Whose Stake Is It Anyway?
By Joshua McDougall on ALTCOIN MAGAZINE
Proof of Stake (PoS) has become a strong candidate for the consensus algorithm of choice for blockchain networks looking for improved performance, decreased reliance on hardware mining, and on-chain governance. While Proof of Stake is not necessarily a new paradigm, the value of assets being protected by this consensus strategy has certainly increased with new networks such as EOS and Cosmos gaining in popularity, and established chains such as Ethereum envisioning a migration from Proof of Work (PoW) to PoS as a necessity from very early on in their roadmap.
As PoS networks gain in popularity, the infrastructure provided to their users naturally improves too to meet this new demand. One notable example is the expansion of custody platforms to provide safe storage of PoS assets such as dash (Dash) and atoms (Cosmos Network), opening up these users to financial basics such as safe third party storage, exchange services, and even digital-asset collateralized loans.
The custody of digital assets has traditionally been focused on the safekeeping of these assets while they are at rest. Customers are provided with an address in which they can send their assets, and those same assets will only be released by the custody provider when certain pre-established conditions are met and aggressively verified. At any moment, a custody customer could review the respective blockchains ledger and verify that their funds are still assigned to the same address and, as such, still under the presumed control and protections of the business.
Unlike a bank, which can use customer deposits in many different ways within their respective regulations, custody providers in the digital asset realm act more like a digital safe deposit box. The asset you deposit is held securely, and when appropriate, the same asset is returned.
Therein lies the issue with the traditional digital asset custody though, the asset sits until conditions are met for their release. Nothing more, nothing less.
Users who would like to custody assets within a proof of stake blockchain need more than security. They require that their assets at rest are staked. They require this because the consensus algorithm dictates how new coins are created within the network. With PoS this means that in order for one's portfolio to hold its value, it must be staked or the value owned by the individual will theoretically decrease due to the natural inflation of the networks PoS reward system.
Custody providers are not ignorant to this, they have happily added mechanisms and processes in place to ensure that assets held can be staked and proceeds from the staking are funneled back safely into the same customer account within the custody solution.
Great, so there was an issue and now it’s resolved. Why is there a two page article about this non-issue?
Where things get interesting is that revenue generation isn’t the only outcome of staking coins, there is also the governance aspect. Staking coins is considered as providing an equal amount of votes to the system, dictating how fundamental portions of the consensus algorithm function, which new features can be activated and when, and in some systems even providing a mechanism for dictating blacklists that can be used to freeze funds. Voting power in these systems is a serious business.
Of course, custody providers could easily act as a proxy for decisions to be made. Constantly providing their customers with a list of open votes and using their feedback to make sure their opinions are reflected in the votes cast by the custody platform. In practice, many users won’t have informed opinions on each and every vote, or quite simply won’t care.
Most users will be happy to trust the same organization they respect enough to have held their assets, in many cases their life savings or the core runway of their business, with the choices at hand in governance voting. This, if anything, is a feature rather than a bug of the [Delegated] Proof of Stake model.
Outside of this common and completely voluntary delegation of voting rights and power transference, there is another possibility that is just as likely to create highly influential clusters of assets — crimes and the subsequent seizure of assets.
Consider a ransomware variant which requires the payouts to be done in assets from a PoS network. Potentially allowing criminal empires to work together in votes to dictate network rules that govern the implementation of new privacy features to increase censorship resistance and keep revenue stream liquid.
Or consider the government agency that eventually seizes their ill-gotten gains. Historically, the government has had no issue auctioning off digital assets they had seized, but if a government agency has a chance to turn the seized assets into a reoccurring revenue stream, such that staking provides, it surely sweetens the deal to also establish substantial voting power in an increasingly powerful and global-reaching financial network.
Each of these scenarios alone could easily signify the perceived imminent failure of a Proof of Stake system. So many nefarious, opportunistic, or completely well-intentioned but selfish actors attempting to sway their own requirements into the network operating structure. The reality of it though is that this competition is not something to be concerned about, it is exactly how these networks are expected to find their equilibrium amongst a global user base with varying priorities and beliefs.
Proof of Stake has become an effective way to execute efficient transaction validation on a global scale and has provided networks with a much-needed mechanism for providing a layer of governance with no single leader. By design, you can put your money where your mouth is to validate the present and influence the future. There is no doubt that as these networks start to handle a larger portion of the world's economy, many organizations will start to appreciate the game of stakes more and more.
This article was originally written for the Proof of Stake series in our Duff & Phelps Blockchain and Cryptocurrency Task Force Newsletter (Vol. 68). I hope you enjoyed a rare glimpse into the internal publication distributed to >1,000 professionals every week.
