns with there liquidity and lure all the tokens to their platform. Not that Upbit needs more than 120M tokens, that's already enough to hijack all 20 witnesses.
If I set my account to powerdown to Binance and then get a bunch of liquid hive, why can't I withdraw and then cancel the powerdown? Its a shady thing to do, of course. The point is, that it ought to be a concern with providing instant power-downs to users.
Huh? You can't cancel the powerdown because Binance controls the powerdown.
It's a by proxy situation where the exchange offers yield on the token like FTX or Coinbase.
Okay, I get it. The scenario is that they control the stake. Another problem is the SEC is only American and CExes may start this for non-Americans even without challenging the SEC.
From my personal point of view, I'd never trade the control of my account for a quicker powerdown: I get that this may be appealing for some - many? - but for me would be a big "NOPE".
Nontheless, I see how something like that could also lead to risks for the entire ecosystem and I'm not sure how it could be, eventually, addressed.
Everyone who reads this post, and especially writes a comment on it, is going to share this sentiment. The problem is that the diehard users seem to not understand that most users aren't hiehard by definition and they'll just do whatever seems best in the short term. Most users are casual users across all platforms and games and whatever else.
That's true: most people follow the money, no matter what. If someone will ever offer an instant powerdown, people will go for it, even if it will mean losing control of their money and put the governance of the chain in the hands of someone else. The only solution I can see is hoping that most of the bigger stakers won't go for it, maybe because they care more about their money and the future of the chain, as they are more involved into it... yet, "hope" usually is not the best solution 😅
Interesting discussion.
Thanks for connecting the dots between the SEC lawsuit and our seurity.
I have a question.
When I had about 60,000 STEEM powered up I noticed an exponential increase in earnings via curation, which seemed greater then the percentage of stake increase. Do you think this is a normal increase in curation in both Steem and Hive or did Hive change the algorthym so that curation increase with stake is a strictly linear increase?
I know you meant this for @edicted, but I have been here and followed the changes. In the beginning Steem had inflation like Venezuela. You escaped that with powering up. Steem was meant to be something you immediately traded when a power down gave you some to another who would immediately power it up. Powerdowns took half a year to complete.
Also when there are fewer people there was a greater per user distribution of the reward pie on average. And yes, prior to the patch called equality, post rewards were super linear.
Thanks for the background information.
I think what your saying makes sense.
If I understand correctly you are saying I may have experienced greater proportionate rewards from fewer competitors for the reward pool pie.
That makes sense.
When you are here day in and day out, regardless of the Steem price or Hive price we sometimes forget that others have left the project to earn bigger rewards elsewhere, and that may inflate our rewards compared to a period when we had less steem / hive and more competition.
Thank for you helping me understand another variable in earnings.
You gave a better answer than I did 🖖
That hasn't been a thing since before I joined Steem in 2017.
Not sure what you were experiencing you aren't really giving me much information.
There are a couple of reasons why the reward pool might get inflated but rewards have pretty much always been linearly based on powered up stake.
I was referring to what I thought was a larger increase in curation rewards when I went from 1000 Steem to 2000 Stee. The reward increase seemed to more then double. So for a while I ran a project where I would combine other peoples Steempower into a voting account which seemed to deliver larger rewards.
But it could have been for some other reason like timing of my vote, since that was also a deciding factor at one time, and the subject of discussion and change with the hardforks.
I think keeping control of your own funds is always the best option, even if the idea of instant powerdown is tempting. Long term security over short term convenience any day any time 😁
That's correct but it's also not the point.
If there's a financial incentive to do it people are going to for sure do it.
It's a statistics game.
You know what.... You're 💯 right 🤔 people will definitely do it. Thanks for the enlightenment brother
I find it interesting that every single comment on this post is basically:
totally not the point
I actually find that kind of alarming that everyone packages the message and internalizes it using individualism.
Definitely an interesting thought experiment. I think I would still maintain custody of my tokens, but I'm a die hard Hive guy.
Sure but even in that case you might be tempted to be 10%-20% of your funds on the exchange for the immediate powerdown option in the case of a big pump. And this would arguably be a smart move on a personal level even though it's bad for the network as a whole.
Yeah, my stack just isn't that big though. I get what you are saying. Maybe one day...
My only Question is how the hell is steem still alive?
I suppose it takes a lot less effort to keep something like that on life support than originally anticipated.
This is a really cool thought experiment dude. I think we should definitely have these situations explored now when they aren’t being applied. Kind of like a war games scenario. Find out a way the enemy can do something before they do it. Enders game except not as cool.
I am torn on the instant power down thing. It will absolute be abused if it ever gets implemented.
The answer would probably be a manual and human one: we would have to come to consensus to deliberately flag the accounts used by large holders of non-custodial Hive on behalf of clients and treat them slightly differently, probably around governance and especially DHF voting.
For this sort of thing to bother anyone, the account would need to be pretty giant on a Hive scale and would need to be publicly advertised in some way.
Yeah it often comes back to this but also treating one account differently than another is a huge red flag in itself when it comes to decentralization. Something like this would be very bad optics for anyone outside the system looking in. It also incentivizes exchanges to Sybil attack the network and create thousands of anonymous accounts to circumvent such targeting.
At the end of the day I think we have to get creative with our solutions by employing positive reinforcement strategy instead of negative. Punishing users for doing bad things isn't as effective as rewarding users who do good things (in this case the good thing being having access to private keys).
Your thought experiment is really very interesting. As you have stated, there are clear incentives to carry out this type of activity. Even though they are not illegal, they could represent a very effective attack vector in the not too distant future.
Perhaps the problem lies in the way power down currently works or is conceived. As far as I understand, while the user does a power down the benefits associated with the staked hive remain intact, except for a reduction of 1/14 of their voting power each week. Maintaining that benefit during the power down is, in my opinion, what opens up the possibility of this type of activity.
If we consider that the start of the power down is a public manifestation that you have decided to abandon the ecosystem, then it does not make any sense that during the power down period the user can maintain the same benefits that the rest of the community enjoys. That is, if someone decides to take the power down then their ability to continue obtaining benefits from the ecosystem should be put on hold until the power down is completed or suspended.
Of course, I understand that many users are forced to do a power down due to cases of need or emergencies, but those same users must understand that there is a price to pay when leaving the ecosystem. Typically, these users power down all of their staked hives to get a slice quickly, and then suspend it. It is very logical that these users understand that during the power down they lose some benefits.
Well, that's the conclusion I came to after thinking about it very carefully for a couple of hours, because it's certainly not a tiny problem that you've raised. In fact, you've already brought it to the fore and most likely some will be doing their math...
As a commentary to all those who say "I'd never be part of that, I'm thinking that all it takes is "the right situation."
Your spouse is in hospital and will die unless they get a transplant within two weeks, and the only way you can raise $50K (or whatever) is liquidating your HP, most people would be all over signing their souls over to Binance.
"Sorry dear, but you'll have to die because I won't abandon my principles" doesn't actually play very often in the real world.
As a thought experiment, though, this is a potential threat vector, to be sure.
=^..^=
I mean let's be real this would be very nice utility for any account that wants to earn yield while also keeping their tokens liquid (which is the standard for AMM farming). I think a lot of people can't even fathom Hive getting mainstream adoption judging by these comments.
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STOPThe mathematics I am seeing here presents a threat. I guess there is always a puzzle to solve in every halve decade.
I feel like for the first time siding with SEC but we know this exchanges can pay for crimes.