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Proof-of-Stake and Stablecoins: A Blockchain Centralization Dilemma

74 points by yasp 5y ago

Animats 5y ago
Good article. A few key points: Proof of stake: "Proof-of-work is fundamentally very simple, is easy to analyze, is easy to implement and deploy, and proof-of-stake has a lot of moving parts. You can code up a proof-of-work algorithm in a hundred lines [of code] or so. Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake." What could possibly go wrong? Remember the DAO hack. The author also points out that proof of stake makes it much easier to change the rules for a token. He considers proof of stake coins to be a different asset class because of that. NFTs: A key problem is that these types of NFT sets are pretty easy to manipulate ... The first scam is to bid up asset prices and trick buyers into thinking those prices are real and to buy into it. It’s market manipulation, in other words. For example, a user can set up five different Ethereum addresses, and start trading around an NFT to themselves at increasingly higher prices. Outside observers don’t know that all these wallets belong to the same person and that this is literally just insider trading. This is only possible with a non-fungible asset; you can’t manipulate the price of an individual bitcoin or an individual ether on your own, you can only manipulate unique objects like for example CryptoPunk #9998. Then, with prices (seemingly) so high, some people want to get in on the momentum and buy the NFT, so the person who was trading among their own wallets finally sells the asset at a higher price to that unsuspecting newcomer. When that newcomer tries to sell the asset, he or she is unable to find other buyers who actually want to pay that price. They don’t realize that a lot of the liquidity and price-escalating transactions were actually just manipulation. Yes. We know now that the famous Beeple sale was faked like that. Go over to OpenSea and look at some of the high-priced items. Then look at the bid prices on them. As I pointed out previously, this is exactly like Beanie Babies on eBay - asking US$5000, actual sales around US$50. The result is a stalled market, rather than a crash - lots of asks, few bids, orders of magnitude bid-asked spreads, few transactions. Stablecoins: "any smart contract blockchain that relies heavily on DeFi for its use case, can have the outcome of its hard forks significantly determined by centralized stablecoin custodians. These custodians can nullify the value of all stablecoins on whichever side of the fork they don’t view as the correct one, which severely reduces the survivability of that side of the blockchain by rendering its DeFi mostly insolvent." Custodians. Like Tether/Binance. Those guys.
- cmckn 5y ago
  > Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake. Well, not quite. Prysm[1] has a pretty harrowing codebase, but it’s not huge. You can grep all of the ick in a handful of minutes. :) [1] https://github.com/prysmaticlabs/prysm https://github.com/prysmaticlabs/prysm edit: I stand corrected! I guess it's been a while since I took a peep. Don't say I didn't warn ya! ------------------------------------------------------------------------------- Language files blank comment code ------------------------------------------------------------------------------- Go 1496 32842 20431 257311 C 3 3528 874 4783 Bourne Shell 31 348 278 2304 YAML 15 43 51 1343 C/C++ Header 5 456 239 666 C++ 1 31 64 182 DOS Batch 1 18 7 145 PowerShell 1 21 8 98 ------------------------------------------------------------------------------- SUM: 1553 37287 21952 266832 -------------------------------------------------------------------------------
- tromp 5y ago
  > He considers proof of stake coins The author is a she.
- sanderjd 5y ago
  > You can code up a proof-of-work algorithm in a hundred lines [of code] or so. Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake. There is an obvious asymmetry here. You can code up a toy PoS implementation in less than the hundred thousand lines of code in the actual production ethereum clients. The production PoW implementations are also not "a hundred lines or so". And it's not that this point is wrong, PoS is more complex than PoW, but the hyperbolic comparison is not necessary to demonstrate that point. It sets off my "doth protest too much" alarm.
prohobo 5y ago
Aren't stablecoins kind of pointless and dangerous? We all know that Tether is a huge scam, and it underpins like 75% of Bitcoin transactions - meaning if it crashes it could take Bitcoin with it. Adding onto that, stablecoins only really make long-term sense as havens for speculators and day traders. Do we really want to weaponize crypto markets like some kind of hyper-stock market?
- verdverm 5y ago
  A CBDC (Central Bank Digital Currency) backed by a money market, and a hybrid public-private partnership between the govt and thin banks would have the stable nature of a currency while eliminating much of the inefficiencies in the current TradFi and cryptos.
  - guilhas 5y ago
    So.. go back to the old system? Keep the same corrupt people in power, inefficient systems that promote the production of nothing, making the rich richer...
    - wmf 5y ago
      Stablecoins combine the worst features of the old system and crypto so CBDCs should be better.
  - sanderjd 5y ago
    Yes, this is the solution, but it doesn't really look like anyone is interested in making it happen.
  - deleted 5y ago
    [deleted]
- 0x64 5y ago
  Dai, MakerDAO's stablecoin, is over-collaterized through various crypto assets and there's around $6.5b worth of it in circulation right now.
iskander 5y ago
>The digital blockchain, via proof-of-work, is thus connected to real-world natural resources. This, in essence, is why any further adoption of PoW chains is deeply incompatible with climate change mitigation. I'm happy to see crypto mature into some kind of open source / open protocol financial system but it needs to happen strictly on proof-of-stake chains (whatever the challenges to decentralization).
- verdverm 5y ago
  Proof of Authority might be better than staking. There are some interesting winner take all like properties in both systems. One is easier to regulate for the broader good when things go awry.
