Author Topic: Delegates responding to market rates, weird game theory with current set-up  (Read 4814 times)

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Offline Riverhead

I think that's one of the big advantages to a PoS system over PoW.  The cost to operate a delegate is substantially less than running a PoW GPU/ASIC farm.

For a real world example it costs me about $15/m to run a delegate. I was paying $1500/m in power costs (plus about $12k in hardware) to run a PoW farm.  Granted the ROI made sense at the time for PoW however there is no way I'm going to eat $1500/m "for the good of the network" but I'll hardly miss $15/m to ride out a low time.

Offline maqifrnswa

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I hate replying right after myself, but I think this may be more serious than I originally thought:

Assuming constant fees, and fees are in BTSX (not bitUSD). At some point the delegate payrate market will become efficient, and all nodes will have approximately the same pay rate a little above the cost of the node (for example, 5%). Imagine a shock to price (e.g., a one day drop of 10% in BTC, which has happened in the past). ALL nodes now are operating at a loss, and the correct thing to do economically is to turn off enough so the remaining nodes become profitable again. That will damage the network, which may cause BTSX to drop in value, which then would cause more nodes to turn off, until a new equilibrium is reached with only a portion of the network being active.

Of course, this outcome should be avoidable by selecting delegates that promise not to do that. But how long would you operate in the red before turning it off? $10? $100? $1000 lost? At some point, delegates not being able to raise their fees may lead to a breakdown in DPOS.

EDIT:
Not allowing delegates to raise their fees is the same policy as China not allowing short selling in the market. It sounds like a good idea, but leads to crazy economic outcomes. Even China had to give up on that idea:
http://www.bloomberg.com/news/2013-02-23/china-to-expand-short-selling-program-as-part-of-reform.html
« Last Edit: July 31, 2014, 02:09:14 am by maqifrnswa »
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Offline maqifrnswa

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I think what you guys forget is that BTSX is deflationary and it will always increase in value.

no, i'm quite aware of that  ;)
serving as a delegate should be the equivalent of buying BTSX at a discount. However, if the cost of running a node is more than the earnings, I'm running a node for the privilege of being forced to buy BTSX at a premium. If I think BTSX is going up (that is, always increasing in value as you say), why would I pay to run a delegate node when I can buy on the open market for less? That is the vector we're discussing. The problem is that delegates in that  situation have no recourse besides damaging the network by turning off their highly-voted node. They can't increase pay rate, so they can only discontinue service in order to stop losing money.


Here's another perspective.  The number of delegates are currently fixed at 101.  So as the transaction volume ramps up the delegates are only going to make more and more money.  It's not like the system requirements are going to scale at the same rate as transaction volumes.  If the transaction fee is controlled by the delegates then it's just up to the delegates to come up with some balance.  And really once BTSX are worth $1/ea or more than we'll be fine even at 95% burn rate. If BTSX doesn't get higher than that then we're all sort of out of luck anyway :) .

The real control we have to worry about is transaction fee.  Naturally if BTSX goes to $100 no one will want to pay 0.1BTSX so a balance will have to be struck.  Dynamic pay rates is just one lever, the delegates have others.

This is very true, transaction fee rates may too need a market. If that happens, then pay rates definitely need a market since delegates would have no control over their income.

EDIT: there/their oops
« Last Edit: July 31, 2014, 01:48:56 am by maqifrnswa »
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Offline Riverhead


Here's another perspective.  The number of delegates are currently fixed at 101.  So as the transaction volume ramps up the delegates are only going to make more and more money.  It's not like the system requirements are going to scale at the same rate as transaction volumes.  If the transaction fee is controlled by the delegates then it's just up to the delegates to come up with some balance.  And really once BTSX are worth $1/ea or more than we'll be fine even at 95% burn rate. If BTSX doesn't get higher than that then we're all sort of out of luck anyway :) .

The real control we have to worry about is transaction fee.  Naturally if BTSX goes to $100 no one will want to pay 0.1BTSX so a balance will have to be struck.  Dynamic pay rates is just one lever, the delegates have others.

Offline GaltReport

ah, I did not know you couldn't increase your fee!!  Should have read the fine print.  :(

Oh well, I didn't do it to earn any money but figured I could always increase it to cover costs.  I agree that it would be good  to have someway to do it.  Maybe allow 1 change every quarter or something like that.

Offline Troglodactyl

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Alternately, delegates could use the official delegate pay rate only as a guaranteed maximum to reduce trust required by the voters, and could then manually destroy the current difference between that rate and their actual desired pay rate.

Should there be a hardcoded burn address, and can we choose to do publicly visible transactions yet?

Offline Riverhead

If we had a functioning BitUSD it would be very easy to set a minimum on delegate fees. The minimum should be at or slightly above the expected cost of operating a delegate. I would say for guaranteed uptime a delegate needs to earn at least $10 monthly.


Yup, that's about what it's costing me.

Offline luckybit

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There is a weird game theory thing happening with delegate payrates, by preventing delegates from raising rates you risk damaging network coverage.

Current Rules:
1) You are allowed to lower, but not increase fees
2) Once elected a delegate, you remain one until votes decrease to eliminate you.

