black and red caliper on gold colored bitcoin

The Flaws of Proof-of-Stake: Why It’s a Defective Cryptosystem

Read Time:2 Minute
  • Proof-of-stake algorithms implemented as distributed consensus mechanisms in the base layer of blockchain networks are defective cryptosystems by nature.
  • By trying to improve the energy efficiency of blockchains using proof-of-work in the consensus mechanism, proof-of-stake is introducing a set of significant new flaws in both monetary and governance models.
  • Such systems are plutocratic, oligopolistic, and permissioned.
  • Initial supply and distribution are fundamental problems to tackle and consider when designing a cryptocurrency.
  • Proof-of-stake essentially means proof of wealth.
    Block rewards are directly linked to the amount of coins participants own and stake.
  • The more coins stakeholders have, the more they will be earning in the future.
  • Stakers receive coins, and miners earn coins.
  • There is a centralized creation of the initial supply, followed by its distribution, and ending with stakeholders (shareholders) receiving block rewards (dividends) by holding coins (stocks).
  • Blockchain networks implementing proof-of-stake algorithms as distributed consensus mechanisms are oligopolistic cryptosystems.
  • In oligopolies, the supply side is small, and it is non-competitive. There is no natural selling pressure for the recipients of block rewards.
  • However, miners of blockchain networks implementing consensus mechanisms relying on proof-of-work are, in a certain way, forced to partially sell their rewards to cover costs (pay equipment and electricity bills).
  • That is when newly issued coins enter the market — there is a market distribution coming from the participants engaged in the opportunity cost that the mining process offers.
  • Contrarily, in proof-of-stake systems, stakeholders are incentivized not to sell their coins due to the perpetual oligopoly and the plutocratic governance model.
  • For a blockchain to not be dependable on external trusted third parties nor central authorities, it must be permissionless.
  • In blockchains using consensus mechanisms based in proof-of-work, anybody can become a node operator or a miner, and consequently, participate in the distribution of coins and in the validation and verification process by running a full node without having to own any stake.
  • Conversely, in blockchain networks using proof-of-stake as a consensus mechanism there is only a single way for users to join the network, by buying coins from coin owners willing to sell.
  • There is no possibility that somebody without coins can participate in the reward distribution, in the process of securing the network, or running a node.
  • Moreover, the total amount of nodes is limited by the network rules and its supply, preventing a major decentralization, and making many users dependable of external node operators in view of the minimum requirements to run a node.
  • One of the main concerns of oligopolies is that their members may block new entrants.
  • In this case, with a central authority managing the initial supply of the cryptocurrency, attached to the fact that the system is plutocratic and oligopolistic, this centralized authority is the one dictating who can join the network.
  • Therefore, proof-of-stake implemented in the protocol layer of a blockchain network only enables a permissioned system.
  • By trying to improve the energy efficiency of blockchains using proof-of-work in the consensus mechanism, proof-of-stake is introducing a set of significant new flaws in both monetary and governance models.

In conclusion, it is clear that proof-of-stake algorithms are defective cryptosystems by nature. By trying to improve the energy efficiency of blockchains, they are introducing a set of significant new flaws in both monetary and governance models. Such systems are plutocratic, oligopolistic, and permissioned.

black and red caliper on gold colored bitcoin
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