On June 18th, we held a conference call with five thought leaders (see invite below) on Proof of Stake (PoS) to discuss the advantages of PoS over Proof of Work (PoW), as well as the different flavors of PoS that are emerging. You can watch the entire one hour call below:
Or you can read our five highlights:
1. Proof of Stake is the Prevalent Consensus Mechanism For New Blockchains
While the market cap of existing Proof of Stake blockchains is relatively small today (around $6B per Staked, others have it at $15B+), the significant majority of new chains (e.g. Dfinity, Near Protocol, Harmony, Polkadot…) are Proof of Stake. As existing chains grow in value, as new PoS chains list (e.g. Algorand), and as Ethereum migrates to Proof of Stake next year, the market cap associated with Proof of Stake blockchains is poised to explode (likely far beyond the $30B projected below).
2. Proof of Work Was A Great Early Solution, But Proof of Stake Offers Many Compelling Advantages
The many advantages offered by Proof of Stake highlighted by the speakers include:
- Better incentive alignment between the players — Jacob (with Tezos) stated that that the better alignment between holders and validators is the biggest advantage of PoS.
- Better for coordinating governance
- Less competition between players in the same ecosystem
- Diseconomies of scale — ASICS and Bitmain game the PoW consensus algorithm due to the inherent economies of scale in mining
- Easier to customize security mechanisms — like slashing
- Attackers can be forked out of the system — unlikely to ever be used, but the nuclear option makes it less likely they’d acquire massive amounts of stake
- Less Energy Use — PoS is an environmentally conscious algorithm using trivial energy compared toPoW.
Proof of Stake Does Have Disadvantages
There is no nirvana in blockchain. It’s largely a series of tradeoffs. As such, the Proof Of Stake disadvantages include:
- Proof of Stake is early relative to PoW. Most have been launched in the last year or so, with many yet to have launched. So they’re simply less battle tested.
- There’s a risk of collusion between stake holders
- PoS’s that use bonding can be capital inefficient
- If your not up 100% of the time, if you don’t produce blocks, you’re not getting paid.
- You have to be highly secure. If you or your validator double sign a block, which is largely due to hacking, you can lose part of your stake.
There Are Many Flavors of Proof of Stake
From Medium Post “Different Types of Proof of Stake and Staking”
Just looking at the companies on the call:
Tezos- Is “Liquid” Proof of Stake, where blocks are proposed and “endorsed” by “bakers” (i.e. stake holders). It’s “liquid” because any user can delegate or transfer their rights to participate in PoS to other users with sending their funds (custodially) to others. They do so without the risk of getting slashed. So its different from Delegated Proof of Stake (DPoS) where there is a small fixed number of block producers that are controlling things.
Algorand- They refer to themselves as a “Pure” Proof of Stake, where they rely on the entire population of the ecosystem, just needing the majority of players to be honest. Therefor, Algorand doesn’t need “penalties” like slashing, so they avoid the capital inefficiencies of bonding. It also eliminates forking
CasperLabs-Is based on a design by Vlad Zamfir in the early days of Ethereum called Casper Correct by Construction (CBC) which rethinks how blocks are created and propagated on a blockchain. It enables sharding, which enables greater scalability, while remaining decentralized. Importantly, CasperLabs is not tied to one programming language.
And this is just the tip of the iceberg of what’s to come.
There Are Hybrid Proof of Stake Consensus Mechanisms
While the call was focused on PoS, it’s interesting to note that there was some discussion of hybrid PoS models, most notably “Work Tokens” which utilize aspects of both PoW and PoS:
If you’re not excited about all the innovation going on in crypto, and Proof of Stake in particular, you’re dead inside.
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