Before focussing on the title, let us first see what a Proof of Stake consensus mechanism in a blockchain means. Proof of Stake is when a miner is able to mine or validate transactions in a block based on their current holding of the particular altcoin. So, the more percentage of the altcoin you hold, the more is your mining power. This is contrary to the Proof of Work consensus mechanism used by Bitcoin where the mining power is proportional to the computing power that a miner holds.
UPDATE : Karachain has been shut down, as has always been communicated, we were anyways not going for any fundraising round in the near future, which still stands in place.
Why would a blockchain use Proof of Stake (PoS) as their consensus mechanism?
A major drawback of the Proof of Work (PoW) consensus mechanism is the requirement of heavy computing power to validate transactions in a block. This needs huge areas of mining equipment placement, proper Internet connectivity and proper cooling facilities leading to huge electricity requirements et. al.
This is humungous waste of resources just for mining or validating transactions in a block.
On the other hand, a PoS consensus mechanism does not need any such explicit physical resources — rather only the availability of holding of the particular altcoin in the miner’s wallet. The more, the merrier, for the miner. It is very similar to having more say in a decision if you’ve contributed more.
Focussing back on the title
During our research at Karachain yet, we have gone through hundreds of white-papers, documents, articles, blogs — to find an answer to what would be the best implementation of a consensus mechanism. Even though we still haven’t arrived at a perfect answer to the above question, what we have been able to ascertain is why a pure PoS consensus mechanism implementation may not be the best bet in terms of reliability. Let us see why.
Staking may not address malicious intentions
This is a major disadvantage of the PoS consensus mechanism. Any stakeholder who is staking their holding of the altcoin may very probably have malicious intentions. They may, for instance, vote for both forks of the blockchain. If a validation mechanism is not present, this would then be extremely undue advantage — not only of the blockchain, but also of the other users who have a way lesser holding or have only voted for a fork, which must be the ideal case.
This cannot happen in the case of PoW, or even if a mix of both, PoS and PoW is implemented. If you mine both sides of a fork, you are simply wasting energy, not profiting from it.
Hence, in such a case, we can clearly fathom why a pure PoS implementation may not be cent-percent reliable.
The problem of Founders having a huge stake and a vesting period
We all understand that a significant chunk of the total tokens is available with the team, specially with the C-level. Now, the top-level management have a vesting period associated with their tokens. This is implemented so that founders are there to stay, and also work equally deliberately for the success of the project for a sufficiently stretched term.
When Proof of Stake consensus mechanism is concerned, the availability of a large portion with the founders makes the project vulnerable to a veto. This is because the founders or the C-level may tune or bend the project and it’s associated activities based on their own preferences. This kind of veto is certainly very unacceptable in the case of blockchains. Blockchain is all about decentralisation, and such kind of concentration of power kills the very essence of the blockchain technology.
Hence, the vesting period which is introduced in the best interests of the project may lose its essence when a pure PoS mechanism is implemented.
Hoarding to have commercial benefits
Holding (or Hodling, if we may say) of the coins by the stakeholders has a very promising effect on a project as it shows that the contributors have faith on the project. But, if a pure PoS mechanism is implemented, this very concept may turn to hoarding, where contributors only hold to foster specific commercial interests. This comes as equally negative to the project.
What we see is that a pure Proof of Stake consensus mechanism based blockchain may face exploitation of certain features. There are some alterations and enhancements like Delegated Proof of Stake as well as Hybrid PoS and PoW which have solved the problems associated with both PoW as well as Pure PoS.
However, if the initial distribution of funds is done in a decentralised way, example via airdropping, then we have a solution to the major drawback of pure PoS. Hence, it is of umpteen importance to analyse the use cases deeply before a blockchain decides to implement a pure Proof of Stake consensus mechanism from the genesis block itself.