Today the well established crypto currency exchange Binance announced a “Lisk staking” product, which was quickly embraced by the community.

The idea is simple and effective: Binance holds the users’ tokens in a cold wallet, votes for delegates that pay out rewards to their voters and then distributes those rewards to Binance users. Right now Binance claims to pay out 100 % of those rewards to the owners of the tokens, so their primary motivation is probably to incentivise activity on their platform. All of this is coherent considering the economical motivation of Binance and their LSK token holders. So what’s the problem?

There is no staking at Lisk

Proof of stake does not necessarily imply a staking mechanism is in place. It just means you have a voice relative to the amount of tokens you own. Staking on the other hand means there is something at stake which goes hand in hand with penalties. In a staking protocol you explicitly put some of your tokens at stake and in case of a provable misbehaviour a portion of that stake is taken away from you (“slashed”). A provable misbehaviour would be e.g. downtime or signing two different blocks of the same height (which risks a fork of the chain). Staking implies a risk. This risk incentivises you to behave in a way that stabilizes the network.

There are typically two levels of staking. On the first level, the block producers (“delegates” or “validators”) who earn block rewards for providing infrastructure and whose stake incentivises them to run economically high quality infrastructure. On the second level, token holders don’t produce blocks themselves. Those people or organizations delegate their tokens to a set of validators who they trust to do a good job. With their delegation they are signaling that their chosen candidates are good for the network. They are punished if a block producer misbehaves. For this risk they are rewarded with a share of the block rewards.

Staking is when rewards and risk are in balance to the benefit of the network.

Lisk voting system

Lisk’s selection of block producers does not rely on in-protocol punishment of misbehaviour but on a democratic voting for the top 101 good guys (“delegates”) who are responsible for securing the network. Token holders are asked to vote for the delegates they believe do a good job.

As elegant and simple as the idea is, the fact that votes are public allows off-chain rewards from the block producer to the voter, i.e. vote selling. This way voters are incentivised to vote for the best paying delegates, not the ones that are best for the long term success of the network. This negative effect multiplies if groups only pay voters if they vote for all members of that group. But that’s not the focus of this article.

Voting should not be a matter of rewards but ethics and informed decision making, especially when there is nothing at stake for the voter.

Next level

The Binance “Lisk staking” product now builds on top of this problematic voting foundation. By holding LSK tokens on the exchange, the user votes for a set of delegates that Binance chooses. How this decision is made is intransparent. But what we can see is that there was an initial vote on the active 101 delegates on February 14th and then some adjustments on February 25th. It is plausible that the exchange favours delegates promising the highest rewards. With this extra layer indirection, the end user is shielded from on-chain politics and only sees the payouts.

If Binance wanted to offer a custodian voting service that aims to work well for Lisk’s voting system, it had to allow per account voting which is turned off by default. Every user could choose to make an informed decision and cast their vote when they’re ready to.

Effects on the delegate landscape

For a long time exchanges stayed neutral in Lisk voting, which makes sense given their big pockets of tokens that belong to other people. What we are seeing now is a voting weight of more than 5 million LSK that primarily cement the status quo in the delegate landscape. To put that into perspective: voting weight of about 28 million LSK is required to become an active block producer.

To be fair, we are seeing a couple of vote changes towards popular delegates from the #HeroesNotZeroes campaign, but I assume vote changes are a result of swapping zeros with potential reward payers.

The point is, a single company takes a completely intransparent decision on delegate selection on behalf of the token owners.