Project Catalyst: A Cautionary Tale Of Cardano's Failure At Decentralisation

Cardano’s Project Catalyst has just ended the 10th round of project funding- and to say that the Cardano community is not happy with the results of the round would be a massive understatement.

All over X, Cardano holders have been venting frustrations with the results. Some of the frustrations included projects that are already well-funded being given more cash for development, while good projects that offered clear benefits to the ecosystem failed to receive funding. Others also pointed to funding going to ideas that were clearly failing.

But in general, the social media consensus was not in doubt- there was something deeply wrong with the Cardano ecosystem, and something had to be done. But what exactly was everyone complaining about?

What is Cardano’s Project Catalyst?

In a nutshell, Project Catalyst is supposed to be a decentralised funding system that rewards innovative and creative projects within the Cardano ecosystem by providing them with additional capital to deploy and develop.

Think of it as a venture capital firm that is governed by the Cardano community, who act as judges on an episode of Shark Tank.

Projects that want to receive funding submit proposals to Project Catalyst, and the community reviews these proposals and projects, before voting to give capital to these projects from Project Catalyst’s treasury.

In a sense, decentralised funding in this way can be the next step forward. Instead of having to curry favour with big businesses in order to get funded and supporting narrow interests, decentralised funding works because it incentivises builders to cater instead to broad and cross-cutting interests since this gives them the highest chance of success.

By cutting out rent-seekers who serve their own selfish interests and pervert projects to suit their own needs, this approach incentivises project builders to build projects that would serve the community instead.

But what works on paper does not always work in reality.

During the recent funding round, decentralised exchange Sundaeswap received funding to the tune of 2.8million ADA tokens, worth around US$700 USD, to help with their legal costs. For those unaware, the protocol is currently being sued for fraud, misleading statements, violating the California Business Code, and violation of Wyoming law.

At the same time, DeFi yield optimiser GeniusYield, which many community members rely on to calculate DeFi yields, did not receive any funding.

So what happened to helping the community and supporting projects that benefit the community?

Policy, incentives, and government

As we have seen, just because a project supports the community doesn’t mean that the community will support it.

Okay, that statement was a bit disingenuous. Or rather, it’s a fallacious conclusion that one might draw about Project Catalyst unless one understands how voting on proposals within the project actually works.

Voting on a proposal in Project Catalyst is not like voting for your next president, where everyone has one, and only one vote. Under such a system, everyone has equal voting power, regardless of how wealthy or impoverished one is, of where you come from, or who an individual is. Once the basic criteria of citizenship is met, everyone has equal say in who should be elected.

Instead, how much voting power you have is tied directly to how many ADA tokens you own. This system provides disproportionate power to the wealthiest among the Cardano community, known as ‘whales’.

Yet, this system is not entirely unheard of. In a corporate setting, it is quite common that not every shareholder has an equal say. Instead, how much voting power you have is determined by how many shares you hold, and the quality of those shares.

ADA therefore acts not only as a marker of economic wealth, but also political power within the ADA ecosystem.

And the disparity in wealth and political power is huge. The bottom 95 per cent of wallets only control around 22 per cent of Cardano’s wealth, and therefore, only account for around 22 per cent of votes.

In order to obtain a simple majority of votes, it is only necessary to obtain the agreement of those who possess at least one million ADA- meaning that anyone hoping to pass a proposal could easily ignore the interests of around 98.5 per cent of ADA holders, and cater exclusively to the top 1.5 per cent.

If Cardano was a single country, this distribution of wealth would mean that it has a Gini coefficient of around 80.68 per cent, higher than has ever been measured in an actual economy. And let’s not forget that in Cardano, the concentration of wealth also implies a concentration of decision making power.

Although Cardano is supposed to be a decentralised system that evens the playing field, the reality is that a few actors can and do control who gets what, and the rest basically have to accept the decisions with little hope of actually making any meaningful impact.

Power begets power, and powerlessness begets powerlessness

So how did we arrive at such an unpalatable situation? The simple answer is that the situation is a natural product of what happens when power is left unchecked.

Power is a fact of life in any system- if one does not act to accumulate more power, one will be acted upon by others in order to increase their power. Therefore, power is never static- it decays or grows in relation to the power that others have.

In government and civic life, the realisation of this fact is often dryly enunciated as ‘the rich get richer, while the poor get poorer’.

The mechanics of how this happens is often attributed to some idea of how the wealthy are able to spend more on their political goals, which results in greater pressure for governments to cater to their demands, including demands for favourable policies that would enable them to better accumulate wealth. This wealth then in turn funds further efforts to influence policy in a cycle until they have entrenched themselves so firmly within the system that any attempt to change it will be feeble at best and laughably pathetic at worst.

Whether or not this is a virtuous or vicious cycle depends entirely on whether you are part of the wealthy or not.

It would be hubristic to believe that blockchain and crypto can solve this problem entirely. On the contrary, the rules of power are so entrenched that they are baked into the code of cryptocurrencies themselves. For an explanation of why this is the case, we have only to look at the process of cryptocurrency mining, and how power influences the outcomes of these.

