XRP Ledger, No Incentives Are Best?...Schwartz: "Mining Rewards and Staking Are Both Poison"

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David Schwartz, former Chief Technology Officer of Ripple, argued that artificial rewards in blockchain systems can actually increase costs and conflicts of interest. The Crypto Basic reported on the 13th that Schwartz re-emphasized his existing view from a March 2020 lecture, stating that “blockchain systems can function better when artificial incentives are completely removed.”

Schwartz explained that for networks like Bitcoin (BTC) to work, all participants must agree on the fact that a transaction has occurred. He noted that while a blockchain has a public record of all data, clear rules for determining valid transactions, and a shared understanding of what each transaction does, these elements alone are insufficient when multiple valid paths of progression exist, such as when the same asset is sent to different people.

Schwartz divided stakeholders in the blockchain ecosystem into natural and enforced stakeholders. Natural stakeholders are users who rely on the system for actual needs like payments or value storage, while enforced stakeholders are participants, like miners, who must exist by system design. He pointed out that enforced stakeholders take value from natural users, creating additional costs for the system.

He cited Bitcoin miners as an example, explaining that while miners earn rewards and fees, these costs come from users who want their transactions processed. This structure creates a conflict of interest because users desire low fees while miners benefit from high fees. Schwartz believed that while blockchain systems were created to reduce such friction, reward-based structures repeat the same friction in a different form.

Schwartz also raised the high cost of Proof-of-Work systems as an issue. He explained that Bitcoin must generate millions of dollars daily to sustain mining, and network security is linked to market value. He also saw it as a weakness that honest participants must spend more to protect the system than attackers might spend to disrupt it.

It was also pointed out that a significant portion of mining costs goes to power suppliers and hardware manufacturers. Schwartz explained that mining creates competition for cost reduction and causes miners to focus on short-term profits rather than network improvements. Over time, mining could concentrate in regions with cheap electricity, weakening decentralization.

Schwartz raised similar issues with staking and slashing systems. The structure of locking up volatile assets creates risk for participants, who then demand high rewards in return. He explained that because staking relies on native tokens, it can create difficulties for networks that handle other assets on a large scale, like ERC20 tokens.

He also mentioned tax issues, where some countries treat staking rewards as income, as an additional cost. The Crypto Basic reported that Schwartz viewed incentive-based systems as creating unnecessary burdens for participants based on these points.

Referring to decisions made in 2012, Schwartz explained that the XRP Ledger took a different path. The XRP Ledger was designed to reduce the power of specific participants and eliminate transaction reordering features that could be exploited. The system uses rules to determine which transactions to include and focuses on reaching consensus on transaction order.

Schwartz believed that this process does not require high-cost incentives. Users already want the system to work correctly, thus having a natural motivation to maintain the network. He explained that the XRP network limits the influence of malicious actors and allows users to ignore them without loss.

Schwartz concluded that artificial incentives can lead to centralization, conflicts of interest, and increased user costs. He presented Bitcoin full nodes, which support the network without direct rewards, as an example of natural incentives, emphasizing that networks without incentives can offer lower fees, faster transactions, and a fairer structure.

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