Cryptocurrency. Immutable, incorruptible, and decentralized money, these core fundamentals are what most, if not all cryptocurrency protocols promise. An alternative to the extremely corrupt fiat currencies. One problem with these cryptocurrencies is, the potential for centralization by monetary incentive for securing the network. These consensus models, that were designed to protect and secure the network, could potentially be the protocols downfall.
To begin to understand the issues with these types of consensus models, we must define, firstly what consensus is, and secondly what types of consensus models exist.
A general agreement about something an idea or opinion that is shared by all the people in a group. Examples: The (general) consensus (of the group) was to go ahead with the plan. — Merriam Webster
That is to say, consensus is when a group of people come to full agreement on a problem or plan. When speaking about consensus in the context of cryptocurrency, we are speaking about how the confirmation of transactions are made. This meaning, consensus = network-wide agreement on the state of transactions.
Now that we have an understanding about what consensus is in general, and in crypto specifically, we must understand the different consensus models used today. For the sake of simplicity I will only be explaining PoW (Proof-of-Work) and PoS (Proof-of-Stake), though dozens of other exist.
Proof-of-Stake (PoW):
- PoW uses computing power to prove that you are not a fraudulent actor, and that you are invested in the network.
- The bar of entry for PoW is extremely high, the amount of computers and servers needed to turn profits is immense.
- PoW is extremely wasteful in energy and computing power, all miners work on the same problem while only one ends up solving it.
Proof-of-Stake (PoS):
- PoS uses financial assets you hold (or rather stake) to prove that you are not a fraudulent actor, and that you are invested in the network.
- The bar of entry for PoS is extremely high, the amount of money to even begin validating is immense.
- PoS is less wasteful in energy and computing power, one validator works on the each problem while only one ends up solving it.
Now that we have a vague understanding about what PoW and PoS are, let me reiterate the issues that arise, that could potentially create a more centralized network.
- Both of the consensus models provide monetary incentive to continue validating and mining.
- Both consensus models have high bars for entry.
Therefore meaning, the more you mine or validate, the more you will have the ability to mine or validate, the more capital you can raise in both situations directly impacts your ability to mine or validate more. This self feeding loop could potentially create a few parties that control more or all of the hash-rate.
* Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger’s maintenance and development. “Mining” is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again. — Investopedia
