This proposal aims to address some of the issues highlighted in the Dynamic Curation Tax and Curator Impressions threads. Specifically, it aims to mitigate the steady-state incentive to front-run and pump-and-dump and any other tactics that reward an attacker for behaviors that are counter to the purpose of curation, which is to act as a prediction market for high-quality subgraphs.
Unlike the Showroom and Dynamic Curation Tax proposals, this aims to mitigate harmful behavior in the steady-state, not just when a subgraph is newly deployed. And unlike the Dynamic Curation Tax proposal, it seeks to do this without extracting any value from the curation mechanism, which we might expect to introduce a deadweight loss.
This proposal introduces a decaying capital gains tax. It works as follows:
- When a Curator mints shares in the bonding curve, update the Curator’s cost basis and time basis for the bonding curve.
- The time basis is the stake-weighted average purchase time of the Curator’s shares in the bonding curve.
- The cost basis is the stake-weighted average per-share cost of the Curator’s shares in the bonding curve.
- When a Curator burns shares in the bonding curve, compute their profit and holding time.
- profit is computed as the GRT received when burning shares minus the aggregated cost basis of the shares sold.
- holding time is computed as the time at which the shares were sold minus the Curator’s time basis.
- Tax the profits (capital gains) according to how long the holding time is, and return the collected revenue back into the reserves of the bonding curve.
- Profits that were earned over the course of a block should be taxed close to 100%
- Profits that were earned over an arbitrarily long period of time should be taxed close to 0%.
- Can explore the use of different decay functions. The prototype linked below shows a linear decay period where the capital gains tax decreases linearly from 100% to 0% over the course of a decay period.
The effect of this is that behavior that would generate profits over very short time periods–such as most forms of front-running, sandwich attacks, and pump and dump schemes–are no longer profitable, while behaviors that generate profits over a longer period of time, such as signaling on a subgraph that goes onto become widely used and generates query fees for the network, continue to be incentivized.
The immediate effect of this might be to decrease overall Curation activity as a large portion of the activity during the network’s bootstrapping phase appears to be motivated by trying to earn these short-term profits through anti-social behaviors.
I developed a prototype in this Observable HQ Notebook alongside prototypes of other ideas that have been put forth in the forums.
Since the notebook is only lightly commented at the moment, I recorded some quick Loom videos to walk through an overview of the prototypes:
- Notebook Overview - This video gives a brief overview of how the notebook is structured as well as how to run the simulations.
- Decaying Capital Gains Tax Walkthrough - This walks through the decaying capital gains tax prototype specifically in a bit more depth, as well as some of the related results from the simulations.
I’ll note that in the sandwich attack simulation included in the notebook, where we assume the attacker has 10x the budget of the honest Curator, and the sandwich attack happens over several consecutive blocks, the profitability of the attack is reduced by 99.998%. These precise results will vary based on how the simulation is configured, but it’s fair to say that the profitability of short-term profit-making is decreased dramatically in all cases.
- Should the decay from 100% to 0% be linear or use some other decay function that drops off more sharply as a function of holding time?
- How long should the decay period last? Alternatively, over what time periods should profit-making be more heavily or less heavily rewarded?
- What are the additional gas costs imposed by tracking cost basis and time basis on each mint, as well as computing the capital gains tax on each burn?
- Since Curation shares are ERC-20’s how should the cost basis and time basis bookkeeping be extended to support token transfers?
- @ariel has kindly agreed to use the above prototype as a starting point for evaluating such a mechanism.
- If the gas costs are acceptable, and the community can get behind such a proposal, then we can put this into a GIP.