Terra Collapse Shows Why Proof-Of Stake Sucks | ZeroHedge


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Terra Collapse Shows Why Proof-Of Stake Sucks | ZeroHedge

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As the Ethereum blockchain edges closer towards adopting Proof of Stake (PoS), there's been a lot of debate around the alternative consensus algorithm. Supporters of PoS say the main benefit is that it avoids the incredible energy consumption associated with Proof of Work (PoW), the mining algorithm made famous by Bitcoin. But those sitting on the other side of the fence say that PoS results in greater centralization and therefore undermines the reasons why crypto exists in the first place. 

Pavol Rusnank, co-founder of Satoshi Labs, the company that develops the Trezor hardware wallet, recently argued that the PoS consensus model is comparable to how the existing fiat monetary system operates. According to him, it has a critical flaw in that it allows the largest stakeholders to establish a near-monopolistic level of control over any cryptocurrency that adopts it.  

Proof of Stake is how Fiat works. The ones with most stake control the validation rules and they receive a reward for doing so. Once you acquire a large stake, there is no way for smaller players to take you down. Proof of Stake is not a step forward. It's a step back.

-- Pavol Rusnak ✊ ∞/21ᴍ (@pavolrusnak) April 29, 2021

Rusnak's tweet came in reply to Bitcoin developer @notgrubles, who said earlier that banks are going to love Ethereum 2.0 when it switches to PoS, because it will allow them to print indefinite amounts of fiat and buy more ETH. Through this, @notgrubles said, they could ultimately seize control of the world's second-most famous blockchain. 

Rusnak added that the major weakness of PoS is that the actors with the most dominant stakes get to determine how the system functions. In this way, they are responsible for the way transactions are verified, and can dictate how much new money is created. 

Concerns that PoS erodes decentralization are nothing new. Last year, Twitter founder Jack Dorsey made a similar point, saying that PoS cryptocurrencies are highly centralized and therefore less secure than PoW-based coins. Critics of Ethereum's shift from PoW to PoS say it will lead to centralization, with a handful of validators having control of who processes the transactions, which transactions are processed, and what future upgrades will be made. 

The problem with Ethereum's PoS is it will rely on validators who are chosen at random to validate new transactions, based on how much capital they're willing to stake. To be eligible to validate blocks on the Ethereum network, it will be required to stake a minimum of 32 ETH, or around $63,000 at the time of writing. 

It's a not inconsiderable amount of money that rules out the vast majority of Ethereum's users from participating. Thus, the only people who will be able to validate Ethereum's network will be the early adopters - so called whales - and institutional investors that have millions of dollars worth of assets under their control. 

One of the biggest critics of Ethereum's shift to PoS is none other than Dr. Craig Wright, the computer scientist who claims to have invented Bitcoin using the pseudonym Satoshi Nakamoto. In a 2019 post on Medium, Wright argued that if Ethereum does switch to PoS then ETH will effectively become an "unregistered security token" that falls under the control of a limited number of stakeholders. 

"Moving to a proof-of-stake system allows the top 1% of active holders to control the entire system," Wright warned. 

No Decentralization, No Transparency

The dangers of a "decentralized" network becoming too centralized were brought into sharp focus earlier this month with the sudden and shocking collapse of the Terra blockchain and its LUNA utility token and UST stablecoin. The disintegration of Terra and its ecosystem was one of the most catastrophic events in the history of the cryptocurrency ecosystem, and saw LUNA, formerly a top ten coin in terms of its market capitalization, see its value fall from just over $119.18 per coin at its peak, to a fraction of a fraction of a cent. Meanwhile, UST, an algorithmic stablecoin that's supposed to stay pegged to the U.S. dollar, bottomed out at just 13 cents per coin. 

Exactly what happened to Terra has been the subject of intense debate and it's still unclear if the depegging event was due to a coordinated attack, a rugpull by its backers, or something else entirely. 

One of the reasons for this debate is that the Terra project lacked transparency, said Victor Young, Chief Architect at Analog, which is building a blockchain powered by the alternative Proof of Time consensus model. According to Young, Terra wasn't decentralized at all, despite its claims to the contrary. 

