PoS networks like Cardano are said to be the same as the current fiat system. This is because if someone is rich, they can buy large amounts of coins and thus retain power forever. Moreover, the rich investor is getting richer also forever. Another concern is that the coins will be held by the centralized exchanges, so they will decide for the people.
Jimmy Song said:
“Definitely a big risk and the reason why PoS doesn’t work. It’s essentially paying rich people to be rich and it’s a permissioned system and therefore not decentralized.”
He added:
“I suspect exchanges will basically be the controllers of such coins. This is similar to how the current central-bank backed fiat money system works in that banks have undue influence over money.”
Pavol Rusnak said the following on the topic:
“Buying mining equipment is not enough, you need to keep it running to maintain the stake in PoW. With PoS you can just buy the coins once and own the stake forever.”
The criticized problems are mainly that the stakes can be held by the people forever and that centralized entities will hold the coins instead of the people so that they can make decisions for them. They also think it is easy to change monetary policy in PoS networks. Let’s discuss these arguments in detail.
A stake is forever in PoS networks
The “rich get richer” argument applies more to PoW networks than to PoS. Mining requires high input costs. Staking does not. The rich have an advantage due to the economy of scale and can better withstand short-term market fluctuations. The rich may gradually drive small and less successful players out of business. For PoW networks, it is possible that smaller miners may not be able to maintain their stake (in the form of hash rate) forever because mining may not be profitable as it used to be before. Mining is a competitive environment in which only the successful can keep the business running. Is this good or bad for the network?
In a decentralized network, everyone should be on equal footing with each other. That’s an unattainable ideal, but it’s useful for the network to have incentives and rules set so that we get closer to the ideal. The ability of the big to crowd out the small is certainly a principle that runs counter to the network’s desire to achieve a high degree of decentralization.
From a decentralization perspective, it is beneficial for the network if people can keep the stake they have once acquired forever. It is mainly important for people with smaller stakes. No one can displace them from their position as a stronger player. However, this principle may appear to be a problem in the case of the rich.
Even Bitcoin has no defense against the big miners and the gradual centralization of the network. The problem of the rich is valid for both PoW and PoS networks. The difference may be that if one rich PoW miner wants to displace another rich miner, it may go into economic loss, subsidize mining and displace the competition. Imagine that Alice is an honest miner and is acting in the best interest of the network. Bob, another big miner, shows up and wants to try to compromise the network with some kind of attack. He will therefore try to displace Alice and has a chance to succeed. Is that good or bad?
In this case, it is obviously detrimental that the honest miners may lose their stake if someone bigger comes along. If a very rich miner comes along who wants to do damage, he can do so. He only has a chance because he can get rid of a bunch of small honest miners or even the big ones. From a decentralization perspective, it is beneficial to support as many small stakeholders as possible. Cardano makes it possible to participate in decentralization even with a very small stake. The smaller your stake, the more likely it is that you will not want to harm the network. The network protects your assets.
It is not good that honest miners can be pushed out of the system. It is true that the reason may be a less efficient business model. The more efficient miners are crowding out the less efficient ones. However, this again can lead to centralization. Mining used to thrive in China, but now it is in the USA. We can imagine that some miners may gain an advantage through laws or major technological advances in technology. A monopoly may emerge.
On the other hand, it is a disadvantage for PoS networks if someone who wants to harm the network holds a large stake. In that case, he can attack the network forever and cannot be deprived of the stake. This is theoretically possible, but the question is whether it is feasible in practice. An attacker would have to acquire more than 50% of the ADA coins in circulation. High demand for ADA coins would certainly drive up the market value, making them economically costly to buy. Moreover, the attacker would actually be attacking his own wealth. It’s basically the same principle as if someone in the PoW network invested in an attack. Only the technological feasibility and cost of the attack prevent it. In PoW networks, the attack is riskier because the cost of the attack must be continuously covered. However, the attacker will eventually get block rewards.
From our point of view, it seems to us to be an advantage that users can keep the stake forever. The way the fiat system works is that the rich decide, or that decisions are made centrally. Less well-off individuals have an increasingly minor position. PoW suffers more from the phenomenon of wealthy entities emerging at the expense of small ones. PoS networks give a better chance for a large number of small stakeholders to exist in it.
As long as the smaller honest players collectively retain a majority stake in the PoS network, no one extremely rich can come in and gain control of the network. No amount of money will help an attacker buy 51% of the ADA coins if people hold on to them and don’t sell them. This is not the case with PoW. For the money, an attacker can always gain control of the network.
Hypothetically, if Cardanization occurred and the entire world was using ADA coins, getting the stakes needed to attack would be nearly impossible.
How to change the monetary policy of the blockchain project
National monetary policy is decided by central banks together with commercial banks. They are centrally managed. Let’s look at how monetary policy can be changed by blockchain networks.
If the monetary policy of Cardano or Bitcoin were to change, the team would have to create a new version of the client to incorporate the changes. No stake in the network consensus is required to create such a client version.
Anyone in the network who runs full-node can voluntarily decide which version of the client to install. Full nodes are not equal to each other. Nodes of pool operators have a more significant status in the network. In the case of both Cardano and Bitcoin, new blocks are produced by pools.
If you look at the number of pools in the Cardano network and compare it to the number of pools in the Bitcoin network, you will clearly see that Cardano has a more decentralized block production. In order to change the monetary policy of the blockchain protocol, pool operators would have to agree and install a version of the client with the changes.