  - iskander 5y ago
    Interesting, hadn't heard of it before. What gets slashed in PoA? Is there some kind of quantified reputation that you lose through misbehavior?
    - verdverm 5y ago
      It's a permissioned system, so there is a cartel like group who decides who can do what. It's very similar to what we have today. It's also not like anyone can add code to Bitcoin, so there are permissioned parts of the system.
    - nostrademons 5y ago
      PoA is centralized, by definition. You are approved to be a validator by some trusted entity. In theory, this can be a group or consensus (you could imagine a PoA scheme where the set of authorized validators is passed around like a HOSTS file), but you still need to trust the mechanism that authorizes validators. You lose your right to be a validator through misbehavior; you are removed from the list of authorized validators, and hence can't do it anymore.
  - chpatrick 5y ago
    At that point haven't you just reinvented the banking system?
allanrbo 5y ago
See also this article posted on HN yesterday, which also discusses the topic of proof-of-stake and centralization: https://news.ycombinator.com/item?id=29366310 https://news.ycombinator.com/item?id=29366310
outside1234 5y ago
At the end of all of this crypto BS we are going to figure out that the solution to all of these problems is Stripe.
- joeldg 5y ago
  I dunno man.. Web3 is pretty fun.
yokem55 5y ago
There are a couple things that the author misses about externally collateralized stablecoins and their ability to dictate or veto hard forks. First the stable coin issuers would would have to collude with each other to have any chance of success. Just because Circle would want to go a certain direction doesn't mean that Gemini or Tether would also. Second any fork from a stablecoin issuer would be inherently hostile, and the legitimacy of the resulting chain that they dictated would suffer. Users of the tokens on the 'blessed' chain could easily cause a run on token. Between these factors, a centralized stablecoin issuer taking control over a chain like this would result in close to mutually assured destruction. Yes, many (but not all) defi applications in the original chain would be severely impacted, but the forked chain would have no legitimacy with users either and they would be quick to dump the issuer's stable coins as quick as possible. The Steem/Hive fork following Justin Sun's attempted takeover is quite instructive on what can happen when a hostile takeover of a chain occurs.
- vineyardmike 5y ago
  > the forked chain would have no legitimacy with users either and they would be quick to dump the issuer's stable coins as quick as possible. Wouldn't it have legitimacy with the actual fiat banking system though? TBH thats the side i'd personally pick if i owned significant eg USDC and it was only honored on one side of the fork.
  - yokem55 5y ago
    Sure, but users don't have to pick. They could choose to recognize their eth on one chain and USDC on the other, just long enough to cash out their USDC for real USD from the forked chain (as long as Circle/Coinbase has liquidity to do so). At that point the user would be free to use a different stable coin if they chose.
    - gruez 5y ago
      How does this work for the USDC that's locked in various difi contracts?
wmf 5y ago
This is better than the rant from the other day but still has some questionable parts. 1. Saying PoS is bad because it has more economy of scale than PoW is contrary to what we see in reality. People need to verify their first-principles thinking. 2. The "you can't run a PoS node" stuff is not universally true and seems like an unacknowledged PoW bias. 3. Talking about what happens after hard forks is like worrying about surviving nuclear war. The focus should be on preventing it IMO.
- DennisP 5y ago
  Yep regarding (1), the article focuses on the stakers having much lower expenses, while disregarding their much lower revenue. Stakers and miners can both reinvest their profits, and stakers don't have a big advantage here.
TTPrograms 5y ago
I keep seeing the argument that Proof of Stake is more centralizing than Proof of Work, but it doesn't really add up with what I'm seeing in practice - Bitcoin mining centralized heavily around cheap electricity sources and companies that can afford SOTA dedicated mining ASICs. In contrast, anybody can become an ETH staker by purchasing the requisite amount of ETH (currently worth around $128,000, previously closer to $32,000) and make profitable return on it. You also retain a liquid asset that can be sold back at a later date. With the staking pools even this lockup amount can be reduced arbitrarily. For a consumer to participate in PoW based on current miners it seems like they need to buy perpetually out-of-stock specialized ASICs for a sunk cost of $10-15k with the expectation that they'll break even in about a year and probably need to refresh in 3. The hardware management aspect as well as the variable cost of electricity seems to incentivize centralization of mining significantly. Being able to standup a staking node with commodity hardware seems far more accessible.
- jdgoesmarching 5y ago
  That’s just centralization without extra steps.
  - sanderjd 5y ago
    It isn't obvious what this comment means. What is the "that" that is centralization? What are the extra steps?
    - matrixcubed 5y ago
      It’s a Rick and Morty reference. See S2E06.
- jl2718 5y ago
  Miners have to sell.
- witweb 5y ago
  I don't really get your point here as you don't have to buy ASICs every X years with PoW consensus. A friend of mine mines with his 3070 in a mining pool and makes a small plus with it. Hell, you can even mine with a 7 year old PC. Will you ever find a block? Probably not, but you're still securing the network and may get lucky. I don't see how this incentivizes centralization any more than PoS. With PoS, you have to be part of the network by spending money on a token while with PoW, you just need an existing PC with some compute power.
CryptoPunk 5y ago
