Fiat-like proof of stake chains promote centralization and players …






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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 crypto asset, the crypto community as a whole is very often at variance. .

One of the most debated mechanisms currently is Proof of Stake (PoS). While its supporters argue it avoids the dazzling power consumption associated with Proof of Work (PoW) networks like Bitcoin (BTC) and Ethereum (ETH), those on the other side of the debate argue it leads to centralization. and help the rich get richer.

In fact, at least one prominent figure in the industry recently argued that proof-of-stake is not much different from how the current fiat money system works, and that key stakeholders have near-monopoly control over the whole. system. This is an assessment that many other commentators agree with, although few agree that we will soon have real (central) banks buying control of the Ethereum blockchain. 2.0 because it aims to start using PoS.

Centralized betting

By posting on Twitter, Pavol Rusnank, co-founder of Satoshi Laboratories , hardware wallet maker Trezor, said “the proof of the stake is how fiat works”. As he explained, actors with dominant interests determine how the system works, with the responsibility of controlling how transactions are verified and how much new money is created.

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. .

For other Bitcoin developers and supporters, the possible involvement of financial institutions is a tangible risk.

“It’s 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 authoritative system and therefore not decentralized, ”said Jimmy Song, Bitcoin educator, author and developer.

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 at this time. Nonetheless, most critics 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 the centralization of participation in exchanges and other depositories, which is fueled by minimum participation requirements. But in the longer term, the threat to the ability of the financial system to acquire unlimited participation in the system should not be overlooked, ”he told

Incentives, Disincentives and 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 on-chain token-weighted governance, so owning more ETH doesn’t give a single user greater control over every aspect of the network.

“In addition, attacking the network or acting in a malicious way will cause a drop or could freely drop the price (and the properties of the attacker) in an extreme situation. Existing financial incentives prevent validators from easily benefiting when they act outside of the platform’s defined rules, ”he told

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.

“Absolutely [Ethereum] It’s centralized, so there is no risk of it becoming centralized, it is! I suspect that the exchanges will essentially be the controllers of these currencies. This is similar to how the current central bank backed fiat money system works, in which banks have undue influence over money, ”said Jimmy Song.

This is an opinion with which Josef Tětek largely agrees, arguing that PoS has built-in centralization tendencies, and that exchanges are likely to be the biggest beneficiaries.

“With minimum participation requirements (such as Ethereum 32 ETH per validator), small owners will also be looking for ways to participate, and exchanges are the obvious providers of joint participation 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 many coins generally equates to earning many more coins.

“The largest existing holders will be further enriched by the PoS, without taking any tangible risk,” he added.

While stating that the prospects for a bank breach of Ethereum 2.0 are very low, Wilson Withiam agrees that PoS has an “almost inevitable” problem of getting rich.

“Those with initial assignments have a perpetual right to seigniorage at the expense of those who do not participate. It is also subject to economies of scale, as professional betting providers can run more validators, and exchanges (services with multiple revenue streams) can offer bets at almost zero cost to users ”, a- he declared.

Both of these factors can lead to a concentration of participation, he added. But on the other hand, he noted that no consensus mechanism is perfect and that Ethereum has two main counter-arguments:

“His six years of PoW broadcasts have allowed him to have a more equitable distribution. Its distribution and holder base is more diverse compared to more recent PoS networks. Decentralized stake pools allow users with any amount of ETH to participate in the stake 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 you can just add. This is something that is inherently very difficult to find and altcoins like Ethereum just aren’t, no matter how much they claim otherwise, ”he told

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 leave the real-world anchor of PoW, you open the system up to tendencies of centralization. PoW via specialized devices such as ASIC SHA256 [hardware de minería] it’s much more difficult to control: ASICs are already scattered around the world and 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 engagement focus:

built-in incentives to encourage stakeholders to bet 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; Stakeholders could receive more rewards and voting power to block their participation for a longer period (examples include the Internet computer); implement an equitable initial distribution; Avoid oversized workforce and insider assignments.


Learn more:
– Ethereum will not hide quantum computers behind the PoS shield
– Proof of disagreement: Bitcoin’s work vs. Ethereum’s planned share

– Bitcoin proof needed as critics and competitors unite to play the weather card
– A closer look at the environmental impact of Bitcoin mining

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