jakiro
Author: Pavel, Source: Hazeflow, Compiled by: Shaw Bitchain Vision
summary
We are considering which asset is more conducive to keeping the system healthy and the consistency of incentives.
-
When cuts are the initial stage of punishing malicious behavior, reallocating assets is usually more effective than destroying them directly.
-
When destruction is a core feature of the design and does not involve cuts (e.g. in a deflationary economy), there is no reason to implement redistribution.
-
When reallocation is a core feature of the design but it looks more like a vulnerability, there is no reason to replace it with destruction, and it must be improved at the basic level.
definition
Many people seem to be confused that when a token is cut sharply, the reduced share will be automatically destroyed, resulting in a decrease in supply.But that’s not the case.
“Cutting” describes the “take” of assets from malicious acts, while “destruction” and “redistribution” describes the situation that occurs after the assets are taken away.
As we said before, they are either destroyed or redistributed: one act reduces the total supply, while the other transfers value to the other party (not always the damaged party).Due to the protocol’s built-in mechanism design, destruction can also be performed without cutting.
Redistribution helps economic security
Let’s take EigenCloud, one of the well-known protocols in the cryptocurrency field today, as an example.Here, operators will be given a reduction in rewards if they fail to fulfill their obligations, which is a good thing: bad people will be punished.However, before introducing a redistribution mechanism for reduced funds, these funds are permanently destroyed (and may still be destroyed to this day).
We believe that in such a system, destroying cut funds is tantamount to shooting oneself in the foot.When the operator’s pledge funds are cut, the operator is penalized (for a reason), but:
-
The victim will not receive any compensation after being injured (imagine you are hit by a car, the driver is held and punished, but you are not helped).
-
The system becomes less secure (because there are fewer assets to protect the system now).
So, since we can retain these values and transfer them to the damaged party, why destroy them and shoot ourselves in the foot?Reliable parties can increase the rewards they receive, damaged users can receive compensation, and value remains in the ecosystem; it is simply redistributed.It can also unlock a large number of use cases for the application.
New on-chain insurance agreements may operate correctly in a licensing-free manner.
Faster and more reliable DEX transactions will be compensated if the transaction request fails, expires or is not completed on time.This will further inspire operators to operate honestly and transparently.
Protect lenders with guaranteed annual interest rates (APR), higher transparency, and potential local currency fixed interest rates.
Economic security can not only directly protect users’ safety before an accident (such as a destruction mechanism), but also directly protect users after an accident.Protocols such as Cap have implemented a redistribution mechanism, and the cut operator funds will be redistributed to affected cUSD holders.
It’s not without its shortcomings
Destroy assets is easier than redistribution because you don’t have to care about what happens after the assets; they are just destroyed and no one gets any benefits.The benefits of destroying assets are less and the risks are significantly reduced.Redistribution will make the rules of the game change dramatically, and implementation (confiscation of assets from the bad guys → reallocating them to the damaged party) is not as simple as it seems.
Malicious operators can now join forces with Malicious Verifier Sets (AVS).Currently, AVS can implement any custom slashing logic, even if it is unfair or unobjective.With a punishment mechanism, AVS malicious actions are meaningless, because if operators know that they may be punished for no reason, they will not invest their rights.
Through reallocation, AVS can transfer the interests of one operator to malicious operators (who conspired to collude) and thus extract value from the system.The same thing will happen if the AVS key is leaked, which will also affect the overall “attraction” of the carrier or AVS.
Additional evaluation of mechanism design is required here.The operator should not have the option to “switch type” after creation.Instead, there should be a way to identify damaged (malicious) operators and redistribute them when value falls into their hands, as well as continuous monitoring, etc.
While it would be much easier to destroy funds, redistribution is fairer, but it requires additional complexity.
Solve the problem of bad redistribution
Maximum Extractable Value (MEV) can be viewed from the perspective that harmless users and liquidity providers (LPs) suffer losses for no reason.When users want to exchange assets, they may be preemptive or pinched, resulting in worse transaction results (price).
We can say with certainty that they suffer losses because they put the shares (the assets to be exchanged) into the system (DEX), hold them for a period of time (exchange time), and eventually receive much less than what they deserve.
Here are two core issues:
-
LPs were cut for no reason (they did not act maliciously).
-
Users are cut for no reason; they have no malicious behavior, and they don’t even intend to make profits or do good things for the system, they just hope that their operations can be executed.
Here, value is extracted and redistributed, the exploiters are rewarded, and the party who did nothing wrong is hit hard.
-
By creating certain sorting rules, such as Arbitrum Boost, users can solve this problem more easily.
-
For LPs, this problem is more complicated because they are often victims of leverage ratios (loss versus rebalancing).
Can this be solved by destruction
Destruction can bring broad benefits to all token holders without the need to specifically compensate liquidity providers who suffer directly from losses due to arbitrage activities.Technically, this problem can be solved by destruction, and once profits are destroyed, there is no motivation for arbitrage activities.
However, once arbitrage profit is extracted, it becomes more difficult to identify such arbitrage: While on-chain transactions are visible, the CEX data does not show the exact address of the trader.
In this case, poor redistribution design can be solved by application-specific sorting, so that liquidity providers can acquire value that would otherwise have been taken away by speculators.This is one of the solutions implemented by Angstrom and it works quite well.
In this specific case of MEV, neither redistribution nor destruction is a feasible option; they are just treating the symptoms but not the root cause.Changes must be made at the basic level.
Destruction may be better than reallocation
What we want to emphasize is that reallocation is not a panacea, and it does not always replace destruction.When no reduction (Phase I) is involved, in most cases, destruction of funds is a key feature of mechanism design.
Taking BNB as an example, BNB tokens are destroyed once a quarter, which is the core feature of the deflationary token economic model.In this model, redistribution cannot be achieved because the process involves neither the exploiters nor the damaged users.
A similar process also occurs in the design of Ethereum (EIP-1559), and the underlying expenses will be destroyed, resulting in a deflation effect.Given the mechanism design of Ethereum, the expenses may become very high during network congestion, and one might think that rather than destroying the underlying expenses, it is better to transfer the underlying expenses to a treasury fund to compensate some of the expenses during network congestion.However, the disadvantages of doing so far outweigh the potential benefits:
-
Redistribution of fees may weaken the deflation effect, lead to higher inflation and may lower the token value over time.
-
Improper allocation of funds, reduced income (how should the fund determine which transactions should be prioritized? Is it meaningful to pay a priority fee when users can compensate with funds? etc.).
-
If you know your expenses will be funded, it may be easier to over-send messages and cause greater congestion.
-
Assuming the redistribution of Ethereum’s underlying fees to stakeholders may incentivize validators to prioritize high-fee transactions, ignoring those that are not funded or paid in advance.
There are many other cases, but the key is that reallocation is not a panacea.If the destruction occurs on its own (no prior cuts are required), there is almost no reason to replace it with a redistribution.
in conclusion
Finally, we want to point out thatRedistribution is usually not as effective as destruction without prior cuts involved, and in cases where destruction is involved, redistribution usually plays a better role than destruction.
The issue of incentive coordination is a long-standing problem in the cryptocurrency space and often changes depending on the protocol.If economic value directly affects the security of the system or other critical factors, it is best not to undermine this value, but to find a way to correctly redistribute it to those who act honestly, thereby inspiring fair and honest behavior.
