Do Slashing Mechanisms Help or Hinder Your Crypto Investment?

Do Slashing Mechanisms Help or Hinder Your Crypto Investment?

Cryptocurrency
November 8, 2021 by Jenna Medvedev
943
Algorand’s first Governance Period has had me pondering quite deeply about slashing mechanisms and whether they are worth the financial risk for the average investor. In a nutshell, slashing mechanisms offer higher crypto rewards in return for staking for a predetermined length of time and voting during a Governance Period. This same slashing mechanism heavily penalizes
Do Slashing Mechanisms Help or Hinder Your Crypto Investment

Algorand’s first Governance Period has had me pondering quite deeply about slashing mechanisms and whether they are worth the financial risk for the average investor. In a nutshell, slashing mechanisms offer higher crypto rewards in return for staking for a predetermined length of time and voting during a Governance Period.

This same slashing mechanism heavily penalizes investors for withdrawing committed crypto during a specified time frame, or failing to vote during a Governance Period. Although it is currently being voted upon during Algorand Governance Period #1, this slashing penalty would equate to an 8% loss of principle, should the vote pass. In essence, an $800 loss on a $10000 investment.

For the current Algorand Governance Period #1, the voting measures are A: Keep the current Governance Rewards the same. Governors failing to stake or vote lose rewards, but not principle. Or, B: higher Governance Rewards with slashing. Governors failing to stake or vote lose rewards AND principle.

The Difference Between Slashers & Stashers

There are obviously two different groups of investors here. What I call Slashers and Stashers.

Slashers – Slashers are looking for the highest possible ROI, at any cost. That is why they gravitate to the DeFi world of crypto in lieu of fiat, after all. For sky-high, adrenaline-pumping, bull-riding returns.

Slashers are the least risk averse of the two groups of investors and do not shy away from punitive measures. In fact, they believe that penalties are fair game for not complying and keeping one’s word.

Governance is very serious business for Slashers who would never dream of withdrawing crypto early or breaking Governance commitments. With greater rewards comes greater responsibility. Slashers also believe that there is no room for error and hence accept slashing mechanisms. Many Slashers put ROI above potential community growth and adoption, as decisions always boil down to highest ROI.

These Slashers do not believe that emergency money should be tied into any Governance mechanism.

Stashers – Stashers compared to Slashers, also love high ROI, but will not accept it at any cost. In a Governance voting situation, they will vie for a non-punitive option—even if this option means lower Governance Rewards, ROI or profits.

Stashers are more risk averse than Slashers and understand that some smaller investors do tie emergency money into Governance situations. Life happens, right? What good is crypto if it is untouchable?

Stashers leave room for error and know that Governance staking can be broken accidentally or on purpose. For example, by dropping from $10000.00 to $9999.99 during a Governance slashing mechanism—even for one second—will cause a breach of Governance. Stashers know this would instantly render them ineligible to collect higher rewards and the 8% locked in escrow would immediate be lost to the Stasher.

Stashers accept that if they have to renege on a Governance commitment, they will lose Governance Rewards, but not their principle, which is non-negotiable, untouchable, taboo.

It is also recognized by Stashers that life happens and investors can forget to vote in a Governance Period. An 8% loss of principle is quite punitive for forgetting to vote, no? Especially when the user experience has no failsafe built in to avoid this sad fate.

Stashers consider the long-term growth and development of the community, in addition to ROI.

Do Slashing Mechanisms Help or Hinder Average Investors?

Good for Slashers – Slashing mechanisms can offer fantastic Governance Rewards, but only for the investors that I call Slashers. These investors should be able to manage their portfolios perfectly.

This means not accidentally withdrawing promised Governance funds from the wrong wallet. This means not purposely withdrawing crypto, even if your life depends on it. This means not slipping up once during an entire Governance Period, regardless of Governance length (i.e.: 3 months, 6 months, 1 year).

This means never forgetting to vote during Governance. Or at least, be willing to have your principle heavily penalized if you mess up in the slightest.

Bad for Stashers – Slashing mechanisms would work poorly for investors that I call Stashers. However, lower Governance Rewards in lieu of slashing mechanisms would benefit this group.

For example, for the current Algorand Governance Period #1, all Governors can now expect a 17.46% – 30% annual yield without a slashing mechanism in place. This calculation includes APY coupled with Governance Rewards, which equates to cold, hard crypto. This percentage will continue to rise above 17.46% as Governors either fail to vote their wishes during Governance, or their wallets drop below their committed algo amounts.

And the penalty for not staking or not voting in this scenario? No Governance Rewards, but no loss of principle either.

Slasher or Stasher: You Decide

Locking into a slashing mechanism is not a prospect to be taken lightly. If you are a Slasher, you are all in, crypto to the moon, go big or go home. You know how to manage your portfolio and you are here for earth shattering ROI. Nothing less is acceptable.

If you are a Stasher, caution should be taken and you should think three times before locking into a slashing mechanism. You enjoy a wild ride, but all bets are off when the blockchain swipes your crypto principle.

Slasher or Stasher, the cryptoverse is big enough for all investors and there are bull profits to be made everywhere (this is not financial advice). Just know what kind of risk is acceptable, when your principle is on the line.