Market forces:
1) BTSX price and BTC are volatile, as is daily fees earned
2) there are fixed expenses (for the most part) for running a node/delegate
3) People are bidding on fees, lowest bids should, in theory win.

Outcome:
1) Delegates bid such that they make a profit
2a) If BTSX increases in value, they can decrease to stay competitive in the market
2b) If BTSX decreases in value, there is no ability to increase fees to stay competitive. The delegate will turn off their machine since income is less than cost. Voting response is slow. Network yield is hurt.

I currently am only running 1 delegate, at 15%, and am providing services to the community (maintaining an ubuntu PPA, bug reporting/testing/validation). Others are running 5 nodes at 100%. That's fine, I don't mind only running one delegate since I believe in decentralization - but now that BTSX is slipping I see I'm stuck with the choice of losing money or hurting the system. I'm going to keep it running, but others in my situation will hurt the system.

Could there be a mechanism by which delegates increase their fee? perhaps they declare a fee change and have to wait x number of days before it is implemented so voters can vote them out if they think it is unfair?

I'm not running a delegate because I also saw it as a race to the bottom scenario. If the fees would adjust so that each delegate were at least guaranteed to be paid above the cost of operating then it would make sense.

If you can afford to operate a delegate at a loss then more power to you.

The way BM explained it another thread was that your pay rate was part of your campaign platform and making it so you could reduce your income but not raise it would remove at least one thing people needed to trust in their delegates.  He also mentioned that if you want to raise your fee just create another delegate and campaign to have the votes switched to that one.


I'm not saying I agree or disagree; I haven't given this aspect a lot of thought because my delegate is really cheap for me to run and I'm happy to do my bit to secure the network even at a loss.  This is just what was imparted to me in another thread.

That's what I assumed as well. But that thought process is what the OP is about since it leaves the network vulnerable to delegates bailing and hurting the network. Yes, it is temporary, but it does create a market incentive for delegates to intentionally hurt the network. That seems unusual.

The best solution is typically a transparent market solution, so allowing delegates to control their pay rate up and down is a market solution, and giving them a 1 week delay between announcement and implementation will allow for a transparent solution that the market can accept or reject.

If we had a functioning BitUSD it would be very easy to set a minimum on delegate fees. The minimum should be at or slightly above the expected cost of operating a delegate. I would say for guaranteed uptime a delegate needs to earn at least $10 monthly.
« Last Edit: July 30, 2014, 10:02:24 pm by luckybit »
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Offline ag

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It's kind of strange that a delegate can change it's pay rate automatically, arbitrarily. but I agree with OP they should be able to increase. If you make adjustment slow it should be fine. the actual pay could be a moving average of it's rate or just make it so the rate can only adjust by a fixed amount per day.

Offline jshow5555

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Demand is forbidden word... there is only one thing and it is called supply!


Demand is forbidden word... there is only one thing and it is called supply!

Supply creates its own demand!

Pretty much all significant discoveries in Economics were made before the start of the 20th century!

The economist did not have much to do and to justify its own existence created a ton of wrong theories!

Demand side economics is a pile of BS!


« Last Edit: July 30, 2014, 09:31:49 pm by jshow5555 »

Offline biophil

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I think what you guys forget is that BTSX is deflationary and it will always increase in value.

Nothing "will always increase in value." It is our desperate hope that it will always increase in value, but it will only do so if demand is constant or increasing.

The OP makes a good point: even a relatively short-term decrease in value (down 25% for a month?) could put quite a few delegates in the awkward position of needing to create new accounts and get a large portion of voters to switch votes. Doesn't sound like a great situation.
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Offline Riverhead


I think what you guys forget is that BTSX is deflationary and it will always increase in value.


Like LTC?  :-\

Offline jshow5555

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I think what you guys forget is that BTSX is deflationary and it will always increase in value.

Offline Riverhead

Outcome 2b is not one I had considered and is something that needs to be discussed.  I'm a bit disappointed in myself for not considering that outcome since I have about 18 Mh worth of Scrypt mining gear gathering dust for this exact reason.

I'm also curious how diligent people will be in monitoring network health and delegate reliability once the delegates get so much support that unseating one becomes difficult.

Unrelated: When I post I tend to get a lot of white space that I have to modify my comment to remove.  That happen to anyone else?
« Last Edit: July 30, 2014, 09:17:38 pm by Riverhead »

Offline maqifrnswa

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The way BM explained it another thread was that your pay rate was part of your campaign platform and making it so you could reduce your income but not raise it would remove at least one thing people needed to trust in their delegates.  He also mentioned that if you want to raise your fee just create another delegate and campaign to have the votes switched to that one.


I'm not saying I agree or disagree; I haven't given this aspect a lot of thought because my delegate is really cheap for me to run and I'm happy to do my bit to secure the network even at a loss.  This is just what was imparted to me in another thread.

That's what I assumed as well. But that thought process is what the OP is about since it leaves the network vulnerable to delegates bailing and hurting the network. Yes, it is temporary, but it does create a market incentive for delegates to intentionally hurt the network. That seems unusual.

The best solution is typically a transparent market solution, so allowing delegates to control their pay rate up and down is a market solution, and giving them a 1 week delay between announcement and implementation will allow for a transparent solution that the market can accept or reject.
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