While the main purpose of Testacoin is to help the blockchain community fight outright scams, there are also some public blockchain projects that probably also need to be avoided by investors, even if they are not plain vanilla frauds.
It has been known for some time that the delegated proof of stake (DPoS) consensus mechanism pioneered by Bitshares and Lisk and later implemented by EOS and Tron was highly problematic.
Only a few days ago, the official Twitter account of EOS New York revealed that six out of 21 EOS block producers were secretly controlled by the same entity. This revelation only came to light because the entity in question did not even bother to seriously cover its tracks. Yesterday, we were given an even more spectacular example with regard to the Tron platform.
In a Twitter thread, Brian Fabian Crain from staking-as-a-service startup Chorus One revealed the finding that 56% of the voting power on the Tron platform is controlled by Binance. In order to explain what Crain means by this viral statement, one needs to better understand how DPoS, in general, and its Tron version, in particular, work.
DPoS and Tron
DPoS is an approach to blockchain consensus in which all token holders regularly vote for the set of block validators for each period according to the one-token-one-vote principle. For Tron, voting takes place every six hours. The candidates who receive the most votes win the right to produce blocks and earn rewards for doing so. During the period for which the current validators were chosen, they are randomly selected one by one to produce blocks.
This model has several immediate implications. First, in order to ensure that the chain continuously approve transactions, there may not be a minimum number of voting tokens needed for the vote results to be valid. Otherwise, if it were not reached for a given period, the platform would become unusable. Secondly, there are few means to prevent large token holders from behaviours like voting for themselves or friendly entities, buying votes, coordinating their actions with other large token holders and so on. Finally, voting is the only way of incentivizing block validators, they do not face the risk of their tokens getting slashed for flagrant misdeeds.
Arguably, the biggest problem with DPoS is low participation by smaller token holders because of the lack of incentives. Let us illustrate this with the example of Tron. As the Tron explorer website indicates, Tron has 27 validators called “super representatives”. The one with the lowest number of votes at the time of writing received around 252 million votes. The total number of TRX tokens in circulation is 66.7 billion. Which means that it received 0.38% of all possible votes.
What is, however, more astonishing is that the top super-representative, Binance Staking has around 12.5 billion votes and its closest rival just 777.6 million. In fact, Binance controls 55.85% of all the voting TRX tokens. It gets worse, however, as, according to Brian Crain, if Binance so wished, it could distribute its token vote among 25 candidates and have them all win. Its control of the platform would be complete, at least for some time.
But Binance is not a malicious actor, is it?
One may object that Binance’s potential domination of validation on Tron would not be a matter of grave concern as Binance is an actor deeply interested in the success of the crypto space. It is not going to disrupt the Tron platform whose token is one of the most traded on it, does it?
This might be true but it is beside the point. What Binance can do any other large actor can. With an expense of around $350 million, a hostile actor like a large government could take Tron over. Even if Tron got really big and its market cap became 100 times higher than today, we are still talking about $35 billion, peanuts for states like China but even for much smaller ones.
Crucially, in contrast to bonded proof of stake validators, misbehaving super representatives controlling the chain would not face immediate repercussions for any misbehavior. The biggest risk for them would be a large part of the community and users just moving over to another platform. However, this requires a lot of coordination and, perhaps, completely egregious acts by super representatives. If they just quietly pull the strings, they may well get away with it.
The biggest lesson here is that given the still underdeveloped state of cryptocurrency markets at present, projects like Tron may achieve high market capitalizations, despite having critical vulnerabilities. Even if those vulnerabilities are inherent in their very design. Having extremely marketing-savvy, well-connected figureheads like Justin Sun or tons of half-baked gambling DApps certainly helps a lot. However, no amount of such signs of success should fool you, such projects do not have what it takes to form the basis of a resilient, widely-used decentralized crypto ecosystem.
P.S. While Tron is not an outright scam, there are many flagrant scams targeting participants of the crypto space like you every day. Try our quck questionnaire that helps detect crypto scams and spread the word.