A Counter-Incentive to Combat Corruption
“Incentives guide behavior. They don’t make you work harder; but they do make you work smarter.”— Compensation Consultants everywhere
While the discussion around alleged EOS Block Producer (BP) collusion rages on, and we consider potential “fixes” to address these issues, I’ve also been thinking about simpler measures which could help counterbalance the very real risks that bad actors pose to the EOS network in the short-term. In particular, I’ve been focusing on measures that would be relatively straightforward to implement and which could be enacted relatively quickly.
This article presents and discusses an EOS whistleblower program which, for ease of reference, I have named WHISPER (whistleblower + program = whisp = WHISPER). This initiative, I believe, could be an extremely valuable tool to help protect all EOS stakeholders by partially offsetting the incentive to collude and corrupt with an incentive to reveal and report.
Any implementation of such a program will undoubtedly require considerable thought to ensure proper governance, structure and administration. But, I firmly believe that we have the skills and capabilities within the community to bring this to life, if we so choose. Let’s start with a little background.
Anyone in the U.S. who works in finance, or who simply has a semi-active interest in politics or governance, is probably familiar with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Enacted by Congress in July 2010, Dodd-Frank brought sweeping reforms to financial regulation and consumer protections as a result of the serious financial misconduct that contributed to the Great Recession in 2008.
While the implications of this extremely hefty piece of legislation have been wide-ranging, it’s well-known that many provisions remain unimplemented as political parties from both sides of the aisle have fought to approve or overturn elements most suited with party lines when power has changed hands.
I’d like to think, however, that one of the more universally accepted pieces of positive change brought about by Dodd-Frank was the Securities and Exchange Commission’s (SEC) whistleblower program. This program, which officially began in 2010, sought to incentivize, reward and protect citizens who provide “tips” related to violations of federal securities laws, including insider trading, stock manipulation and collusion. In return for information which led to judicial actions against white-collar criminals, individuals were not only provided with employment protections, but also financial rewards which generally range between 10% and 30% of the monetary sanctions imposed on guilty parties.
In total, since 2012 when the first whistleblower award was made, the SEC has awarded over $266 million to 55 individuals, and has ordered monetary sanctions against wrongdoers in excess of $1.5 billion. For whistleblowers, that equates to an average reward size of approximately $4.8 million per person — that represents a pretty powerful incentive, don’t you think?
Bringing it to the Blockchain
Of course, you can’t just copy and paste pieces of complex legislation from the “real world” and apply them to blockchain or, in this case, EOS. Programs that enforce federal laws have been designed by and for centralized entities which have the power, authority and ability to impose penalties on civilians, sometimes with the very real threat of force or loss of liberty for noncompliance.
Clearly, this would not translate well to a decentralized blockchain-based system. On the blockchain there are no central parties to actually enforce financial penalties or order the disgorgement of ill-gotten gains. However, EOS’ delegated proof-of-stake consensus model does still confer meaningful power to Block Producers to remove or blacklist BPs who are found, as a result of a successful arbitration, to be in violation of the EOS Constitution.
The provision of reliable, credible and compelling evidence which can reasonably demonstrate corruption within EOS, such as collusion or vote-buying, should be sufficient to prove wrongdoing and result in a BP’s removal or blacklisting. This shouldn’t be a surprise to anyone. What’s missing currently, however, is the right counter-incentive to encourage members of the community to step forward with information about wrongdoers, and to then reward them for their efforts to help safeguard the network.
The remainder of this article focuses on the high-level development of an open source framework for WHISPER around some basic parameters. The framework is “open source” because, much like the EOSIO software, WHISPER must ultimately be shaped, implemented and administered by the EOS community, and there are many excellent minds who should be consulted on this if we decide to pursue it.
A Basic Framework
For ease of presentation, I’ve divided this section into four broad subsections: Governance, Funding, Fund Administration, and Payment of Awards. Under each of these subsections, I outline a non-exhaustive set of parameters which could serve as a foundation for WHISPER.
For a program like WHISPER to be effective, it must be governed by a committee of trusted and independent members from the EOS community. So, while there are many excellent minds and contributors among EOS Block Producers, the potential for conflicts is too great to permit anyone with known BP affiliations to sit on the governance committee. It also obviously excludes other members of the community like me — those who want to help create value for the network, but at the same time value their privacy and anonymity.
I envisage the governance committee comprising four to eight known, active and unaffiliated members of the EOS community who have demonstrated a long-standing commitment to EOS and its development, and have a trusted track record of transparency and impartiality. Prospective members of a governance committee must be willing to fully disclose their identity, as well as any current and past affiliations with EOS BPs or other key stakeholders.
In terms of membership demographics, the committee must be geographically diverse to avoid bias and to ensure that it fairly represents EOS as a global community. At a minimum, I believe that four of the seven continents should be represented.
To determine committee membership, individuals would ideally be elected by vote, perhaps by using some variation of the upcoming referendum tool. Alternatively, the committee could be self-appointed under certain circumstances. Self-appointment is not ideal, but it’s also not an impediment provided that WHISPER is funded through voluntary donations (discussed below). In the absence of a formal voting and election process, the community will simply decide informally whether the committee is “worthy” by choosing whether to donate. Under this scenario, the program would live or die based on the committee’s own ability to self-select suitable members.