What happens when you mine cryptocurrency?

Whether the blockchain uses a proof-of-work, proof-of-stake, or delegated proof-of-stake does not matter- what matters is whether you have the resources to put into the system. In proof-of-work blockchains, this means buying expensive mining rigs that can run computations faster than others so that you find the appropriate hash. In proof-of-stake and delegated proof-of-stake, it means buying and staking cryptocurrencies so that you can validate new blocks and earn gas fees and block rewards.

Needless to say, this means that the more you have and the more you commit into the system, the more crypto you get and the more power you have.

With Cardano’s Project Catalyst, this gets even worse. Since decisions for Catalyst funding come down to either a yes or a no, this means that even if the bottom 98.5 per cent of ADA holders all want to back a project with everything they have, the top 1.5 per cent can block the funding since they have the same number of votes.

A look at the recent results of Catalyst funding reveals a good proportion of funds went to projects requesting money to fund audits- and one user accused the whales of basically voting to give these projects funding because they had vested financial interests in helping these projects. At worst, this might even mean whales submitting proposals for their own projects and voting their own proposals through, with the net effect being that they obtain more ADA in their wallets and therefore more voting power.

In political science terms, what these whales have done is to turn themselves into veto players- entities that have the power to block any change to the status quo. Since they control huge amounts of ADA, no proposal will pass unless these whales assent to it- and no assent will be given unless they benefit from a proposal more than any other group stands to benefit.

The failure of Iagon to get their Statur reputation model passed would support this conclusion. Their proposal would have added a reputation system to Cardano, and would allow this reputation score to also factor into the voting power for individuals within Cardano.

This would mean that community members who contribute to growing the community and helping others would get more say in which proposals pass. But helping others in the community and growing the community is not necessarily mutually exclusive with amassing large volumes of wealth.

If the proposal failed, we can quite safely conclude that it was because those who were not interested in helping and growing the community were already in power, and are vetoing the proposal in order to prevent a change to the status quo that would see their power decay.

Meet the new boss- same as the old boss

If this situation feels extremely familiar to you, you might not be wrong. One of the main problems with regards to governance and government in the Web2 world is to decouple wealth from power as well.

Unfortunately, the Web2 world has not done a particularly good job of this, since vote-buying, large scale political campaign donations, and other forms of questionable political practices still continue to this day.

The problem, at its core, remains the need for profit and power for many of these actors. People donate money to political causes in order to help the cause get more publicity, but not all donors are equal. Some donors are more wealthy and have more resources to donate, while some donors, especially those championing broad community-based interests, may often find themselves cash-strapped and unable to even the playing field, much as they want to do so.

What has happened within the Web3 world is that instead of introducing checks and balances within the new system, the Web3 world has removed all such checks and balances, and the result has been a tendency towards centralisation and the revelation of decentralisation as nothing but an empty promise.

As everyone in Cardano votes for proposals that would be in their interest, what happens is that a rift emerges between the haves and the have-nots, as whales continually succeed in pushing through proposals that favour their narrow interests, and block any proposals that do not, even though these proposals may be beneficial for the community.

If we truly want to create sustainable decentralisation, then the free market is something to be limited, not encouraged, because capitalism creates a tendency towards centralisation rather than decentralisation.

But whether or not we as a Web3 community are ready to give that up is also something to think about- after all, earning money from a financial system that is less broken than the fiat currency system is a key reason why many of us are in the Web3 world and investing into cryptocurrency. The removal or limitation of the profit motive would certainly limit further investment into the space, and would certainly face opposition from those who are already benefiting from the lack of current limitations.

Yet, unless the incentives are changed, the story of Cardano’s Project Catalyst is not likely to remain as an isolated incident- on the contrary, as more blockchains, protocols, and projects cling to the combination of decentralisation and capitalism as the ‘natural order’, the greater the tendency towards centralisation and monopoly.

The story of Cardano’s Project Catalyst should act as a cautionary tale for all of us in the Web3 world- that we cannot always cling dogmatically to ideology. Most political scientists today would not consider blockchain tech an example of democratic self-governance, because it lacks the basic checks and balances that are found in democracies: redistributive tax policies, equal voting rights, and the presence of the rule of law.

Yet, many of us continue to praise the idea of “the code is law” and the freedom that can be found in the crypto world. Admittedly, there can be something to be gained by automating policy decisions so that they are optimised- but one must also question who these policies are being optimised for.

The scholar Robert Cox wrote in 1981 that “theory is always for someone, for some purpose”- meaning that every theory will inevitably serve one group more than it serves others. Capitalism favours the rich, communism favours the poor, meritocracy favours the hardworking, and so on.

It is time that the Web3 world recognises its shortcomings, and stops pretending that they are features rather than faults- and works to fix them before they completely destroy us. As Churchill once remarked, “However beautiful the strategy, you should occasionally look at the results.”.