# The Cognitive Penalty: Ablating System 1 and System 2 Reasoning in Edge-Native SLMs for Decentralized Consensus

arXiv: https://arxiv.org/abs/2604.16913 · HTML: https://mlsanity.com/paper/2604.16913/

## Key facts

- No citing papers in the map yet (data through 14 Oct 2026).
- Placed in Reasoning for agents, planning and code, one of 17 directions in LLM reasoning.
- Builds on 33 of its 38 references that are in the map.
- First posted on arXiv 18 Apr 2026.

## Placed in

- LLM reasoning / [Reasoning for agents, planning and code](https://mlsanity.com/lr/reasoning-for-agents-planning-and-code/)

## Builds on (most cited first, 30 of 33)

- [Mamba: Linear-Time Sequence Modeling with Selective State Spaces](https://mlsanity.com/paper/2312.00752/) (2023)
- [Constitutional AI: Harmlessness from AI Feedback](https://mlsanity.com/paper/2212.08073/) (2022)
- [Language Models (Mostly) Know What They Know](https://mlsanity.com/paper/2207.05221/) (2022)
- [Language Models Don't Always Say What They Think: Unfaithful Explanations in Chain-of-Thought Prompting](https://mlsanity.com/paper/2305.04388/) (2023)
- [Towards Understanding Sycophancy in Language Models](https://mlsanity.com/paper/2310.13548/) (2023)
- [RWKV: Reinventing RNNs for the Transformer Era](https://mlsanity.com/paper/2305.13048/) (2023)
- [From System 1 to System 2: A Survey of Reasoning Large Language Models](https://mlsanity.com/paper/2502.17419/) (2025)
- [Context Length Alone Hurts LLM Performance Despite Perfect Retrieval](https://mlsanity.com/paper/2510.05381/) (2025)
- [Reasoning Theater: Disentangling Model Beliefs from Chain-of-Thought](https://mlsanity.com/paper/2603.05488/) (2026)
- [Inference-Time Computations for LLM Reasoning and Planning: A Benchmark and Insights](https://mlsanity.com/paper/2502.12521/) (2025)
- [Chain-of-Thought Unfaithfulness as Disguised Accuracy](https://mlsanity.com/paper/2402.14897/) (2024)
- [FaithCoT-Bench: Benchmarking Instance-Level Faithfulness of Chain-of-Thought Reasoning](https://mlsanity.com/paper/2510.04040/) (2025)
- [How RLHF Amplifies Sycophancy](https://mlsanity.com/paper/2602.01002/) (2026)
- [Institutional AI: Governing LLM Collusion in Multi-Agent Cournot Markets via Public Governance Graphs](https://mlsanity.com/paper/2601.11369/) (2026)
- [Autonomous Agents on Blockchains: Standards, Execution Models, and Trust Boundaries](https://mlsanity.com/paper/2601.04583/) (2026)
- [Through the Valley: Path to Effective Long CoT Training for Small Language Models](https://mlsanity.com/paper/2506.07712/) (2025)
- [On Robustness and Chain-of-Thought Consistency of RL-Finetuned VLMs](https://mlsanity.com/paper/2602.12506/) (2026)
- [Value-State Gated Attention for Mitigating Extreme-Token Phenomena in Transformers](https://mlsanity.com/paper/2510.09017/) (2025)
- [Mechanistic Interpretability for Large Language Model Alignment: Progress, Challenges, and Future Directions](https://mlsanity.com/paper/2602.11180/) (2026)
- [Reward Modeling for Reinforcement Learning-Based LLM Reasoning: Design, Challenges, and Evaluation](https://mlsanity.com/paper/2602.09305/) (2026)
- [Towards a Mechanistic Understanding of Large Reasoning Models: A Survey of Training, Inference, and Failures](https://mlsanity.com/paper/2601.19928/) (2026)
- [LLM Misalignment via Adversarial RLHF Platforms](https://mlsanity.com/paper/2503.03039/) (2025)
- [Attention Sinks Induce Gradient Sinks: Massive Activations as Gradient Regulators in Transformers](https://mlsanity.com/paper/2603.17771/) (2026)
- [From Logic Monopoly to Social Contract: Separation of Power and the Institutional Foundations for Autonomous Agent Economies](https://mlsanity.com/paper/2603.25100/) (2026)
- [AgentCity: Constitutional Governance for Autonomous Agent Economies via Separation of Power](https://mlsanity.com/paper/2604.07007/) (2026)
- [DAO-AI: Evaluating Collective Decision-Making through Agentic AI in Decentralized Governance](https://mlsanity.com/paper/2510.21117/) (2025)
- [To Think or Not To Think, That is The Question for Large Reasoning Models in Theory of Mind Tasks](https://mlsanity.com/paper/2602.10625/) (2026)
- [TraceGuard: Process-Guided Firewall against Reasoning Backdoors in Large Language Models](https://mlsanity.com/paper/2603.02436/) (2026)
- [Confidence is Not Competence](https://mlsanity.com/paper/2510.24772/) (2025)
- [QOC DAO -- Stepwise Development Towards an AI Driven Decentralized Autonomous Organization](https://mlsanity.com/paper/2511.08641/) (2025)

## Abstract (arXiv)

Decentralized Autonomous Organizations (DAOs) are inclined explore Small Language Models (SLMs) as edge-native constitutional firewalls to vet proposals and mitigate semantic social engineering. While scaling inference-time compute (System 2) enhances formal logic, its efficacy in highly adversarial, cryptoeconomic governance environments remains underexplored. To address this, we introduce Sentinel-Bench, an 840-inference empirical framework executing a strict intra-model ablation on Qwen-3.5-9B. By toggling latent reasoning across frozen weights, we isolate the impact of inference-time compute against an adversarial Optimism DAO dataset. Our findings reveal a severe compute-accuracy inversion. The autoregressive baseline (System 1) achieved 100% adversarial robustness, 100% juridical consistency, and state finality in under 13 seconds. Conversely, System 2 reasoning introduced catastrophic instability, fundamentally driven by a 26.7% Reasoning Non-Convergence (cognitive collapse) rate. This collapse degraded trial-to-trial consensus stability to 72.6% and imposed a 17x latency overhead, introducing critical vulnerabilities to Governance Extractable Value (GEV) and hardware centralization. While rare (1.5% of adversarial trials), we empirically captured "Reasoning-Induced Sycophancy," where the model generated significantly longer internal monologues (averaging 25,750 characters) to rationalize failing the adversarial trap. We conclude that for edge-native SLMs operating under Byzantine Fault Tolerance (BFT) constraints, System 1 parameterized intuition is structurally and economically superior to System 2 iterative deliberation for decentralized consensus. Code and Dataset: https://github.com/smarizvi110/sentinel-bench