Welcome!

1. Introduction

This is a decision proposal to increase the proposal system’s spending limit (i.e., its flexibility) and incentivize increasing the value of funded proposals (i.e., its efficiency). Similar to the visual identity / rebranding proposal from 2018, two proposals are being submitted for evaluation. These two proposals are mutually exclusive; only one may be implemented. Further detail about the voting process is found in the next section.

In preparing for this proposal, two alternatives emerged with enough interest and support for network-wide consideration. One option originated from Dash Core Group (DCG), the other from a group of masternode owner/operators (MNOs). The Dash trust protectors (TPs) are submitting both proposal options as a neutral third party. Apart from the proposal submission itself, individual TPs may choose to express their personal opinions non-neutrally.

The primary objective of both proposal system upgrade options is to provide the network with greater flexibility over proposal spending, while better aligning MNO incentives to avoid spending network resources on low-value proposals. The options differ in their approach and the resulting implications. The differences will be detailed in subsequent sections.

After this introduction, and the proposal process section that follows, further details about the background will be presented. These three sections, as well as the appendix at the end are identical in each of the two proposals, so you will only need to read these sections once. The only section that differentiates the two proposals is section 4.

Cross-reference links for each proposal:
[DCG Plan] - 
https://app.dashnexus.org/proposals/decision-vote-improve-proposal-system-dcg-plan/overview
https://www.dashcentral.org/p/decision-vote-improve-proposal-system-dc
[MNO Plan] - 
https://app.dashnexus.org/proposals/decision-vote-improve-proposal-system-mno-plan/overview
https://www.dashcentral.org/p/decision-vote-improve-proposal-system-mn

Link to Dash Forum proposal discussion thread -
https://www.dash.org/forum/threads/decision-proposal-increase-proposal-system-flexibility-efficiency.50873/

2. Process

The voting and proposal process consists of two phases:

• Phase 1 - the two proposal options are evaluated against each other
• Phase 2 - the favored option from Phase 1 is evaluated against our current system

In Phase 1 (this phase, this month) you are asked to vote for which option you prefer. Regardless of degree, the option with the most net (yes minus no) votes will proceed to the next phase (next month). DCG will implement the Phase 2 upgrade option if it exceeds the normal 10% net vote criterion in Phase 2. In the unlikely event the higher ranked proposal exceeds the 10% net yes votes during Phase 1, Phase 2 would not be necessary.

Edit for clarity: "net vote" means "yes" votes minus "no" votes.

In an effort to reduce the need to post and respond to comments and discussions in both proposals, we have created a Dash Forum thread we hope the community will leverage, particularly for any debate and comparisons. If you have comments or questions specifically related to one proposal, those could be posted on the Dash Central / Dash Nexus proposal itself. This will help reduce the workload for the proposal owners (POs) and others that would otherwise need to reply to the same comments in multiple locations.

3. Background

Dash Core Group identified several issues with network economics and incentives, and presented its initial findings in December 2019 at DCG’s Open House, available to view as a presentation titled “Improving Dash as a Store of Value”.

The presentation explored a number of unique attributes of the Dash network’s incentives and economics, and presented a hypothesis regarding the impact those attributes have had on Dash’s market performance and long-term price volatility.

These issues were addressed partially through an independent, but related proposal (passed in the July voting cycle), which approved a reallocation of the block subsidy. The changes were incorporated into v0.16 of Dash Core, which was released to mainnet on September 30, 2020. That proposal did not address any changes to the proposal system itself. Proposal system upgrades are the subject of this proposal.

Dash’s current proposal system allocates up to a fixed 10% of the block subsidy toward proposals on a cycle of 16,616 blocks, which approximates one calendar month in duration, through a “superblock”. Proposal funding is dispersed in a coinbase transaction to the address specified in the proposal if the proposal receives enough support from the MNOs. The proposal system prioritizes payment to the highest ranking proposals until the available funding is exhausted for each superblock, subject to the constraint that each proposal must reach 10% “net votes”. Proposals meeting these criteria are funded with newly created Dash. More information on the functioning of the current system is found in the governance section of the Dash documentation.

While this system has been effective at funding Dash’s development, there are several issues and concerns that emerged over the years. The current proposal system lacks incentives for MNOs to focus on value-creating proposals, resulting in approval of high-cost proposals that deliver limited long-term value. In addition, MNOs lacked the flexibility to increase proposal funding beyond 10%, potentially forcing valued teams to disband due to even temporary price declines.