The second scam is to create a big loss to reduce tax liabilities in a fraudulent way. Again, you create several different wallets. One of them is linked to your real name and the others are anonymous. You buy an NFT with an anonymous account that you control for $200k, and sell it to another anonymous account you control for $250k. Then you sell it to your real-name account for $500k. Your real-name account then sells it to another one of your anonymous accounts for $200k, locking in a massive $300k “loss”. Your anonymous account can then potentially sell it for roughly what you paid for it, maybe $200k if the market hasn’t changed much since you began this trick. This is a useful tax “loss” (which wasn’t really a loss, since you secretly paid it to yourself) that can offset your real crypto capital gains from other trading areas. And then the person has $300K in wealth sitting in an anonymous account that they can't spend, because they can't explain where they got it from without explaining their ploy. If you want to go that route, you could just as easily claim you lost $300K to a hack.
- jkhdigital 5y ago
  The modern-day version of the “boating accident”
tromp 5y ago
I strongly sympathize with the following observation: > The way altcoins market themselves, generally, is to highlight the shortcomings of Bitcoin as though it were old tech or “Boomer coin”, and then explain how they are better than Bitcoin. > When you dig into them, however, it turns out they are making tremendous trade-offs in one area to achieve additional capability elsewhere. They are sacrificing some degree of security, decentralization, auditability, and so forth, in order to achieve things like more features, more speed, or more throughput. It is exceedingly rare to see altcoins describe the tradeoffs they made in honesty.
nootropicat 5y ago
>Since they don’t need to expend resources to stake, they can simply increase their overall staking amount as they earn ongoing coins from staking rewards, and exponentially grow their influence on the network over time, forever. Network dominance tends to lead to more network dominance, in other words. So, literally like reinvesting profits in proof of work? In PoW centralization forces are way, way worse for two reasons. The first is because there are infinite economies of scale: as any mining operation grows, costs per hashrate drops. The starting point right now is a person mining at home, paying residential electricity prices and using air cooling, with an asic bought from an external supplier at a high markup. The end point is a mining company that uses its own power plants and its own chips, with custom made power supplies and cooling that potentially reuses the heat in some way. The second is that mining is vulnerable to forced exclusion that can increase revenue per hash by orders of magnitude: one that's consensus based, and another economically based which can force a consensus-based exclusion. Controlling 51% of hashrate means that every other miner can be ignored, almost doubling revenue per hashrate. However, it's actually worse - because as competitors close, the dominant entity can reduce its active hashrate to a level just above remaining competitors, until nobody else mines, at which point mining can reduce to a very low level, just enough to keep random small miners from winning. In the case of an attack full hashrate is utilized, ensuring it fails. By the virtue of nearly ~100% of revenue being profit, the entity can amass and unassailable amount of idle mining hardware. Economic exclusion means that it's possible to intentionally mine at zero profit to drive difficulty too high, ensuring others turn off. It's a strategy for a biggest miner that doesn't have majority of mining hardware, but by the virtue of being the largest entity has the lowest unit costs. Of course, such an entity would have absolute censorship power. It's the lowest energy point of the system - because while it's in principle possible to replace such an entity, it can be only be done by an even bigger entity, only changing the name at the top, but still retaining full centralization. Those design flaws ensure PoW is certain to centralize, given time. The process is already well advanced - it started with individuals mining on their home pcs. Now miners are buying power plants. PoS has next to zero economies of scale (just the negligible fixed cost of a computer used for staking), and there's no potential of forced economic exclusion - running cost are negligible, so while more stakers mean profit rate goes down, it can never force a loss. Additionally, while it's not implemented yet (at least I'm not aware of anything), the fact it's a semi-synchronous protocol also allows for automated censorship detection - with appropriate punishments. That's because active nodes would be able to see correct messages that should have been included, but aren't. This is fundamentally impossible in PoW, as it's a fully asynchronous consensus system. Socially, PoS is as decentralized as coin distribution - which for some networks is a joke - especially Solana which only sold 1.6% of its initial supply to the public - probably the most centralized L1 coin in existence, controlled by just few VCs. Ethereum sold 83.33% of its initial supply (72M) in a public kycless sale, since then 42M eth have been mined. Supply is very well distributed among thousands of mostly tech nerds that bought before the current boom. As recently as in March 2020 one eth could be bought for $90. This is the most perfect population achievable for resistance to government interference. In contrast, for already mentioned reasons, mining is already controlled by big companies. Censorship is a more realistic risk from regulations forcing miners to censor. With PoW, there's no defense except moving to a different country - because it's impossible to hide warehouses with industrial power connections, not to mention power plants. In reality, as long as regulations don't kill the network outright ('just' an OFAC blacklist, freezing coins from ransomware, theft, other criminal acts) - and these regulations are enforced in places with cheapest available electricity - miners would comply. Once those miners attained a sufficient majority, laws would force them to orphan non-compliant blocks. PoS staking is trivial to hide - it's just a computer with a network connection. The whole network could be made anonymous by utilizing onion or garlic routing. Regulations would be impossible