I would summarize the governance committee’s primary responsibilities as follow: (1) to review evidence provided by whisteblowers, (2) to determine whether sufficient evidence exists to pursue arbitration, (3) to determine the significance and impact of the evidence for the purposes of defining an award amount (e.g., 20% of the WHISPER award fund), and (4) to potentially authorize the transfer of funds to whisteblowers based on successful arbitration outcomes (also discussed below).
Finally, to compensate committee members for the time spent and responsibility assumed to separate factual from fictitious or frivolous claims, I would also support paying a small committee fee to each member as a percentage of total funds contributed, up to some maximum amount of EOS tokens.
A whistleblower program is worthless without funding to incentivize individuals to come forward. The SEC’s program is “cost-less” in the sense that a portion of the ill-gotten gains are simply separated, at their discretion, and paid to whistleblowers once they have been recovered. No direct additional burden is levied on the community to provide funds to whistleblowers through taxation, for example. Since it’s likely not practical to recover ill-gotten gains within EOS, WHISPER must rely on the benevolence of the stakeholders to obtain funding.
In my opinion, each and every member of the EOS community bears equal responsibility to help safeguard the network. Therefore, to fund a program like WHISPER, I believe that anyone and everyone should contribute. This said, building the program around this expectation may not be realistic. As a result, I’ve identified three additional sources of funding which could be considered:
- RAM Trading Fees — distributions from the eosio.ramfee account which currently holds ~2 million EOS
- The Worker Proposal Fund (WPF) — allocations from the WPF to fund the whistleblower pool. The WPF currently builds at a 4% annual rate of the total token supply, so a relatively small allocation would be sufficient (it’s worth noting, however, that the future of the WPF is unclear at this time).
- Block Producer Opt-In Schemes — as a statement of their commitment to fighting corruption among their peers, BPs could establish an opt-in scheme whereby each contributes, say, 1 EOS per day to the help fund the program. If 30 BPs participated, almost 11,000 EOS would accrue over a one-year period with a current dollar value of ~$65,000. Alternatively, BPs could choose to adopt some kind of matching formula based on donations made by non-BPs tokenholders, up to a maximum amount. To be absolutely clear on this, the intent here is not to put BPs “on the spot.” As I said, I believe we all bear equal responsibility to help safeguard the network. Therefore, BP schemes should be established in conjunction with contributions from non-BP tokenholders.
It goes without saying that suitable procedures must be established to ensure that contributed funds are allocated correctly, and not mismanaged/internally comprised by corrupt actors on the committee. To address this, I see two potential solutions:
- Establish a multisig WHISPER account whereby funds are only transferred to whistleblowers (or anyone else, for that matter) if all or a super-majority of members (i.e., 75%+) approve the transfer.
- Establish on-chain execution of fund transfers to whistleblowers using smart contracts in a semi-trustless process. Any other transfers will still require the committee’s approval using the process described under item (1).
Someone with greater technical knowledge than me can speak more intelligently about whether on-chain execution of whistleblower awards is realistic. However, based on my understanding, I believe it is possible provided certain parameters are clearly defined and verifiable on-chain, such as the payment amount and the triggering event.
Payment of Awards
The process for paying awards under WHISPER will vary based on the mechanism that permits the transfer of funds. As mentioned above, funds could be transferred either by approval from governance committee, or perhaps automatic on-chain execution based on event outcomes.
Regardless of the mechanism that’s in place, it is my strong recommendation that successful arbitration against the accused acts as the only trigger for payment for whistleblowers. Arbitration outcomes need not necessarily result in the removal or blacklisting of BPs, but any payments to a whistleblower must pursuant to an independent third-party investigation and ruling against the accused, based wholly or in-part on the evidence provided by the whistleblower.
Clearly, the extent to which these events can be tracked and verified on-chain will dictate whether payments can be made in a semi-trustless fashion, or if we will need to rely on the governance committee’s authorization for transfer to occur.
There is so much more to consider if the EOS community wants to pursue a whistleblower program like WHISPER. It’s simply not possible for me to address every aspect of its design in under ten minutes of reading time. Rather, as with many of my posts, they are intended to start discussion and debate as to whether we, as a community, should consider something like this to help safeguard the future of the EOS network.
I imagine a whistleblower program as an effective and elegant tool that is part of a much larger toolkit to help fight corruption within EOS. Despite the obvious work which would be required to establish such a program, I suspect it would be far less laborious and challenging than it would be to define, develop and implement any solutions at the system level.
If you think there’s merit to this idea, please share it with others so that we can continue the discussion. Do you think you would be a good candidate for a whistleblower governance committee? If so, feel free to run with this idea. While I can’t be involved at an administrative level, I can still in contribute to it’s development as a passionate member of the EOS community.
I am a long-time EOS supporter and advocate for decentralized technologies. I maintain an independent EOS Block Producer ratings platform called Mereo.io, as well as the voter proxy proxymereoio. My background is in finance, compensation and corporate governance. I currently co-own and operate a compensation and corporate governance consulting firm on the West Coast of the U.S.
Follow me on Twitter or message me on Telegram at @theblockchainkid.