LEDGERPATH

Anarcho-capitalism with Proof of Stake

If some of the political ideas and principles behind Bitcoin can be traced to anarchism, then Proof of Stake must be the Anarcho-capitalistic comeback?

Some of the issues we highlighted in the previous post pointed towards the inefficiencies of running Proof of Work (PoW) systems. Large amounts of electricity is needed just for a few transactions to be confirmed, still taking up towards an hour for sufficient levels of confirmation. And still it’s exposed to the 51% attack vector.

This is not good enough, at least not for anything of significant importance.

While initially the thought of avoiding centralization of power, and Proof of Work being required as a mechanism to enable true distribution of wealth (apparently), practicalities win in the end. But it doesn’t require a return to old models. It is still possible to build decentralized systems that avoid any single point of failure, while at the same time ensuring these are efficient tools.

Is Proof of Stake the answer?

Proof of Stake (PoS) is a different algorithm for ensuring distributed consensus, while keeping the cost of corruption sufficiently high like we argued PoW also helped us do.

But instead of using computational power and electricity as a stake, PoS will instead bet your coins. If the network catches you cheating, you give up your stake. Of course, if all is as expected, you’ll be rewarded with new coins instead, assuming you are the lucky one for this round. It’s a different form of mining, basically, as new coins are handed out in the process.

PoS then only works if you argue there is value tied to the coins you put up as a stake. And there are other challenges tied to PoS, like the rich getting richer (since they can put up a bigger stake) which increases centralization, and “nothing-at-stake” problems where those without power can cheaply spam the network, preventing progress.

Taking a step back it might be obvious that PoS is a natural route along the development of cryptocurrencies. If you assume there’s no value in Bitcoin, then PoW was the natural choice as the participants would donate their resources for ulterior (anarchistic) motives. If now however people put some monetary value on the coins in this system, putting it up as stake in an effort to make the system more efficient makes perfect sense.

It’s just a stepping stone

It is however just a stepping stone towards true progress. Just like PoW is inefficient by design, and therefore impractical in the long run, PoS is over-complicating a system we’ll all eventually agree is worth keeping.

There should be no more need for a complication like PoS on top of a DLT than there is for any such complication to be put on, for example, DNS. DNS is one of the critical infrastructures we run to ensure we have an Internet we can all use. Not because there’s much money to be made from DNS in isolation, but because nothing else would really work without it.

There is tremendous value in having a functioning global and public DLT system, just like there is in having a functioning DNS.

And as these true value propositions become clear to all, any inefficiency like PoW or PoS will get rooted out. There already exists other better and more efficient mechanisms that do not require these complications, while still maintaining the requirements we have around a ledger. We’ll look at these in future blog posts.

There will naturally be a lot of resistance towards these better models, not for fundamental technical reasons, but political. Many view PoW and to some extent PoS are pure utopian approaches, without really connecting the technical dots and reasons they were used. This will pass, as progress is made towards true DLT utility.



This blog post was written by Christian. He's got several years of experience working within FinTech holding a MSc in Quantitative Finance and a BSc in Computer Science and Industrial Automation.

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