The root-causes of these issues are as follows:

1. There is no personal and immediate cost for MNOs to approve low-value proposals, as it has no impact on their Dash-denominated rewards.
2. The monthly budget is relatively small and has no ability to increase capacity if needed for large proposals or to accommodate price declines.

Community discussions revealed support for expanding the budget, maintaining a proposal cap, and introducing incentives for MNOs to restrain spending. Both decision proposals carry these features, but differ in the approach and specific effects on miners, masternodes, and proposal owners.

4. DCG Plan

DCG seeks to alleviate both of the above root-causes in a low risk manner. The changes we propose would provide economic incentives for MNOs to spend proposal funds more judiciously, and would also provide greater flexibility to expand proposal funding if needed. The proposal also seeks to limit the associated risks these changes introduce to network economics through several mechanisms discussed below. These risks are outlined along with how the proposal manages those risks.

DCG engaged with the community to explore a range of possible solutions through a series of Q&A sessions, Dash Forum discussions, and updates on our quarterly calls. We also engaged our engineering team, external experts, and prominent community members to develop a perspective on the optimal solution.

We operated under a number of constraints, including security-related constraints recommended by our development team. In addition to simple mathematical constraints regarding the desired economic impact, we also had to take into consideration the effect this proposal would have on all stakeholders within the Dash ecosystem, e.g., masternodes, miners, users, and proposal owners - all of whom are essential for a successful transition.

The primary aim of this proposal is to improve the effectiveness of our proposal system while limiting the potential for new risks to the network’s economic system.

4.1 Guiding Principles

Because of the inherent sensitivity of changes to Dash’s complex economics relative to other networks, DCG favored solutions that provided benefits with more predictable effects and was especially mindful of potential risks, including transition risks, implementation risks, security risks, and economic risks (e.g., potential for price bubbles or crashes due to behavior changes). As illustrated by price changes driven by past changes to network economics, even seemingly small changes carry the potential to introduce unforeseen consequences.

4.2 Proposed Changes

DCG proposes the following changes to the proposal system:

1. Increase the proposal budget limit from the current 10% of the total monthly block subsidy to 20% of the total monthly block subsidy. No other changes to the proposal approval process would be made, including the minimum net-vote threshold.
2. Allocate any unused block subsidy associated with a superblock’s proposal funding toward masternode and miner rewards in the following 16,616 block budget cycle. The incremental allocation would be distributed evenly over the cycle. For example, if 8,308 Dash were unallocated during a cycle, the block subsidy for masternodes and miners would increase by 0.5 Dash per block in the subsequent cycle (8,308 Dash / 16,616 blocks = 0.5 Dash / block).

The resulting split in any period will be a function of the approved proposal budget from the prior period and the current split of non-proposal funds between miners and masternodes. While the miner / masternode reward allocation split is scheduled to change on a quarterly basis due to the previously approved reallocation proposal (approved in July) recently deployed to the network in v0.16, it will eventually settle at 40% / 60% permanently once the reallocation schedule is complete. The following illustration displays theoretical allocations of the block subsidy assuming various approved budgets once the reallocation is complete.



4.3 Benefits and Rationale

As the table above demonstrates, this set of changes provides MNOs with the ability to change the size of the budget over a greater range to meet the needs of the network, or create “surge capacity” to better digest large one-time costs. The maximum budget size would double to 20% of the block subsidy. This could enable new use cases, such as funding for large investments for the DIF without the need to build large reserves first. Note: even at the maximum proposal allocation size, the MNOs would receive a larger portion of the block reward than they do today (i.e., 48% vs. 45% currently).

Concurrently, this approach creates direct financial incentives for MNOs to spend available funding judiciously, because approving additional spending would directly impact their expected rewards over the following budget cycle. This incentive eliminates the risk that MNOs would approve proposals simply to maximize the budget allocation.

Perhaps counterintuitively, miners benefit from an approach that varies the miner reward. This is because as constructed, the reward schedule amplifies miner earnings most during profitable market conditions - conditions in which miners make nearly all profits. Mining margins are usually thin in most market conditions (e.g., flat or declining prices). Even if the asset price increases, if the increase is gradual, this will not result in excess mining profits, since there will be ample time for new mining equipment to be manufactured and installed, keeping profit margins contained. In instances when Dash prices increase rapidly, it is likely that the requested budget requests would drop in Dash-denominated terms. This would lead to larger miner rewards at precisely the times when Dash prices were increasing. This means that miner rewards would grow to amplify profits in instances where mining profits are highest (i.e., periods of rapid price appreciation).

