Understanding Proof-of-Stake: Suggested Benefits, Part 2

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Coinmonks

6 min readMay 30, 2018

This post is Part 2 of my series on Ethereum’s planned upgrade to proof-of-stake (PoS). If you haven’t read part 1 yet, click here.

In part 1:

I explain what Casper is,
Explain how PoS aims to use deposits of Ether to increase security
Explain how PoS aims to reduce energy consumption and
Explain how PoS is seen as a necessary transition before we can increase the speed of the Ethereum blockchain.

In Part 2, I will explain how proof-of-stake aims to reduce mining centralization and aims to enhance the security of blockchain technology.

Reducing Mining Centralization

The Ideal Mining Situation

Ideally, you want many miners evenly spread out over many countries all over the world. Ideally these miners all have about an equal chance of validating blocks. The reason that these conditions are desirable is because it reduces the likelihood that someone or a group of people can successfully attack the network.

If we are going for decentralization, why so centralized.

The current state of proof-of-work mining is far from the ideal situation depicted above. This is because proof-of-work mining has incentives that naturally lead to mining power becoming concentrated into fewer and fewer hands as time goes on. Mining is currently dominated by industrial sized operations that are continually gaining a larger influence over the hash rate compared to smaller operations.

Currently in both Bitcoin and Ethereum, 3 mining pools collectively control over 50% of the hash power of both networks. The chart for Bitcoin mining is on the left. Ethereum mining is on the right.

Centralized Mining is a Product of Economies of Scale

Centralization in PoW mining occurs because there are strong economies of scale in this industry. The easiest way to explain economies of scale is to claim that it is all about getting bigger discounts on the things you need to run your business as you increasingly buy larger quantities of these things.

For instance, let’s say that you received a 10% discount for ASICs (specialized mining hardware) when you purchased 1000 of them in a single purchase. If you decided to purchase 2000 ASICs, an ASIC manufacturer is likely to give you a 15% discount this time. When you grow your mining operation, you are not only creating more Bitcoins, you are also squeezing more profit out of each Bitcoin you produce.

Note: The percentages and quantities mentioned in the previous paragraph are not exact or accurate. I only used these numbers in order to demonstrate the concept of economies of scale.

If you were an industrial sized miner, here is an incomplete list of things you would have to spend money on:

ASIC hardware (specialized mining equipment)
Electricity used to power your ASICs
Cooling equipment that you need in order to make sure your ASICs don’t overheat
Electricity to power your cooling equipment
Facilities used to house your ASIC machines
Other things

In most situations, economies of scale kicks in when you consume the items on this list in larger quantities.

An industrial scale mining operation. It is likely that the man in the photograph is an employee of the mining operation.

It is common to hear industrial scale miners being demonized for having so much influence over the network, but I think it important not to judge them for it. The incentives are literally to go bigger faster or get left behind. For PoW, going bigger is the most logical option.

PoS Removes Economies of Scale from the Equation

If successfully implemented, PoS will take economies of scale out of the question. PoS eliminates economies of scale because it does not need to use the sunken cost of electricity in order to motivate validators to behave. PoS uses Ethereum security deposits instead.

In PoS, your likelihood of proposing a block is proportional to the amount of Ether that you submitted for your deposit. If the total amount of ether deposits made by all validators is 10 million ETH and you have submitted 1 million of that ETH, your likelihood to propose a block is 10% of the time.

This removes what is often referred to as the “industrial arms race” out of securing the network and also provides a fairer system for smaller PoS validators (aka PoS miners).

(If you are interested in reading more about the dark side of PoW mining, check out this article. Many insider secrets were recently made public.)

Making It More Expensive to Attack the Network

PoS aims to make attacking the network more expensive for attackers compared to PoW.

PoW attackers aim to control over 50% of the hash power in order to attack the network. If an attacker with 51% of the hash rate has the goal of destroying the confidence in the Bitcoin network, they can do so by continually reverting the history of the blockchain. After an attacker reaches 51% hash power, the cost of continually attacking the network is now only the cost of electricity.

Vitalik tweeting about the spawn camp attack.

Even once the entire Bitcoin community becomes aware of the attack, they cannot stop the attack unless they create a hard fork that invalidates Bitcoin’s ASIC hardware.

In PoS, only validators with security deposits will be able to propose and add blocks to the network. If a validator attempts to attack the network, their security deposit will be deleted. In addition to losing their security deposit, they will no longer be able to attack the network because they cannot validate transactions without a deposit. If an attacker wants to attack the network once again, they will once again have to submit millions of dollars worth of Ether and in order to make another attempt.

In PoS, the marginal cost of attacking the network is no longer just the cost of electricity; it is an entirely new security deposit.

Next Post: Problems with Early Versions of Proof-of-Stake

Ethereum is not the first protocol to attempt to use proof of stake as a consensus method. The protocols that attempted to use proof-of-stake were faced with 2 major problems; the nothing-at-stake problem and the long range attack problem.

In my next post, I will explain what these problems are and how Ethereum plans to address these problems.