Proof of Stake vs. Proof of Work

At the 1:13:00 mark of this interview Craig Wright talks about the problem of oligopoly with proof of stake.

From Wikipedia:

Proof-of-stake (PoS) is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS-based cryptocurrencies the creator of the next block is chosen via various combinations of random selection and wealth or age (i.e. the stake). In contrast, the algorithm of proof-of-work (PoW) based cryptocurrencies (such as bitcoin) uses computationally intensive puzzles in order to validate transactions and create new blocks (i.e. mining).

Over the past year, the narrative that PoS is a more efficient way to secure a blockchain because it means you avoid the energy costs of mining that you have in proof of work.

Proof of stake systems incentive users to hold their coin and have those nodes validate transactions (for Dash masternodes you must have 1000 Dash and will return 7.5% annually.)

Many people view proof of stake as a better option, but in this interview, Craig Wright focuses in on a problem with PoS that I haven’t heard discussed before–centralization. Over time, a small group of users ends up controlling more and more of the coin over time and more and more of the voting power because it is not a competitive system.

With proof of stake, there is no ongoing cost, no competition, no reinvestment. You simply stash your coins and earn a reward for doing so.

At any given time there can be large groups of miners in a proof of work system, but the competitive nature of proof of work means that the large established players are unseated by innovative upstarts. Like in the market, the Kodak’s and Xerox’s of the mining work are replaced by Facebook, Google, or Apple. It is competitive and requires continual reinvestment.

There are capital costs to become a miner in a proof of work system, but it is a much fairer system in the long-term because those that are innovating and doing the most work to secure the system have the voting power. The electricity costs are an important investment in the security of the network.

With proof of stake, it is simply the early adopters with the largest amount of coin that will continually hold the power and no longer have to invest capital to maintain their stake. They can simply sit around and accumulate more.