Fiat-style proof of stake chains favor centralization and wealthy players
In crypto, consensus often translates into controversy. Of course, the consensus mechanisms themselves obviously result in an agreement regarding transactions, but when it comes to choosing the ideal mechanism for a particular chain or cryptoasset, the crypto community as a whole is very often at variance.
One of the most debated mechanisms today is Proof of Stake (PoS). While his supporters argue that he is avoiding the mind-boggling power consumption associated with Proof of Work (PoW) networks such as Bitcoin (BTC) and Ethereum (ETH), those on the other side of the debate claim it results in a centralization and helps the rich get richer.
In fact, at least one prominent figure in the industry has recently argued this proof of stake is not much different from how the current currency fiat system works, with the largest stakeholders having near-monopoly control over the entire system. This is an assessment that many other commentators agree with, although few would go so far as to admit that we will soon have real (central) banks buying control of the Ethereum 2.0 blockchain, as it aims to start using the PoS.
Post on Twitter, Pavol Rusnank, co-founder of Satoshi Laboratories, the manufacturer of Trezor hardware wallet, said that “proof of stake is how fiat works”. As he explained, the players with the dominant stakes determine how the system works, with responsibility for controlling how transactions are verified and how much new money is created.
@ Dunc2k It’s not the same. Buying mining equipment is not enough, you have to make it work to maintain sta … https://t.co/4XEw5wMurP
Rusnak was responding to a previous tweet from developer Bitcoin “grubles”, which claimed that banks would love Ethereum 2.0 because they will be able to print indefinite amounts of fiat money to buy more ETH, which they can then use to control the blockchain.
@ Santiag78758327 It is obviously more difficult to convince or to force the physical foundries of ASIC to sell you, to acquire… https://t.co/nK8jtMTvsh
For other Bitcoin developers and supporters, the possible involvement of financial institutions is a tangible risk.
“Definitely a big risk and the reason PoS doesn’t work. It’s basically about paying the rich to be rich and it’s an authorized system and therefore not decentralized, ”said the educator, author and developer of Bitcoin. Jimmy song.
For those who are not that closely associated with Bitcoin, the real risk of banks buying control of Ethereum 2.0 (or any other large chain of outlets) is very low right now. Still, critics mostly agree that centralization is a serious concern for proof of stake.
“The problem with PoS is that there is no real-world anchoring, because block validation is completely intrinsic,” said Trezor Ambassador Josef Tětek.
However, he added that, for now, the idea that financial institutions would buy large amounts of ETH seems “far-fetched”.
“The current much greater risk is a centralization of bets on stock exchanges and other depositories, fueled by minimum wagering requirements. But in the longer term, the threat to the ability of the financial system to acquire an unlimited stake in the system should not be overlooked, ”he said. Cryptonews.com.
Incentives, deterrents & the power of the rich
Other analysts suggest that, while possible, severe centralization of Ethereum 2.0 and other proof-of-stake networks is unlikely, given the incentives and disincentives involved.
“It is possible, if not likely, that institutions and banks will view ETH as a viable investment vehicle. But buying ETH does not give validators or stakes unilateral control over the network, ”said Wilson Withiam, senior research analyst at Messari.
As Withiam explained, Ethereum does not have token-weighted chain governance, so owning more ETH doesn’t give a single user greater control over all aspects of the network.
“Additionally, attacking the network or acting maliciously will cause prices to drop or could drop the price (and the attacker’s holdings) in an extreme situation. The economic incentives in place prevent validators from easily profiting when they act outside the defined rules of the platform, ”he said. Cryptonews.com.
But while “attacking” a network is one thing, using a position of power to influence the direction of a blockchain and platform may be another.
“He [Ethereum] is definitely centralized, so there is no risk of it becoming centralized, it already is! I suspect that the exchanges will essentially be the controllers of these coins. This is similar to how the current central bank backed fiat money system works, in that the banks have undue influence over money, ”said Jimmy Song.
This is a view with which Josef Tětek largely agrees, arguing that PoS has built-in centralization tendencies, with exchanges probably being the biggest beneficiaries.
“With minimum wagering requirements (such as Ethereum’s 32 ETH per validator), smaller holders will be looking for ways to participate as well – and exchanges are the obvious providers of pooling services. This is already happening with existing PoS systems, where exchanges are the main stakeholders, ”he said.
Another reason for centralization, according to Tětek, is the positive feedback loop that having a lot of coins generally equates to earning a lot more coins.
“The largest existing holders will get even richer with the PoS, without suffering any tangible risk,” he added.
While he says the prospects for a bank breach of Ethereum 2.0 are very dim, Wilson Withiam agrees that PoS has an “almost inevitable” problem of getting rich.
“Those with initial allocations have a perpetual right of seigniorage at the expense of non-takers. It is also subject to economies of scale, as professional staking providers can run more validators, and exchanges (services with multiple revenue streams) can offer staking at a cost close to zero for users, ”a he declared.
Both factors can lead to a concentration of the stakes, he added. But on the other hand, he noted that no consensus mechanism is perfect, with Ethereum having two main counter-arguments in its favor:
“His six years of PoW broadcasts have allowed him to have a more equitable distribution. Its distribution and holder base is more diverse than the new PoS networks. Decentralized staking pools allow users with any amount of ETH to participate in staking and receive inflation rewards, ”he said.
Centralization trends and improvements
Some, like Jimmy Song, argue that no amount of tinkering can decentralize proof of stake chains.
“Decentralization is not a feature that you can just integrate. This is something that is inherently very difficult to obtain and altcoins like Ethereum just are not, no matter how much they claim otherwise, ”he said. Cryptonews.com.
Even Trezor brand ambassador, Josef Tětek, argues that retail chains will have to learn to live with centralization and that they are not compatible with decentralization.
“When you let go of the real world anchor of PoW, you open the system up to tendencies of centralization. PoW via specialized devices like ASIC SHA256 [mining hardware] is much more difficult to control – ASICs are already scattered around the world, they require a lot of ongoing maintenance, ”he said.
But to end on a more positive note, Wilson Withiam suggests that there are at least three improvements that retail chains can make to limit the concentration of issues:
- built-in incentives to encourage players to play with smaller validators (examples include Cardano’s sk parameter (ADA) and Polkadot’s nominated PoS design (DOT));
- adjusting the reward returns based on a predetermined lock-in period; players could receive more rewards and voting rights to block their participation for a longer period (examples include the Internet computer);
- the implementation of an equitable initial distribution; Avoid overly large team and insider assignments.
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