Proof of Stake: The advantages and disadvantages of consensus building

Proof of Work or Proof of Stake: the different consensus processes divide minds. An argument.

This article first appeared in the November issue of BTC-ECHO’s Cryptocompass. More information on the monthly magazine focusing on digital assets and blockchain technology can be found in the Kryptokompass shop.
Pro Proof of Stake

Without consensus, there is no decentralised network. This is the price decentralised protocols pay and also Golden Profit already the only prevailing consensus in the blockchain universe. However, in the war of faith between Proof of Work (PoW) and Proof of Stake (PoS), the winning arguments are on the side of the PoS crowd.

Proof-of-stake networks secure themselves with reliable validators that are randomly selected to sign new blocks. Depending on the capital deposited (stake), the chances of drawing the lucky lot increase. Carrots and sticks ensure conscientious work: if validators work cleanly, they not only receive the transaction fees, but also increase their reputation and thus the probability of signing further blocks. If they mess around, on the other hand, they are punished by the algorithm and excluded from the network.

Validators thus put their stake on the line. The incentive not to cheat is correspondingly high. Although the focus on validators may seem to contradict the ideal of decentralisation, it is a necessary and comparatively minor evil when it comes to the security of networks. Moreover, this centring also takes place in PoW networks by miners.

In contrast to energy-wasting PoW processes, however, miners or validators are not dependent on the acquisition of expensive mining hardware. Even the most ardent PoW supporters cannot deny that PoS methods also solve the blockchain trilemma of security, scalability and decentralisation.

Contra Proof of Stake

Of course, you can digitally recreate a plutocracy. Just don’t be under the illusion that you are then still dealing with a cryptocurrency. The mantra „dont trust, verify“ is made absurd by a network in which a few handfuls of nodes decide which transactions go through and whether all account balances are correct.

The PoS faction’s claims to have solved the blockchain trilemma are therefore downright mendacious. The greater the crypto assets one can spare for staking, the greater the chance of producing a block and pocketing the staking reward. This applies equally to all staking platforms.

When it comes to decisions on the further development of the underlying protocol, it is also true that those who have a lot have a lot to say. The stylistic blossoms this can cause have been seen, for example, in the case of Steem. The vote on a soft fork turned into a drama because there were fears of a „hostile takeover“ of the Steemit blockchain by Tron.

Tron CEO Justin Sun, with the support of bitcoin exchanges Binance, Huobi and Poloniex, had voted against the proposal from the community, which would have devalued their voting rights. The result was a hard fork. Considering how diligently Binance, Bitfinex and co. are already involved in staking, it is hard to imagine what influence they will have when a proof-of-stake network reaches mainstream adoption.