to enforce. In conclusion, PoS is superior to PoW in every single fundamental factor mentioned in the article, especially censorship resistance. I don't agree that complexity itself is a factor for or against: complex things are certainly harder to build, but once finished and proven to work that becomes irrelevant - only the functional differences remain. There's only one real advantage of PoW over PoS: PoW is a coin distribution method, while PoS isn't. However, 90% of all bitcoins are already mined, so that argument is already very weak and becomes weaker with each day. At the end, these discussions are for nerds - the average person may just get the impression that 'person X is saying PoS is less secure' and be wary for a while, but given enough time of working well, ~nobody is going to care about the anti-PoS position. Additionally, belief in PoW is economically self-punishing: mining costs billions per year, ensuring that PoS supporters, as a group, are getting relatively wealthier to PoW supporters. A cost difference of double-digit billions per year is very hard to sustain over longer periods. It also means that a PoS network can continue working with next to zero buyers - while below some level PoW becomes hopelessly insecure (see eg. 51% attacks on ETC) - making PoS much more resilient to economic shocks.
phkahler 5y ago
I think the real problem these things need to solve is proof of time. The big issue with digital currency is double-spending. To get around that the first spend is generally considered the real one, but proof or work, stake, or other are used to indirectly time stamp a transaction. Bitcoin isnt a distributed ledger, it's a distributed notary. Everything (not just currency) will change when (if) a verifiable time stamp becomes available.
- wmf 5y ago
  VDFs help with this and are being used by some newer PoS systems.
cwkoss 5y ago
One of the most insightful and nuanced analyses of the blockchain space I've read in years. Some highlights: --- "When a hard fork happens, stablecoin custodians cannot recognize both sets of tokens as redeemable for their money, since there are now twice as many total tokens (two full sets, one for each fork of the blockchain). They have to pick which blockchain is the valid one in their eyes, for which they accept redemptions of their tokens for money. And whichever one they don’t recognize as valid, has its DeFi and other stablecoin value eradicated." --- "The biggest challenge with these proposals is that the more features you add to a blockchain on the base layer, the less “small and tight” it is, and therefore the less decentralized it tends to be. The question then becomes, are there shades of partial-decentralization that people will accept, in exchange for more features that the database can offer? And can those partially-decentralized blockchains survive attacks, disagreements, and other tests over the long term?" --- "And that’s not to say that all of the liquidity and price action is fraud. I don’t know how much is. It’s simply that, with the technology as it is, it is very difficult to distinguish what percentage is fraud and what percentage is real, and rising price action based on fraud can temporarily bring in real demand liquidity, making the difference between the two rather murky. This is not much of an issue for large cap liquid tokens but it’s potentially a big issue for non-fungible tokens." --- "Ethereum’s proponents often criticize (rightly) Solana as being too centralized, as their key defense for why Ethereum is better than Solana. But that puts Ethereum in a tight spot, because Ethereum’s proponents then have to criticize Solana as being too centralized, while also defending the fact that Ethereum has these centralized attack surfaces and greater complexity compared to Bitcoin. In other words, it has to justify what the right level of partial-centralization and partial-decentralization is, and that it has achieved this sweet spot." --- "The way altcoins market themselves, generally, is to highlight the shortcomings of Bitcoin as though it were old tech or “Boomer coin”, and then explain how they are better than Bitcoin. When you dig into them, however, it turns out they are making tremendous trade-offs in one area to achieve additional capability elsewhere. They are sacrificing some degree of security, decentralization, auditability, and so forth, in order to achieve things like more features, more speed, or more throughput. And now the same thing is happening to Ethereum; newer smart contract chains offer greater efficiency in exchange for more centralization, and criticize Ethereum for not sacrificing more decentralization to scale faster."
pezzana 5y ago
> So, it’s [Ethereum] a big operating system powered by crypto tokens, for the purpose of moving around… crypto tokens. This is the thing that few authors understand about Ethereum. The main use case is creating new tokens and trading them, and this was clear from the beginning when Ethereum was created as an alternative way to do Bitcoin colored coins. This is not entirely useless. Speculation is a "use" after all. But as the article lays out, such uses are likely to be dwarfed by uses around censorship-resistant base money. Especially with the ways in which the worlds major government-backed currencies have been weaponized. > Ultimately, it partially depends on what governments want. Smart contract platforms with centralized attack surfaces can only exist at the pleasure of the government, so it comes down to how much regulatory crackdown they get vs how much regulatory approval they get. Another point that authors seem to really not get. It's all memes and good times until governments discover there's a casino operating out back that's not paying tribute. We haven't so far seen the effect of a western government clamping down hard on this, but if it comes, it will come to "stable" coins first. And as the author notes, the probable success of such clamp downs positively correlates with the degree of centralization. Many seem to have forgotten Liberty Reserve. https://en.wikipedia.org/wiki/Liberty_Reserve https://en.wikipedia.org/wiki/Liberty_Reserve That precedent should give the oligarchs running a proof of stake chain such as Solana, or eventually Ethereum, reason for caution.

