Proof of Stake (PoS) and Delegated Proof of Stake (DPoS) cryptocurrencies have been touted as the future of cryptocurrency since they are more energy efficient than Proof of Work (PoW) cryptocurrencies and are more scalable. However, they lack decentralization, as proven by the fact that major crypto exchanges just coordinated to take over the Steem blockchain.
Steem uses the DPoS protocol, where the top 20 wallets which stake the most coins are declared witnesses. These 20 witnesses are in charge of verifying all transactions, and therefore these 20 witnesses have the power to make changes to the Steem blockchain.
Recently Justin Sun and the Tron Foundation purchased Steemit Inc., as discussed in a previous article on Crypto.IQ. The community feared that Justin Sun and the Tron Foundation would exert centralized control over the network by using Steemit Inc’s large premine of Steem, and would use that control to take Steem off of its native blockchain and turn it into a Tron (TRX) token, in addition to migrating all Steemit users onto the Tron (TRX) network. Indeed, the Tron Foundation explicitly announced these intentions.
In order to prevent this, the top 20 witnesses conducted a soft fork which took the voting rights away from Steemit Inc’s coins, which is approximately 20% of all Steem and enough to control the network. Previously Steemit Inc. had not used these coins to control the network, but now the Tron Foundation owned the coins, and the Tron Foundation made no promises to not use the coins for voting purposes.
A little over a week after that soft fork, the Tron Foundation and Steemit Inc., which is now just a subsidiary of the Tron Foundation, hit back via coordinating with the major crypto exchanges Huobi, Binance, and Poloniex.
These three exchanges collectively staked an overwhelming 42 million Steem Power, which was enough to knock off all 20 of the top witnesses. Essentially, Steemit Inc. and the Tron Foundation replaced all 20 of the top witnesses with their own witnesses, and forked the blockchain to get rid of the soft fork which locked up Steemit Inc’s Steem premine.
Steemit Inc. and the Tron Foundation justified this overtly centralized action by saying that the community’s soft fork was illegal and criminal, basically saying that the community had no right to take away the Tron Foundation’s newly purchased voting power.
Steemit Inc. also declares that this overt centralized control of the Steem blockchain will continue for 4-6 weeks, although it could of course continue forever. Also, Steemit Inc. says Steem won’t be merged with Tron (TRX) unless the community wants it, which does not seem true, since Steemit Inc. just declared that the community’s top witnesses are criminals.
The truth is that Steemit Inc. and the Tron Foundation can now do whatever they want to the Steem blockchain, since now they have overwhelming centralized control.
The bigger story here is that Steem held on exchanges was used by the Tron Foundation and Steemit Inc. to take over the Steem blockchain.
Essentially, most Steem HODLERS do not use a Steem wallet to hold their coins, and instead use an exchange. This makes sense considering that it would be tedious to download a wallet just for Steem, and it is much easier to trade on the Steem market if the coins are already being held on an exchange.
Unfortunately, this results in most of the Steem supply being held on exchanges. Theoretically this Steem is owned by a multitude of individuals, and these individuals should decide how the Steem should be used for voting.
However, the reality is that all of the Steem on each exchange is in one mega wallet, and the exchange has control of this wallet, giving the exchange the ability to stake the Steem and vote on the Steem blockchain without the owner’s consent.
As proven by this incident, a few major crypto exchanges coming together and using customer’s Steem to vote is enough to take over the Steem blockchain. Of course, it can be considered morally wrong for exchanges to use customer’s Steem to vote without consent, but that did not stop the exchanges in this case.
Extending this lesson, any DPoS cryptocurrency could be taken over in the same way if exchanges coordinated. Therefore, DPoS cryptocurrencies like EOS, Tezos (XTZ), Cardano (ADA), and Tron (TRX) are all at risk of being instantly centralized due to most of the voting power residing on exchanges.
Further, any PoS cryptocurrency could be instantly centralized in the same way. If exchanges hold more than 50% of a PoS cryptocurrency’s voting power and stake it, they can make whatever changes they want to the blockchain.
Thus, this incident where Steemit Inc. and the Tron Foundation eliminated the top 20 Steem witnesses and substituted their own witnesses and forked the blockchain via coordinating with major exchanges is proof that DPoS and PoS cryptocurrencies lack decentralization, and are therefore fundamentally flawed.
PoS and DPoS claim to be the future since they use negligible energy compared to PoW for securing the network, and they have a much higher throughput of transactions and are far more scalable. However, these benefits come at the expense of decentralization. Indeed, after this Steem incident it is clear that any PoS or DPoS cryptocurrency could easily be taken over by a few major crypto exchanges working together.