"Terra did not reflect this as Do Kwon constantly silenced critics who pointed out flaws in the stablecoin's algorithm," Young said. "The coin was not decentralized at all. Terra is built atop of Cosmos and relies on a variation of PoS, called Delegated Proof of Stake. DPoS relies on a few sets of validators to agree on the transactions to be confirmed." 

Research from The Block shows that the Luna Foundation Guard deployed more than 80,000 BTC (worth over $3.5 billion) from its treasury to try and prevent UST's collapse, but conclusive evidence of what happened to these funds is not yet available. Meanwhile, conspiracy theories have since sprang up, suggesting (without any proof) that the LFG in fact used these funds to bail out so-called "whales", namely the largest (institutional) holders of LUNA and UST. The LFG has denied this

Young said conspiracy theories are to be expected given the lack of transparency around Terra. 

"Can we trust that $3.5 billion in BTC was truly deployed to steady the ship?," he asked. "In my view, any discourse regarding what caused the UST to crash cannot ignore that the stablecoin was not pegged on any non-crypto collateral. Instead it used a pairwise token system where users swapped LUNA to UST and vice versa for a guaranteed price of $1, relying on a weak and manipulative consensus mechanism." 

Decentralizing Proof of Stake

In order to move away from energy-intensive PoW and maintain decentralization, Young argues that an entirely new consensus mechanism is required, based on the concept of "Proof-of-time" pioneered by Analog. 

Proof-of-time is a decentralized consensus mechanism that eliminates the barrier to entry present in most PoS systems. It works by randomly selecting "electors" that run so-called "time nodes". Electors are chosen based on a mechanism that involves a fixed stake and a ranking score. The ranking score is a grading system in which each validator builds up a score over time, based on their historical experience, or more specifically the accuracy with which they have validated previous event data. 

Under the fixed stake system, each elector is required to stake an equal amount of ANLOG tokens to participate in the network. It's far more inclusive, as richer network validators cannot simply "out stake" other participants to wrest control away from those who stake lower amounts.

For each new block on Analog's Timechain, electors are selected through a randomized process that incorporates a verifiable delay function based on its fixed stake and ranking score. 

Every time a new block on the Timechain is created, each of the time nodes will first determine if it has been chosen as an elector or not. If chosen, it collates the event data, verifies the publisher's signature and then generates VDF proof. The hashed transaction is then broadcast to the other time nodes. This is followed by a vote where a committee of 1,000 other time nodes determines the validity of the transaction. If more than two-thirds agree on it, the block will be approved and added to the Timechain. 

Young says Analog's Proof of Time consensus is more inclusive, and therefore more decentralized than either PoW or PoS. With PoW blockchains such as Bitcoin, miners are required to invest in thousands of dollars worth of computer hardware. As a result, smaller players are disenfranchised, he said. It's the same story with PoS, where only a few big-spending nodes have a chance of being chosen as validators.

According to Young, the collapse of Terra shows us why the narrative of decentralization is so important for blockchains. He said Terra's lack of decentralization meant that only a few elite validators on its network were able to dictate how the Luna Foundation's BTC reserves would be deployed. This is why there's so much skepticism about what it actually did with those funds, he maintained. 

"At the end of the day it was probably Do Kwon himself in complete control of the reserve distribution," Young said. "Who knows what he did with it? This is exactly why PoS sucks." 

Young said that such a situation would never be able to happen with a blockchain running a Proof of Time consensus because it's far more accessible to users. Analog's Timechain is designed in such a way that any user with a fixed stake, who patiently waits to accumulate a ranking score can propose and confirm blocks on the Timechain. In this way, he argued, it's far more decentralized than any PoS mechanism can ever be. 

"We built Proof of Time to deviate from the more centralized and corrupt DPoS that Terra was running," Young said. 


Contributor posts published on Zero Hedge do not necessarily represent the views and opinions of Zero Hedge, and are not selected, edited or screened by Zero Hedge editors.

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