74 points by yasp 5y ago

Good article. A few key points: Proof of stake: "Proof-of-work is fundamentally very simple, is easy to analyze, is easy to implement and deploy, and proof-of-stake has a lot of moving parts. You can code up a proof-of-work algorithm in a hundred lines [of code] or so. Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake." What could possibly go wrong? Remember the DAO hack. The author also points out that proof of stake makes it much easier to change the rules for a token. He considers proof of stake coins to be a different asset class because of that. NFTs: A key problem is that these types of NFT sets are pretty easy to manipulate ... The first scam is to bid up asset prices and trick buyers into thinking those prices are real and to buy into it. It’s market manipulation, in other words. For example, a user can set up five different Ethereum addresses, and start trading around an NFT to themselves at increasingly higher prices. Outside observers don’t know that all these wallets belong to the same person and that this is literally just insider trading. This is only possible with a non-fungible asset; you can’t manipulate the price of an individual bitcoin or an individual ether on your own, you can only manipulate unique objects like for example CryptoPunk #9998. Then, with prices (seemingly) so high, some people want to get in on the momentum and buy the NFT, so the person who was trading among their own wallets finally sells the asset at a higher price to that unsuspecting newcomer. When that newcomer tries to sell the asset, he or she is unable to find other buyers who actually want to pay that price. They don’t realize that a lot of the liquidity and price-escalating transactions were actually just manipulation. Yes. We know now that the famous Beeple sale was faked like that. Go over to OpenSea and look at some of the high-priced items. Then look at the bid prices on them. As I pointed out previously, this is exactly like Beanie Babies on eBay - asking US$5000, actual sales around US$50. The result is a stalled market, rather than a crash - lots of asks, few bids, orders of magnitude bid-asked spreads, few transactions. Stablecoins: "any smart contract blockchain that relies heavily on DeFi for its use case, can have the outcome of its hard forks significantly determined by centralized stablecoin custodians. These custodians can nullify the value of all stablecoins on whichever side of the fork they don’t view as the correct one, which severely reduces the survivability of that side of the blockchain by rendering its DeFi mostly insolvent." Custodians. Like Tether/Binance. Those guys.

cmckn 5y ago
> Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake. Well, not quite. Prysm[1] has a pretty harrowing codebase, but it’s not huge. You can grep all of the ick in a handful of minutes. :) [1] https://github.com/prysmaticlabs/prysm https://github.com/prysmaticlabs/prysm edit: I stand corrected! I guess it's been a while since I took a peep. Don't say I didn't warn ya! ------------------------------------------------------------------------------- Language files blank comment code ------------------------------------------------------------------------------- Go 1496 32842 20431 257311 C 3 3528 874 4783 Bourne Shell 31 348 278 2304 YAML 15 43 51 1343 C/C++ Header 5 456 239 666 C++ 1 31 64 182 DOS Batch 1 18 7 145 PowerShell 1 21 8 98 ------------------------------------------------------------------------------- SUM: 1553 37287 21952 266832 -------------------------------------------------------------------------------
tromp 5y ago
> He considers proof of stake coins The author is a she.
sanderjd 5y ago
> You can code up a proof-of-work algorithm in a hundred lines [of code] or so. Our current (Ethereum) clients are a hundred thousand lines or so for proof-of-stake. There is an obvious asymmetry here. You can code up a toy PoS implementation in less than the hundred thousand lines of code in the actual production ethereum clients. The production PoW implementations are also not "a hundred lines or so". And it's not that this point is wrong, PoS is more complex than PoW, but the hyperbolic comparison is not necessary to demonstrate that point. It sets off my "doth protest too much" alarm.

prohobo 5y ago

Aren't stablecoins kind of pointless and dangerous? We all know that Tether is a huge scam, and it underpins like 75% of Bitcoin transactions - meaning if it crashes it could take Bitcoin with it. Adding onto that, stablecoins only really make long-term sense as havens for speculators and day traders. Do we really want to weaponize crypto markets like some kind of hyper-stock market?

verdverm 5y ago
A CBDC (Central Bank Digital Currency) backed by a money market, and a hybrid public-private partnership between the govt and thin banks would have the stable nature of a currency while eliminating much of the inefficiencies in the current TradFi and cryptos.
- guilhas 5y ago
  So.. go back to the old system? Keep the same corrupt people in power, inefficient systems that promote the production of nothing, making the rich richer...
  - wmf 5y ago
    Stablecoins combine the worst features of the old system and crypto so CBDCs should be better.
- sanderjd 5y ago
  Yes, this is the solution, but it doesn't really look like anyone is interested in making it happen.
- deleted 5y ago
  [deleted]
0x64 5y ago
Dai, MakerDAO's stablecoin, is over-collaterized through various crypto assets and there's around $6.5b worth of it in circulation right now.

iskander 5y ago

>The digital blockchain, via proof-of-work, is thus connected to real-world natural resources. This, in essence, is why any further adoption of PoW chains is deeply incompatible with climate change mitigation. I'm happy to see crypto mature into some kind of open source / open protocol financial system but it needs to happen strictly on proof-of-stake chains (whatever the challenges to decentralization).

