Dicing with Dash

For the first time since I got into Darkcoin, or Dash as it is of course nowadays. I am doubting the project. I shall try to explain why.

Ryan Taylor the CEO of Dash Core Group, a very influential person in the Dash community, is seeking to change the block reward allocation in favour of masternode owners at the expense of miners. Well ok. What does that mean I hear you ask?

First I explain a bit about how Dash works in case you don’t know, (skip the next couple of paragraphs if you don’t need this bit).

With Dash, unlike most proof of work cryptocurrencies only a portion of the block reward goes to the miners, 40% of it in fact. Another 40% goes to masternode holders. The remaining portion funds a treasury, which pays for projects as voted on by masternode owners. If the proposal gets a ‘yes’ then the proposal owner is funded with Dash. This is how Dash Core Group is funded.

Masternodes are nodes on the network incentivised to give a service, in contrast to bitcoin nodes which depend on altruism for someone to run a full node. Another difference between a masternode and a normal full node is that masternodes are able to perform additional services such as coin mixing for enhanced privacy, chainlocks which prevent chain reorganisations by 51% mining attack, and instant send in which transactions are fully confirmed and respendable after only a few seconds. Finally in order to run a masternode you have to have 1000 dash sitting unspent on an address you have the private key for.

All of this is well and good. Dash really is an amazing project and has delivered many firsts in the crypto space. So far I love it. So why the need for change?

This is where Ryan Tayor comes in with the idea of reducing miner reward and giving more to masternode owners. I would urge you if you have enough skin in the game and are invested in Dash to see his presentation. This change could have a big impact. Maybe not in the way Ryan Taylor hopes though. Ryan Taylor is part of Dash Core Group, who are the developers tasked with delivering maintenance and upgrades to the Dash software. So you might even ask, why is he getting involved in questions of economics in the first place?

Like all of us Ryan is concerned about the bear market, he is looking for a way to support the price, or another way of saying it, to improve Dash as a store of value. Ryans’ reasoning goes a bit like this: “Dash has chainlocks now which secure the network at a depth of only 1 block, therefore mining is not very important for Dash anymore.” (I am paraphrasing remember). “Dash pays 40% of block reward to miners to secure the network, that is too much, too expensive for what Dash needs. Dash being the leading X11 coin can afford to lose a lot of hash rate and stay in the pole position for that mining algorithm.” “Also”, says Ryan, “miners are probably the ones who are selling most of the new supply of Dash, therefore they are causing high inflation ‘of the circulating supply’.” “Masternode owners aren’t forced to sell because the cost of running a masternode is low compared to the cost of mining equipment and electricity.”

In a nutshell Ryan thinks miners are all to blame for sell pressure on the market and masternode demand will boost the market.

Not really surprisingly I guess, this idea is almost universally popular among the masternode owning community, they will get more dash rewards. And there is, on the surface at least, a justification for it. They will surely vote to approve the change when it does come to a vote.

One would hope that masternode owners are incentivised to only do things that improve the network, that is how it is designed. They don’t want to ruin dash, because they have skin in the game they are incentivized to only do good for Dash. However the treasury of full of examples of votes decided by the masternode owners which did not work out well at all. So. There is that.

Where I really start to dislike the idea is that this move is equivalent to moving towards more proof of stake and away from proof of work. Dash although a proof of work coin already does have elements of proof of stake. The economics of it are similar despite it being a boiler plate proof of work coin under the masternode hood. However when you run a masternode it is equivalent to staking the 1000 dash and the getting regular staking rewards. Incidentally Ryan has hmself admitted that this change is a change in the direction of more proof of stake. And less incentive for miners also means less proof of work, or hashrate.

But there is a problem lurking in plain sight. It does not take much research at all to discover that proof of stake has failed as a store of value in the wider crypto market. The innovating projects such as peercoin and blackcoin are so far down the rankings in fact and so badly valued they are all but dead. Failed. Why is that when Peercoin for example, which has so many innovations, and boast fast transactions, cheap fees and so on, why is is so bad as a store of value?

I can try and guess and give my reasons for this. But what I think doesn’t really matter as the why you just look at the market and see that it is. It just is that way. Dash has a great innovation, a technical first, chainlocks. (Like peercoin had a great innovation). However in my opinion this feature cannot even partially replace hash rate. Its not about securing the network alone there are monetary principles which are more primary. Scarcity is not understood correctly. Digital scarcity is not just a low number of available tokens. That by itself has no meaning or value. It is much more than that. crucially it has to be coupled with how hard they are to obtain. Proof of stake fails where competitive mining is a resounding success. The hash rate of bitcoin is phenomenal. This imbues real scarcity on the bitcoin. Real world energy. Expensive energy. A bitcoin is expensive to produce in real world terms, not by relying on clever code. Proof of stake is maybe greener but also it is just a technical implementations, easy to supersede with new improved competitors and better code. Not so with the hashrate which can’t be replaced.

Anyway, as I already said my understandings can be argued against. It could be debated endlessly in fact. But what can’t be is the observation that proof of work provides a a much superior store of value than proof of stake. The market comprising hundreds of projects shows it.

Here are a few examples.

So why then will a move towards proof of stake improve Dash as a store of value when it does the opposite for proof of stake coins? Why will Dash go against that grain? What will make Dash uniquely improve value by moving towards proof of stake? Not by guessing some demographics, making some assumptions, that miners will be selling, and we pay too much for hashrate, that chainlocks is as good as hashrate, that argument. Just as the developers of peercoin thought staking was as good as hashrate.

Also, on the subject of circulating supply and influencing that by changing the block reward allocations. Those 1000 dash collatorals are not locked. IF the price pump doesn’t materialise. If the market doesn’t like to pay more for more masternodes and the price doesn’t follow. Then that not-so-locked-afterall collatoral might actually begin circulating too. Then that will my friends be a huge increase in inflation of circulating supply. Ryan plays with fire at the bottom of the bear market. All dash are circulating supply. He draws lines in shifting sand.

So what should Dash do in my opinion? The exact opposite of Ryan’s proposal. Dash should reallocate as much reward to miner as possible while sustaining a large enough masternode network to provide the services. It is easy to argue that Dash doens’t need to pay for so many masternodes, just as it was easy to say we don’t need so many miners. Except I think we do need more mining, to generate as much scarcity as we can in the Dash tokens. If Dash creates them on the cheap the market will value them accordingly.

So. This then gets to why I am dicing with Dash. I am heavily invested in Dash and yet now it looks to be going in a direction I really dislike. For the first time I question my Dash investment.

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