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Decision Proposal: Increase Proposal System Flexibility and Efficiency

Introduction
This is a decision proposal that - if approved - will increase the proposal system’s spending limit (i.e., its flexibility) and incentivize greater focus on the value of approved funding proposals (i.e., its efficiency). Similar to the visual identity / rebranding proposal from 2018, two proposals were submitted for evaluation in the November voting cycle in order to present the network with two options. Those two proposals were mutually exclusive and this proposal received a higher number of net votes. The November cycle, therefore, represented “Phase 1” in which the two solutions competed against one another. This proposal - “Phase 2” - will determine whether the favored solution will be implemented and will change the way Dash’s proposal system functions.

The primary objective of this proposal 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. It will also establish certainty over Dash’s final circulating supply.

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. This proposal did not address any changes to the proposal system itself, which is 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 when Dash prices are high (and the budget is large), resulting in approval of high-cost proposals that deliver limited long-term value. Conversely, when the price of Dash has been low, the 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.
   

Proposed Solution
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. This 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.

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.

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 is complete. The following illustration displays theoretical allocations of the block subsidy assuming various approved budgets once the reallocation is complete.

Approved Budget Allocation	Resulting Miner Reward	Resulting MNO Reward
0%	40%	60%
5%	38%	57%
10%	36%	54%
15%	34%	51%
20%	32%	48%

For full technical details of the proposed implementation, click here: Draft Proposal System DIP

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 did prior to the reallocation (i.e., 48% vs. 45% previously).

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. Doing so would reduce their own rewards significantly.

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.

Risk Management
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 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).

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.

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.

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.