Another benefit to this approach is that by structuring the reward allocation such that both miners and masternodes jointly absorb the variability caused by the proposal system funding changes each month, the economic risks outlined in the next section are reduced. The risk section goes into greater details.

Lastly, because no portion of the block subsidy goes unused, it provides certainty over Dash’s max supply. While minor, it is a benefit worth noting.

4.4 Risk Management

4.4.1 Economic risks

There are two primary economic risks that result from implementing financial incentives for MNOs to reduce spending. The first risk is that MNOs could become overly parsimonious to the detriment of the network or cut funding to valuable projects for short-term benefit. The Dash network is dependent on funded projects for continuing software development, local adoption efforts, and business development. It is impossible ahead of time for anyone to know the extent to which the financial incentives may impact MNO voting behavior. If it impacts behavior less than we expect, the severity of this risk is contained. However, a change in behavior that results in defunding projects to an extent that puts the future of Dash at risk could possibly be severe and even irreversible if it impacted price substantially.

The second risk is that the resulting MNO reward variation introduces stability risks in the number of masternodes the network can support. In a worst-case scenario, this could lead to a vicious cycle. Specifically, if a low Dash price leads to a larger share of the budget to be allocated over a sustained period, this would result in lower masternode rewards. Lower masternode rewards - if sustained - would likely lead to fewer MNOs (caused by masternode liquidations from ROI-motivated investors). Masternode collateral liquidations could cause the price to fall further, exacerbating the issue and causing an even higher share of the proposal system funding to be used.

The above economic risks are the main reasons why the reward volatility is absorbed by both miners and masternodes in this proposal. This has the effect of narrowing the possible masternode rewards to a more predictable and stable range, helping to mitigate both risks. By dampening some of the impact to MNO rewards, these rewards will be more stable from month-to-month (resulting in greater price, rewards, and proposal funding stability).

Related to this, it is worth noting that the block reward reallocation proposal’s table that predicted a range of MN count was predicated on this proposal’s design. There is therefore a link between the MN rewards contemplated in this proposal and the range of likely MN counts previously presented, and therefore to the resulting circulating supply growth rates. See the table near the bottom of the block reward reallocation proposal that passed in July for more information.

https://app.dashnexus.org/proposals/decision-proposal-block-reward-reallocation/overview

Proponents of the alternate proposal argue that placing 100% of the variability resulting from proposal approvals is “appropriate since MNOs carry 100% of the proposal-funding responsibility”. However, requiring each masternode to assume approximately one 5,000th of the proposal cost (since there are ~5,000 masternodes) creates misaligned incentives, considering each masternode receives only about one 10,000th of the benefits (e.g., their share of the total supply). We agree that creating “personal and immediate” costs to MNOs for funding proposals is desirable - and both proposals do just that. However, we caution against moving from one extreme (in which MNOs incur no costs) to the other (in which MNOs collectively incur 100% of the costs), and advocate for an approach that better aligns the costs and benefits of the decision-makers.

In fact, the argument that MNOs should bear 100% of the costs is antithetical to the stated goal to “increase the value of funded proposals”. Because of the misaligned incentives, MNOs are incentivized to reject a subset of the proposals that would have been value-creating (defined as benefit exceeding cost), if the value created is less than ~100% return. Such a high bar may leave opportunities on the table and discourage the network from pursuing exploratory opportunities or new teams. Intelligent risk-taking and opportunity exploration remain critical to the future success of Dash.

Proponents of the alternative proposal also argue that “proposals are essentially paid 100% by ‘other people’, i.e., the costs are socialized”. It is a logical fallacy to position only the costs, but not the benefits, through a lens of “socialization”. The implied presumption is that sharing of the costs of a proposal is negative. In a parallel argument, contributing 1% of the capital toward an investment would mean the full investment costs are “socialized” among the investors (i.e., ‘other people’). This is simply an illogical interpretation of a shared cost / shared benefit arrangement. While 99.99% of the costs are borne by others, it is likewise true that 99.99% of the benefit will accrue to others; similar in nature to 1% of the profits from an investor would accrue to the person that contributed 1% of the investment. This is not a negative, it is necessary to efficiently align incentives.

Finally, given masternodes are already unwilling to approve the full available monthly budget, we do not believe there are risks that this proposal carries insufficient incentives for MNOs to restrain spending should the price of Dash increase substantially. Every proposal approved will directly and immediately impact masternode rewards.

