Codifying Consequences in Crypto
Ways to change the skewed incentives in our anon crypto world
I was talking to one of my IRL friends some time back. I redpilled him on DeFi a year or so ago and he’s a pretty smart guy so he grasped the potential fairly quickly. He isn’t deep in the pits of degeneracy like myself so I occasionally tell him about what’s going on in this side of the world.
One day he told me “bro this is cool and all, very interesting mechanics, but why should I or anyone else care?”
I replied “what do you mean why should you care?”
He said “you’ve told me about at least 20 different rugpulls over the last couple months but have not once told me about anyone who’s been caught or faced legitimate consequences, so what is the incentive for me or anyone to do the ‘correct’ thing? If I can just make a project and then rug for a decent chunk of money anonymously then wouldn’t everyone just do that”.
I thought about this for some time and came to the conclusion that I’m sure most of you came to some time back. There is genuinely no incentive to do the correct thing in DeFi or even NFTs for that matter. What’s the worst thing that’ll happen? ZachXBT will mention you in a thread on twitter dot com and the entire community will bring out the pitchforks and attack your anon twitter account and then gradually forget about the entire thing in 2-3 days.
OOOOO SO SCARY
The fact of the matter is that the only reason people like you & me haven’t scammed is because we have morals. We could easily scam in different ways with differing levels of obfuscation. We haven’t because we either wouldn’t want to ruin other people’s livelihoods, we care about our anon reputation, we care about the overall wellbeing of this industry, or we just feel like it’s wrong.
Unfortunately, there are very few such people in this world. Majority of people couldn’t give less of a shit about morals and would rug you in a heartbeat.
Personally, the core ethos of crypto is what resonated with me the most. I like the core idea of decentralization, I like the fact that we have the freedom to transact in a permissionless environment, I like the fact that we are trying to build a system where there is no authoritative figure dictating our every move, I like the fact that we can anonymously interact and work with some of the brightest minds in this world. Unfortunately, liking these things doesn’t mean anything.
We continue to see “thought leader” VCs fund low-tier ponzis, and we continue to see people rug projects and escape with less than a scratch on the arm. If nothing changes, then I’m afraid that we essentially end up building the same traditional world but on-chain. What’s worse is that it may have already begun. Nonetheless, I will try and do my bit.
Honour amongst anons
You’ve heard the phrase “honour amongst thieves” but do you think we have honour amongst anons?
While you may send one of your anon homies in the group chat a $100k and have no doubt that you’ll get it back, is this comradery true in the broader crypto ecosystem? I’d argue that it isn’t. The whole idea of honour amongst thieves is that there are some unwritten rules that you abide by, this unfortunately doesn’t exist in our anon crypto world.
I personally love the idea of being Anon and being able to work with a bunch of Anons. The only thing that matters is your ideas, your work ethic, and your vibes. Unfortunately, the flipside is you can hide under the guise of 15 different twitter accounts and create as many different rugs as you want and nobody will know who you actually are.
There are a bunch of other negatives which I’m not going to waste your time by going into, but at the end of the day the game is the game. It’s about making money and if the only thing that’s stopping people from scamming is a moral compass then unfortunately most people will continue to scam.
The Primary issue
This is obvious, it’s incentives. In a permissionless and pseudonymous world the only way to make people do things a certain way is by creating the incentives for them to do so. Currently, the incentives are skewed in favour of acting immorally. So I started thinking about what could be done to sway the incentives the other way while still preserving the crypto that we know and love.
The conclusion I came to is codifying consequences.
But there’s one problem, I don’t know anything about coding. LOL. So I spammed a bunch of Devs and mechanism design experts in the DMs to gather their thoughts on this idea. This is the general gist of what most of them said.
· It’s an interesting idea and is theoretically possible but very tough to implement
· The main issue is quantitatively defining the conditions that constitute a “rug” to subsequently put into a coded mechanism
· It is not a black & white issue, it’s often a fairly contextual issue that requires qualitative analysis to understand whether it was a rug/scam or not so it becomes hard to automate this process
· It’s a very broad topic which makes designing a mechanism around this a very long and tedious process, but there is a possibility to create functions for some very specific instances.
So here’s my 50 IQ attempt at trying to elaborate on this idea. If anyone reading this has any other ideas then please let me know in the comments or on twitter. It’s a very idealistic thought but I think it’s a problem worth looking into, especially if we don’t want harsh regulations.
So let’s get started
Defining conditions
The obvious solution is to figure out a way to define conditions, however this is easier said than done. Rugging is a rather subjective issue, so defining these conditions into quantitative and logical conditions becomes very difficult.
I think everyone knows what a rugpull looks like, if a major chunk of the supply of the wallet is in one address then that’s a red flag, if the contract hasn’t been renounced then that’s sketchy, and ultimately when the liquidity is pulled from the pool the rug is confirmed. You can of course check services such as tokensniffer.io and honeypot.is to see if a project is a honeypot or not. However, most people don’t know about these services and there are instances where they have been wrong as well. So here’s a potential suggestion.
What if there was a service that monitors the contract owners address in a completely automated manner. Projects can integrate with this service beforehand which would act like a checkmark on safety standards or individual users could pay a certain amount to hire this service to monitor a specific project that they are invested in. When rugpull behaviour is detected the users will be alerted and have a chance at exiting. Or, the service could freeze accounts. I know freezing accounts isn’t a thing but if something along those lines is possible then that would be an ideal solution.