In order for a change in monetary policy to take hold, a majority of the network must agree on it. The stakes of individual participants in the consensus come into play. The ADA holders and their stakes in the Cardano network or the miners and their hash rate in the Bitcoin network are important for the change to happen. The pools that will produce the majority of blocks are decided by stakeholders or miners in a given network. The version of the client for which there is a higher stake will prevail.
Note that the number of persons holding stakes is not important. A majority stake can theoretically be held by one person.
In the PoW network, miners, not BTC coin holders, make the decisions. Only a small group of businessmen make decisions, not those for whom the decision is most important. Recent studies have shown that 50% of the hash rate is controlled by about 50 large miners. This means that a relatively small number of people could push through change. If someone very rich wanted to force the change, they could try to take control of the network in the short term. Theoretically, the attacker only needs a single pool to do so. There would probably be a split in the network. There would be a blockchain with the old rules and a blockchain with the new rules changing the monetary policy. Let’s leave the other implications aside in this article. Consider that Cardano has a hard-fork combinator so it is not so easy to create a fork of the blockchain.
In the Cardano network, all ADA holders participate in making decisions. Total stakes of pools are made up of all those who have delegated their ADA coins to the pool. This is similar to miners delegating a hash rate to a chosen pool. ADA delegators can keep track of which version of the client the pool is running. If they don’t agree with the version, they can delegate coins elsewhere at any time. This will reduce the stake of the pool, which will have a negative effect on the number of blocks it will produce. PoW miners can do the same.
While the principle of delegating decision-making power to a pool is similar, there is a fundamental difference between Cardano and Bitcoin.
In the Cardano network, it is much more difficult to enforce a change in monetary policy because it is decided by a much larger number of actors. In the Bitcoin network, there will always be a larger number of BTC holders than miners. In the case of Cardano, the ADA holders are also the ones who hold the decision-making power.
Rich stakeholders have more decision-making power, but that’s exactly the same as in the Bitcoin network. The important thing is that all ADA holders can decide, and no one can take away their right to stake and vote. In the Bitcoin ecosystem, the rich miners are getting bigger and the number of smaller ones is decreasing. Besides that, there are a growing number of BTC holders, but they have no direct rights in the network consensus.
Now let’s look at what more closely resembles the current fiat system. If the minority decides the majority, it is similar to the fiat system. BTC holders definitely make up the majority. This group has no rights in the decision-making power. Only a small percentage of BTC holders run their own node, but that may not be significant in pushing for change. The longest chain decides the true Bitcoin, and miners decide that, not BTC holders.
In the Cardano ecosystem, there are not two separate groups of miners and coin holders. Each ADA holder has decision-making rights, i.e. something like a miner in the PoW network. The Cardano ecosystem is more democratic. Everybody decides by ADA coins.
What if the exchanges decide?
Exchanges hold significant amounts of ADA and can theoretically use them to vote. As far as Catalyst is concerned, it has not yet been proven that exchanges have misused users’ ADA coins to vote. The point of decentralization is to get people to keep coins in their wallets. It’s not a problem for Bitcoin that BTC coins are on centralized exchanges because they have no decision-making power in the network consensus. The Cardano community needs to continue to educate newcomers. Fortunately, this is being done.
It is unlikely that one exchange would hold 50% of the coins. We expect the number of coins on the exchanges to decline. In addition, new exchanges will appear, so that the ADA coins will be spread across all of them in some proportion. This fact reduces the risk of abuse by one entity.
You may be surprised to learn that Bitcoin suffers from a similar problem. People are willing to pay third parties to mine for them. The reasons may be different. People don’t want to keep the miner at home, they don’t want to deal with the technical problems, or it’s not economically viable to mine in a given country. So third parties have a huge hash rate that someone else is paying. This hash rate can be used to attack the network very much like coins on the exchanges.
Even in this case, the criticism of PoS networks is not entirely correct, as even PoW does not have a solution to the centralization of mining in the hands of third parties which operate in countries where it is more profitable. Again, the economy of scale is important. Mining through third parties may be more economically viable, so this forces smaller participants to use these services. For both PoS and PoW, there is a risk that a third party will abuse its position.
Conclusion
PoW proponents use arguments from the past and do not reflect reality. When people were mining on computers, Bitcoin decentralization was at its greatest. The emergence of pools and the development of ASIC miners changed everything. People have stopped being critical of Bitcoin and are trying to blindly defend how it works. Unfortunately, they often run into argumentative difficulties because they criticize things on PoS that PoW suffers from as well.
In my opinion, both Jimmy Song and Pavol Rusnak are wrong or not intellectually honest. The current fiat system will more closely resemble Bitcoin. Cardano is more decentralized than Bitcoin when it comes to the production of blocks. Cardano has multiple pools and literally, all the ADA holders make the decisions. Fewer actors would decide on any violent change in monetary policy in the case of Bitcoin. However, such an attack is unlikely in both cases. In the case of Bitcoin, such an attack might be easier for a very wealthy entity. Cardano could be more resilient if ADA holders having the majority don’t sell their coins. With adoption on the rise, this will be an increasingly difficult task. Keeping a stake forever seems like an advantage to us, not a disadvantage. This is only a disadvantage if there is a 51% attack in progress. IOG has a plan to detect and prevent this attack at the protocol level. Both PoW and PoS networks are at risk of third parties that can abuse delegated power. There is no major difference between a centralized exchange and a cloud mining service.
In the end, there is no point in looking for a better solution, but to correctly name the risks and mitigate them. Both PoW and PoS have problems that should be addressed. It must be said that PoS is certainly not fundamentally inferior to PoW.
This article was prepared by Cardanians with support from Cexplorer.
Read the article: Myth busting: Cardano is not like the current fiat system | Cardano Explorer
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