4.4.2 Security risks

A variable miner reward can affect hashrate on the network, so introducing a variable miner reward could impact month-to-month levels of security. There are at least two reasons to believe these risks are extremely low. First, the primary driver of any variation in miner rewards will continue to derive from Dash’s market price. Miners are already accustomed to 20% swings in price from month-to-month, and these changes are absorbed effectively by the mining apparatus serving the network. Even in other ASIC networks like Bitcoin, the most recent 50% reduction in reward subsidy was barely noticeable in the network hashrates.

https://bitinfocharts.com/comparison/bitcoin-hashrate.html#1y

This evidence suggests that the dominant chain for a mining algorithm can absorb large changes in mining rewards while safely maintaining network security. There is no evidence that small short-term changes in mining rewards will destabilize network security. By definition, the maximum monthly change in miner rewards must be less than 20% (and likely much smaller given entities like DCG, the DIF, and others regularly consume a relatively stable portion of the rewards). We therefore view this risk as negligible.

Proponents of the alternative proposal point out that “shifting part of the variability to miners... makes the mining allocation unpredictable from month to month”. This is a misleading statement, because DCG’s proposal lock-in a range of minimum and maximum rewards a miner can expect (about 80% of the maximum possible reward is guaranteed), and it does not affect the fee portion of the reward, further dampening the impact over time as fees grow and the block subsidy shrinks. The likely variability in the value of mining rewards due to variations in month-to-month proposal system allocations will be small in comparison to the month-to-month market price fluctuations already endured by miners in a given month. Further, they make no arguments as to why mining reward variability might lead to an undesirable outcome for the miners or the network as a whole. To the contrary, discussions with miners lead to the conclusion that variability is anticipated to be financially beneficial to their operations.

4.4.3 Migration risks

Strong miner support remains essential for facilitating hard forks in a manner that is safe for our users. ChainLocks are highly effective at preventing 51% attacks, but they offer little benefit toward enforcing a protocol change. This plan benefits miners in two ways that are likely to incentivize their support. First, the likelihood that the MNOs spend more than 10% of the available budget on a regular basis is perceived by most miners as low, given that they often spend significantly less than that amount today without incentives to spend judiciously. Therefore, they feel it is likely that their allocation may increase on average. Second, they benefit from the variation in reward as outlined in the benefits section. We therefore view transition risks as low.

Implementation risks:The required changes to the proposal system are relatively straightforward from a coding perspective. Proposal submission, voting, and allocation will function identically as it does today. The resulting “unused budget” is easily calculated and applied to the subsequent cycle’s block subsidy. We anticipate no significant risks due to unpredictable implementation timelines or a high likelihood of security vulnerabilities.

4.5 Summary

This proposal encourages good stewardship of proposal funding, provides greater flexibility to utilize a larger budget if the need arises, and provides benefits for miners, masternodes, and proposal owners. Importantly, the proposal is mindful of potential risks that could arise from variable network economics, and attempts to reduce those risks by spreading the variability over both masternodes and miners.

5 Appendix

DCG introduced the idea of “Improving Dash as a Store of Value” on December 11, 2019. DCG then engaged in a series of Q&A and discussions held through various communication channels such as Discord, The Dash Forum, Zoom and Telegram from June-July 2020. The following links document these interactions, as well as other relevant information:

• Dash Economics Community Discussion Forum 
• Ryan Taylor - Improving Dash As A Store Of Value - December 11, 2019
• Dash Core Group Presentation on Dash Economics - June 4, 2020
• Store of Value Community AMAs - June 2020
• Joel Valenzuela interviews Ryan Taylor about Dash "tokenomics" - June 5, 2020

Related Discord polls:

• Poll 1 in Discord #general channel - June 5, 2020
• Poll 2 in Discord #mno channel - June 26, 2020 
• Poll 3 in Discord #mno channel - July 4, 2020
• Poll 4 in Discord #mno channel - July 8, 2020
• ABJ interviews RT about block reward allocation (timestamped) - July 16, 2020
• DCG Q2 2020 Summary Call Q&A on upcoming proposal (timestamped) - July 23, 2020
• Block reward reallocation proposal (Dash Central) - July 2020
• Block reward reallocation proposal (Dash Nexus) - July 2020
• Joel Valenzuela interviews Rion and Hilawe on Economic Incentives in Governance - October 9, 2020
• Google Sheets model showing two proposal system improvement options side by side

Side by side decision proposal example from 2018 - Visual Dash Rebrand / Logo proposals (process reference):

• Pre-Proposal - Visual Identity - March 2018
• Core Branding - Ogilvy & Mather - March 2018
• Core Branding - Tharp & Clark - March 2018
• Core Branding - Final Approval - Tharp & Clark - April 2018