verdverm 5y ago
Proof of Authority might be better than staking. There are some interesting winner take all like properties in both systems. One is easier to regulate for the broader good when things go awry.
- iskander 5y ago
  Interesting, hadn't heard of it before. What gets slashed in PoA? Is there some kind of quantified reputation that you lose through misbehavior?
  - verdverm 5y ago
    It's a permissioned system, so there is a cartel like group who decides who can do what. It's very similar to what we have today. It's also not like anyone can add code to Bitcoin, so there are permissioned parts of the system.
  - nostrademons 5y ago
    PoA is centralized, by definition. You are approved to be a validator by some trusted entity. In theory, this can be a group or consensus (you could imagine a PoA scheme where the set of authorized validators is passed around like a HOSTS file), but you still need to trust the mechanism that authorizes validators. You lose your right to be a validator through misbehavior; you are removed from the list of authorized validators, and hence can't do it anymore.
- chpatrick 5y ago
  At that point haven't you just reinvented the banking system?

allanrbo 5y ago

See also this article posted on HN yesterday, which also discusses the topic of proof-of-stake and centralization: https://news.ycombinator.com/item?id=29366310 https://news.ycombinator.com/item?id=29366310

outside1234 5y ago

At the end of all of this crypto BS we are going to figure out that the solution to all of these problems is Stripe.

joeldg 5y ago
I dunno man.. Web3 is pretty fun.

yokem55 5y ago

There are a couple things that the author misses about externally collateralized stablecoins and their ability to dictate or veto hard forks. First the stable coin issuers would would have to collude with each other to have any chance of success. Just because Circle would want to go a certain direction doesn't mean that Gemini or Tether would also. Second any fork from a stablecoin issuer would be inherently hostile, and the legitimacy of the resulting chain that they dictated would suffer. Users of the tokens on the 'blessed' chain could easily cause a run on token. Between these factors, a centralized stablecoin issuer taking control over a chain like this would result in close to mutually assured destruction. Yes, many (but not all) defi applications in the original chain would be severely impacted, but the forked chain would have no legitimacy with users either and they would be quick to dump the issuer's stable coins as quick as possible. The Steem/Hive fork following Justin Sun's attempted takeover is quite instructive on what can happen when a hostile takeover of a chain occurs.

vineyardmike 5y ago
> the forked chain would have no legitimacy with users either and they would be quick to dump the issuer's stable coins as quick as possible. Wouldn't it have legitimacy with the actual fiat banking system though? TBH thats the side i'd personally pick if i owned significant eg USDC and it was only honored on one side of the fork.
- yokem55 5y ago
  Sure, but users don't have to pick. They could choose to recognize their eth on one chain and USDC on the other, just long enough to cash out their USDC for real USD from the forked chain (as long as Circle/Coinbase has liquidity to do so). At that point the user would be free to use a different stable coin if they chose.
  - gruez 5y ago
    How does this work for the USDC that's locked in various difi contracts?

wmf 5y ago

This is better than the rant from the other day but still has some questionable parts. 1. Saying PoS is bad because it has more economy of scale than PoW is contrary to what we see in reality. People need to verify their first-principles thinking. 2. The "you can't run a PoS node" stuff is not universally true and seems like an unacknowledged PoW bias. 3. Talking about what happens after hard forks is like worrying about surviving nuclear war. The focus should be on preventing it IMO.

DennisP 5y ago
Yep regarding (1), the article focuses on the stakers having much lower expenses, while disregarding their much lower revenue. Stakers and miners can both reinvest their profits, and stakers don't have a big advantage here.

TTPrograms 5y ago

I keep seeing the argument that Proof of Stake is more centralizing than Proof of Work, but it doesn't really add up with what I'm seeing in practice - Bitcoin mining centralized heavily around cheap electricity sources and companies that can afford SOTA dedicated mining ASICs. In contrast, anybody can become an ETH staker by purchasing the requisite amount of ETH (currently worth around $128,000, previously closer to $32,000) and make profitable return on it. You also retain a liquid asset that can be sold back at a later date. With the staking pools even this lockup amount can be reduced arbitrarily. For a consumer to participate in PoW based on current miners it seems like they need to buy perpetually out-of-stock specialized ASICs for a sunk cost of $10-15k with the expectation that they'll break even in about a year and probably need to refresh in 3. The hardware management aspect as well as the variable cost of electricity seems to incentivize centralization of mining significantly. Being able to standup a staking node with commodity hardware seems far more accessible.

jdgoesmarching 5y ago
That’s just centralization without extra steps.
- sanderjd 5y ago
  It isn't obvious what this comment means. What is the "that" that is centralization? What are the extra steps?
  - matrixcubed 5y ago
    It’s a Rick and Morty reference. See S2E06.
jl2718 5y ago
Miners have to sell.
witweb 5y ago
I don't really get your point here as you don't have to buy ASICs every X years with PoW consensus. A friend of mine mines with his 3070 in a mining pool and makes a small plus with it. Hell, you can even mine with a 7 year old PC. Will you ever find a block? Probably not, but you're still securing the network and may get lucky. I don't see how this incentivizes centralization any more than PoS. With PoS, you have to be part of the network by spending money on a token while with PoW, you just need an existing PC with some compute power.

