Pitfalls of proof of stake consensus part 1

By Lumai Mubanga

Aside from addressing many bottlenecks associated with proof of work, proof of stake is not without its flaws. For instance, it seem to have introduced its own problems such as the “Rich getting richer”, liquidity issues and the possibility of one changing the history of the block chain. This article will address these pitfalls in detail.

Rich get richer

Validators who have more wealth can stake more and increase their chances of creating the next block. This ensures that they keep receiving the reward and obviously their wealth. A classic example of this implementation of proof of stake is Ethereum’s Casper protocol. That protocol takes this to the next level by enforcing a minimum stake value required to validate blocks. The argument is that it takes the issue to extremes and promotes centralization further, but only time can prove that.

Related to this is that, in proof of stake the amount of voting power is tied to how much stake one has. In PoW, anyone can buy more ASICs and Begin participating in the network. However, in PoS, all the voting power is internal to the system so one can only obtain stake if the current stakeholder sells his share of stake. This means that if a single actor is able to obtain 51% of the cryptocurrency, there is no way this power can be taken back to the network. In proof of work, dislodging 51% power would only require more computation through more honest mining thereby reducing the relative power of the malicious actor. In proof is stake though, the only way to reduce this power is to decrease relative amount of cryptocurrency the dishonest validator has. Unfortunately, the only way is when the 51% stake holder willingly sells his stake.

Liquidity problems

This is another problem that was introduced by the proof of stake algorithm. Validators are required to lockup their funds in order to have a stake in the network. The actual amount of funds available for transactions is therefore much lower. This negatively impacts the liquidity of the cryptocurrency itself, reducing the amounts of funds available on one hand and increasing the price and demand on the other. Because of this, validators are more incentivized to hold onto their funds and sell it when the price increase rather than participating in the network.

Rewriting block chain history

This is the third problem. Someone can rewrite the history of the blockchain if someone with a huge share of stakes sells their private keys. By obtaining such a large stake in the network, they change previous transactions on a different chain.

Aside from these pitfalls of PoS discussed, there exists specific attacks associated with the PoS system. These will be discussed in a future article.