The Future for Ethereum : Balancing Proof of Work with Proof of Stake

As Proof of Stake is nearing completion, many have speculated over whether the switch from Proof of Work to Proof of Stake will work.

The solution to any problem always resides in reconciling the extremes.

What are the two extremes?

• A crypto-nightmare which ends up being controlled by a few very powerful and concentrated mining pools, who also own most of the tokens, centralizing computing power in giant warehouses which drain electricity and spew out hot air into the atmosphere.
• A crypto-utopia where the network is fully distributed among all users, each one having an equal stake and staking the same amount, or pure egalitarianism.
• Both of these are paradise and hell because they are two extremes and neither can/should exist.

How do you reconcile the two?

Here is the general plan for Ethereum’s future.

First, let’s address the problem of Proof of Work. The issues are many but the main ones are: inefficiency and concentration/centralization. The electric consumption of Proof of Work has many worried, and rightfully so. But the problem is not in Proof of Work, but in where the work gets done and by whom.

Centralized mining will inevitably come to a dead end for failing to resolve the pressures that it has set in motion:

• Concentration of both machines and electric power is extremely risky (fire, accidents..)
• Due to volatility in the price of the tokens, yet a fixed cost for hardware and electricity, there is a high risk of negative return on investment.
• Draining the electric resources creates a pressure both on the side of public authorities and the general public. From public authorities due to the potential instability of the electric grid, from the general public, once electricity prices will skyrocket (some people not being able to afford to pay for electricity) and periodic breakdowns of the electric grid under too much stress.

More generally, centralized mining will simply carry too many risks, including political risks. While it is relatively easy to “conceal” private mining (mine crypto-currencies in your private home), centralized mining is completely vulnerable to a take-over by a public authority. Many crytpocurrency maximalists openly state they are here to “disrupt” the current financial system, some even extend that to the political system. The very last action of an old system that has control over the legitimate use of force when it is challenged to the point of dying, will be the hostile take-over of all of the centralized mining farms on its territory. And since the global financial system is… well… global, there will be no or very little countries where centralized miners will be able to hide once the financial system is on the verge of collapse. From then on, governments will meet internationally and coordinate in order to take control of most centralized mining facilities, and use them to generate most of the crypto-currency, or join the permissionless network of any target cryptocurrency and sabotage it.

Do not underestimate the power of the legitimate use of force!

What is the solution? The decentralization of mining. Each household should own 3–4 mining rigs or miners in their home. A broad reflection between companies and other entrepreneurs should be undertaken to see how best to re-utilize the electric energy lost during the mining process to provide heat in the winter and hot water in the summer. How to achieve that? Convince the government to pass legislation which exempts from taxation the cryptocurrency produced by mining with up to X number of miners, X number of watts of electric energy consumed. Why would the government do that? To give birth to the first giant world super-computer whose combined calculating power could be harnessed jointly by all governments for their own interests (provide online decentralized services, public research, virtual simulations, tamper proof databases…) and for the greater interest of society. It is also the “easy” way of providing a Universal Basic Income in the form of a crypto-currency, letting people choose whether to pay for decentralized online services or transfer the tokens into fiat to pay for goods or services that are not tied to the blockchain.

What about Proof of Stake? The big issue with Proof of Stake is the fact that it can end up in the hands of a few rich people and allow them to secure their grip on the network by earning a disproportionately high passive income from locking their funds.

What role should it play? Simply, Proof of Stake should help “ease” the burden on Proof of Work to secure the transactions in order to focus on actual number crunching for a purpose (decentralized apps, content, websites…). This is how it could work: any tokens mined would be split in two. Half would be paid directly to the miner, the other half would be used for Proof of Stake. The pay-out from the Proof of Stake would follow certain rules along these lines: half (25%) of the tokens used for PoS would be returned after 6 months with an interest of X% (to be determined). Half of the remaining half (12.5%) would be returned after 12 months with an interest of 2X%. And the last 12.5% would be returned after 2 years with an interest of 4X%. This mechanism would be replicated each and every month. Each month, 50% of the tokens mined would feed a PoS mechanism. Would this be an egalitarian Utopia? Not at all. Exchanges would inevitably happen and some people (especially the ones producing online decentralized content/services) will end up with more then the rest. So it’s a compromise between egalitarianism and so called “meritocracy”.

Why would governments agree to this?

They would benefit directly from setting up a stable decentralized database, and the “loss” in taxation revenue would be compensated by the new decentralized services/content that will emerge, which will reinvigorate their dying global financial system. It will also help stabilize their own fiat currency system (just like in Switzerland with the balance achieved by the Wir and the Swiss franck) given that power would be redistributed equally, thus posing no challenge to their own system. The global financial system will become more resilient since it will now be built on top of a more stable and more evenly distributed digital “currency” which could act as a safety net in case of a global/local fiat meltdown. Also, God only knows what such a super computer could enable Humanity to achieve… Which scientific breakthroughs it might facilitate…

What would the end result look like?

This would create the very first really decentralized super computer. The very last step towards a real revolution is the infrastructure allowing to separate screens from computer chips. Imagine that your next smartphone/notebook was nothing else but a WiFi/5G chip and a screen, all of the calculations would be done collectively by the mining network. You would pay “yourself” for using your phone, unless you consume more tokens running the dapps then the tokens you mine, and you would only need to pay for the cost of data transfers to and from your phone/notebook. Within that super-computer, you could indeed have multiple “Universes” as Vitalik has planned, to make sure that the super-computer is resilient to crashes and bugs. You could for instance have “backups” of all of your data in multiple parallel Universes, and so if your phone “crashes”, it would automatically load a backup from another Universe.

Finally, remember, balance is always somewhere in the middle: follow the golden mean.