CryptoPunk 5y ago

The second scam is to create a big loss to reduce tax liabilities in a fraudulent way. Again, you create several different wallets. One of them is linked to your real name and the others are anonymous. You buy an NFT with an anonymous account that you control for $200k, and sell it to another anonymous account you control for $250k. Then you sell it to your real-name account for $500k. Your real-name account then sells it to another one of your anonymous accounts for $200k, locking in a massive $300k “loss”. Your anonymous account can then potentially sell it for roughly what you paid for it, maybe $200k if the market hasn’t changed much since you began this trick. This is a useful tax “loss” (which wasn’t really a loss, since you secretly paid it to yourself) that can offset your real crypto capital gains from other trading areas. And then the person has $300K in wealth sitting in an anonymous account that they can't spend, because they can't explain where they got it from without explaining their ploy. If you want to go that route, you could just as easily claim you lost $300K to a hack.

jkhdigital 5y ago
The modern-day version of the “boating accident”

tromp 5y ago

I strongly sympathize with the following observation: > The way altcoins market themselves, generally, is to highlight the shortcomings of Bitcoin as though it were old tech or “Boomer coin”, and then explain how they are better than Bitcoin. > When you dig into them, however, it turns out they are making tremendous trade-offs in one area to achieve additional capability elsewhere. They are sacrificing some degree of security, decentralization, auditability, and so forth, in order to achieve things like more features, more speed, or more throughput. It is exceedingly rare to see altcoins describe the tradeoffs they made in honesty.

nootropicat 5y ago

>Since they don’t need to expend resources to stake, they can simply increase their overall staking amount as they earn ongoing coins from staking rewards, and exponentially grow their influence on the network over time, forever. Network dominance tends to lead to more network dominance, in other words. So, literally like reinvesting profits in proof of work? In PoW centralization forces are way, way worse for two reasons. The first is because there are infinite economies of scale: as any mining operation grows, costs per hashrate drops. The starting point right now is a person mining at home, paying residential electricity prices and using air cooling, with an asic bought from an external supplier at a high markup. The end point is a mining company that uses its own power plants and its own chips, with custom made power supplies and cooling that potentially reuses the heat in some way. The second is that mining is vulnerable to forced exclusion that can increase revenue per hash by orders of magnitude: one that's consensus based, and another economically based which can force a consensus-based exclusion. Controlling 51% of hashrate means that every other miner can be ignored, almost doubling revenue per hashrate. However, it's actually worse - because as competitors close, the dominant entity can reduce its active hashrate to a level just above remaining competitors, until nobody else mines, at which point mining can reduce to a very low level, just enough to keep random small miners from winning. In the case of an attack full hashrate is utilized, ensuring it fails. By the virtue of nearly ~100% of revenue being profit, the entity can amass and unassailable amount of idle mining hardware. Economic exclusion means that it's possible to intentionally mine at zero profit to drive difficulty too high, ensuring others turn off. It's a strategy for a biggest miner that doesn't have majority of mining hardware, but by the virtue of being the largest entity has the lowest unit costs. Of course, such an entity would have absolute censorship power. It's the lowest energy point of the system - because while it's in principle possible to replace such an entity, it can be only be done by an even bigger entity, only changing the name at the top, but still retaining full centralization. Those design flaws ensure PoW is certain to centralize, given time. The process is already well advanced - it started with individuals mining on their home pcs. Now miners are buying power plants. PoS has next to zero economies of scale (just the negligible fixed cost of a computer used for staking), and there's no potential of forced economic exclusion - running cost are negligible, so while more stakers mean profit rate goes down, it can never force a loss. Additionally, while it's not implemented yet (at least I'm not aware of anything), the fact it's a semi-synchronous protocol also allows for automated censorship detection - with appropriate punishments. That's because active nodes would be able to see correct messages that should have been included, but aren't. This is fundamentally impossible in PoW, as it's a fully asynchronous consensus system. Socially, PoS is as decentralized as coin distribution - which for some networks is a joke - especially Solana which only sold 1.6% of its initial supply to the public - probably the most centralized L1 coin in existence, controlled by just few VCs. Ethereum sold 83.33% of its initial supply (72M) in a public kycless sale, since then 42M eth have been mined. Supply is very well distributed among thousands of mostly tech nerds that bought before the current boom. As recently as in March 2020 one eth could be bought for $90. This is the most perfect population achievable for resistance to government interference. In contrast, for already mentioned reasons, mining is already controlled by big companies. Censorship is a more realistic risk from regulations forcing miners to censor. With PoW, there's no defense except moving to a different country - because it's impossible to hide warehouses with industrial power connections, not to mention power plants. In reality, as long as regulations don't kill the network outright ('just' an OFAC blacklist, freezing coins from ransomware, theft, other criminal acts) - and these regulations are enforced in places with cheapest available electricity - miners would comply. Once those miners attained a sufficient majority, laws would force them to orphan non-compliant blocks. PoS staking is trivial to hide - it's just a computer with a network connection. The whole network could be made anonymous by utilizing onion or garlic routing. Regulations would be impossible to enforce. In conclusion, PoS is superior to PoW in every single fundamental factor mentioned in the article, especially censorship resistance. I don't agree that complexity itself is a factor for or against: complex things are certainly harder to build, but once finished and proven to work that becomes irrelevant - only the functional differences remain. There's only one real advantage of PoW over PoS: PoW is a coin distribution method, while PoS isn't. However, 90% of all bitcoins are already mined, so that argument is already very weak and becomes weaker with each day. At the end, these discussions are for nerds - the average person may just get the impression that 'person X is saying PoS is less secure' and be wary for a while, but given enough time of working well, ~nobody is going to care about the anti-PoS position. Additionally, belief in PoW is economically self-punishing: mining costs billions per year, ensuring that PoS supporters, as a group, are getting relatively wealthier to PoW supporters. A cost difference of double-digit billions per year is very hard to sustain over longer periods. It also means that a PoS network can continue working with next to zero buyers - while below some level PoW becomes hopelessly insecure (see eg. 51% attacks on ETC) - making PoS much more resilient to economic shocks.