Another interesting solution comes from the project Anysniper (@Anysniper_ on twitter). They don’t have a live product as yet but what they propose in their whitepaper is very interesting. It’s a DEX that’ll be on multiple chains and has some cool features that are in-built. They have an instant contract read function which basically scans every token contract before it is live for trading, if the contract passes the safety checks then it goes live for trading. It has a bot that will analyze any contract and present the data points to users in an easy-to-read manner. They have anti-rugpull measures wherein the contract owners addresses are live tracked by the platform and if shady behaviour is detected then they provide sufficient warning and measures for users to exit the pools prior to the dev pulling the liquidity. A bonus feature for all you traders is that they have TP/SL as well.
Soulbound tokens
Soulbound tokens or SBTs have been a hot topic over the last few weeks. For those who don’t know they are essentially non-transferrable tokens that are tied to an account as a way to measure the reputation of an account. You can see the achievements, features, and events participated in by an account along with other things as a way to gauge the reputation and credibility of an account. This is a good way to solve the problem of how easy it is to be a scammer due to anon culture. Any participant can do background checks on the contract creators address to see if they are trustworthy or not.
However, there are easy workarounds. While it will reduce the amount of rugs, there will unfortunately be enough redacted apes who will put their life savings into a random shitcoin. These devs can keep spinning up new addresses for new projects and are likely to still find some people willing to put their money in.
Insurance Protocols
Insurance protocols are by no means a new idea. In this context you could have users buy insurance for rug protection and they could claim it in the event that they get rugged. I believe such insurance packages already exist but there are some problems that current protocols face. It is tough for the protocol to analyze the truth of the claim, and the other issue is that it is very tough for them to automate the process of assessing claims. I have not seen any existing solutions to this hurdle and I myself am not well-informed enough to be able to give a solution on this. However, it is worth keeping an eye on the insurance protocol space to see if any protocols in the future manage to solve this problem. The one that does is likely to be very popular in the future.
On-chain courts
On-chain courts are an interesting solution when it comes to solving disputes in a decentralized setting. If you want a deeper dive into how on chain courts work then I recommend reading the Kleros whitepaper as a general framework.
The problem in our scenario is that on-chain courts won’t be able to solve issues like rugs. They will be able to determine whether it was a rug or not but will not be able to dish out any meaningful consequences. One issue is finding a way to source funds to compensate all the victims and the other issue is that on-chain courts can be used in contractual disagreements between two parties. Within this contract a clause can be put where in the event of a dispute an on-chain court will be used. Hence, when a dispute occurs, both parties are in agreement that the on-chain court will settle the matter. You can’t implement this clause for an anon dev that intends to rug.
Other issues come from the arbitrary assumptions and incentive mechanisms put in place by on-chain courts as a way to ensure that anonymous and crowd-sourced jurors are sufficient to come to the correct verdict. Finding ways to work around these issues could prove to be helpful but I find it unlikely that on-chain courts could be a viable solution to our problem here.
Protocol level
While DM’ing some of the people that helped me with ideas on this article. One suggestion made was that you could build an entire new blockchain. When building this new blockchain you could implement certain measures at the protocol level because it is tough to implement such solutions in current smart contract platforms.
I gave them the following hand-wavey example: Suppose you have an AMM on a chain and a contract has been created. When the dev pulls the liquidity from the pool or displays any kind of “rugging behaviour” their address gets instantly frozen and the funds get locked. This way they have no access to the funds and negotiations or other measures can be used to retrieve the funds. Such measures could be implemented if it is implemented at the protocol level rather than the application level of a blockchain. This is just one example but I’m sure other people can think of other sorts of implementations that can be made at the protocol level
The issue with this is that you have to deal with the headache of building out an entirely new L1 and then work on building out an ecosystem and then you have to come up against the various competitors. Achieving meaningful network effects for a new L1 is very difficult.
A DAO
This is not an automated process by any means and is open to centralization risks amongst other attack vectors but I’ll give a general outlook of the idea and hopefully people can iterate on it.
As mentioned before, rugging and scammy behavior is often not a black & white case, there are a lot of grey areas which means there needs to be qualitative research that goes into this. Therefore, you can setup a DAO of reviewers and on-chain analysts who will be funded through investors, DAO members, or token sales. Then this group of analysts can be contracted to either review a token contract, a projects code, or cases of people who have already been rugged. They can then determine whether it is a rug/scam or not and then accordingly distribute compensation to victims. I know there are a lot of holes and questions in this model but I’m just freestyling here and hoping you guys can help me build on it.
Concluding Thoughts
I like the idea of codifying consequences and I think it would help a great deal when it comes to adoption. Every new normie who enters the space shouldn’t have to go through scarring experiences and then be expected to stick around. It is only a few of us who can stomach the damage and still stick around.
Unfortunately, in my limited research on the topic it seems like a very idealistic thought. There is nothing wrong with dreaming but it is incredibly difficult to implement such solutions mainly due to subjectivity. When it comes down to it I believe the optimal solution is simply improving education and awareness around such issues and then letting the process of natural selection do its thing. I wish it didn’t have to be that way but it is what it is. I will still keep my eye on new projects that are working to solve these security issues and hopefully something cool comes out in the future.
Would love to hear your thoughts on the matter.
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