Chainfeeds Introduction:
Ultimately, we want to emphasize that: in the absence of a preceding slash, reallocation is often less effective than destruction; and in scenarios involving slash, reallocation is usually more appropriate than destruction.
Article Source:
https://x.com/hazeflow_xyz/status/1970917294260867276
Article author:
Hazeflow
Viewpoint:
Hazeflow: In the crypto-economy, the debate over whether assets should be destroyed or redistributed after slashing is a long-standing one. Many people mistakenly believe that assets are automatically destroyed, reducing the total supply, whenever slashing occurs. This is not the case. Slashing simply deprives the perpetrator of their assets; the subsequent fate of these assets is the subject of either destruction or redistribution. Destruction means the asset disappears completely, reducing supply but benefiting no one; while redistribution redirects value to other parties (not necessarily the victims), maintaining the flow of value within the ecosystem. For example, in EigenLayer's early implementation, if operators failed to fulfill their obligations, staked assets were slashed and destroyed. While this achieved the purpose of punishment, it left two significant problems: first, the victims received no compensation, much like a driver in a traffic accident being jailed but the person hit received no assistance; second, the system's security was compromised because the total amount of stake available to protect the system was reduced. In contrast, a redistribution model allows value to remain within the system: reliable nodes receive additional rewards, damaged users receive compensation, and capital flow remains within the ecosystem. This not only improves overall security but also fosters new use cases, such as permissionless on-chain insurance, DEXs that automatically compensate for failed transactions, and lending protocols that guarantee yields for lenders. The value of redistribution in economic security cannot be underestimated. It ensures that slashed funds are truly put to use, rather than simply disappearing. CapMoney, for example, has already achieved this: when a stablecoin operator is slashed for misconduct, their funds are directly compensated to affected stablecoin holders. This model extends economic security from ex-ante deterrence to ex-post protection, effectively compensating users for their losses. However, redistribution also carries risks. The most prominent example is the issue of Maximum Extractable Value (MEV). The losses suffered by users and liquidity providers (LPs) can be likened to being slashed. In on-chain transactions, users may receive worse quotes due to front-running or pinning, effectively losing a portion of their assets. LPs often suffer additional losses due to LVR (Loss Versus Rebalancing). These groups neither commit malicious acts nor fail to fulfill their obligations, yet passively bear the losses. Under the current mechanism, arbitrageurs often profit while ordinary users and limited partners suffer losses, a misguided redistribution. Redistribution isn't appropriate in all situations. When slashing isn't present, burning is often a core feature of the mechanism design and cannot be replaced. For example, BNB conducts quarterly token burns, which is the foundation of its deflationary economic model. Ethereum, in EIP-1559, burns base transaction fees, introducing a deflationary Ethereum narrative. Redistribution, if implemented instead, could dilute the deflationary effect, triggering higher inflationary pressure and depressing token value over the long term. Worse still, if transaction fees are placed into a fund pool and then returned to users, it could easily lead to incentive misalignment. For example, users knowing they will be subsidized might create meaningless transactions to profit from the losses, further exacerbating network congestion. Therefore, redistribution isn't a panacea. In scenarios involving slashing, it's often more effective than burning, transferring value to those truly harmed, thereby enhancing system fairness and security. However, in scenarios without slashing, burning is generally more reasonable because it maintains system simplicity and economic consistency. In summary, the incentive design of crypto systems always revolves around the twin goals of fairness and security. If retaining value directly enhances system security or user experience, then redistribution is worthwhile; however, if it's simply a cost-saving or deflationary strategy, destruction is the optimal solution. Ultimately, whether destroying or redistributing, designers must strike a balance around the core issue of incentive alignment. [Original text in English]
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