phkahler 5y ago

I think the real problem these things need to solve is proof of time. The big issue with digital currency is double-spending. To get around that the first spend is generally considered the real one, but proof or work, stake, or other are used to indirectly time stamp a transaction. Bitcoin isnt a distributed ledger, it's a distributed notary. Everything (not just currency) will change when (if) a verifiable time stamp becomes available.

wmf 5y ago
VDFs help with this and are being used by some newer PoS systems.

cwkoss 5y ago

One of the most insightful and nuanced analyses of the blockchain space I've read in years. Some highlights: --- "When a hard fork happens, stablecoin custodians cannot recognize both sets of tokens as redeemable for their money, since there are now twice as many total tokens (two full sets, one for each fork of the blockchain). They have to pick which blockchain is the valid one in their eyes, for which they accept redemptions of their tokens for money. And whichever one they don’t recognize as valid, has its DeFi and other stablecoin value eradicated." --- "The biggest challenge with these proposals is that the more features you add to a blockchain on the base layer, the less “small and tight” it is, and therefore the less decentralized it tends to be. The question then becomes, are there shades of partial-decentralization that people will accept, in exchange for more features that the database can offer? And can those partially-decentralized blockchains survive attacks, disagreements, and other tests over the long term?" --- "And that’s not to say that all of the liquidity and price action is fraud. I don’t know how much is. It’s simply that, with the technology as it is, it is very difficult to distinguish what percentage is fraud and what percentage is real, and rising price action based on fraud can temporarily bring in real demand liquidity, making the difference between the two rather murky. This is not much of an issue for large cap liquid tokens but it’s potentially a big issue for non-fungible tokens." --- "Ethereum’s proponents often criticize (rightly) Solana as being too centralized, as their key defense for why Ethereum is better than Solana. But that puts Ethereum in a tight spot, because Ethereum’s proponents then have to criticize Solana as being too centralized, while also defending the fact that Ethereum has these centralized attack surfaces and greater complexity compared to Bitcoin. In other words, it has to justify what the right level of partial-centralization and partial-decentralization is, and that it has achieved this sweet spot." --- "The way altcoins market themselves, generally, is to highlight the shortcomings of Bitcoin as though it were old tech or “Boomer coin”, and then explain how they are better than Bitcoin. When you dig into them, however, it turns out they are making tremendous trade-offs in one area to achieve additional capability elsewhere. They are sacrificing some degree of security, decentralization, auditability, and so forth, in order to achieve things like more features, more speed, or more throughput. And now the same thing is happening to Ethereum; newer smart contract chains offer greater efficiency in exchange for more centralization, and criticize Ethereum for not sacrificing more decentralization to scale faster."

pezzana 5y ago

> So, it’s [Ethereum] a big operating system powered by crypto tokens, for the purpose of moving around… crypto tokens. This is the thing that few authors understand about Ethereum. The main use case is creating new tokens and trading them, and this was clear from the beginning when Ethereum was created as an alternative way to do Bitcoin colored coins. This is not entirely useless. Speculation is a "use" after all. But as the article lays out, such uses are likely to be dwarfed by uses around censorship-resistant base money. Especially with the ways in which the worlds major government-backed currencies have been weaponized. > Ultimately, it partially depends on what governments want. Smart contract platforms with centralized attack surfaces can only exist at the pleasure of the government, so it comes down to how much regulatory crackdown they get vs how much regulatory approval they get. Another point that authors seem to really not get. It's all memes and good times until governments discover there's a casino operating out back that's not paying tribute. We haven't so far seen the effect of a western government clamping down hard on this, but if it comes, it will come to "stable" coins first. And as the author notes, the probable success of such clamp downs positively correlates with the degree of centralization. Many seem to have forgotten Liberty Reserve. https://en.wikipedia.org/wiki/Liberty_Reserve https://en.wikipedia.org/wiki/Liberty_Reserve That precedent should give the oligarchs running a proof of stake chain such as Solana, or eventually Ethereum, reason for caution.