In round 2 of our PoW vs. PoS debate, we'll address another criticism of PoS:
In PoS, "the rich get richer!"
In PoS, "the rich get richer!"
I call such claims "Trumpisms" -- not only b/c they appeal to populist sensibilities but more importantly b/c they're vague and non-specific.
We're all guilty of these -- like claiming "PoW is expensive" -- but they don't help us arrive at a meaningful truth.
We're all guilty of these -- like claiming "PoW is expensive" -- but they don't help us arrive at a meaningful truth.
Just as we attempted to dissect yesterday's claim that "PoS is not meritocratic", what's needed is to break this claim down into a clear question or scenario.
So let's do that.
So let's do that.
First, the idea of the rich getting richer is a statement about wealth inequality. It's a prediction that a PoS-based currency will have a worse coin distribution over time than a PoW-based currency.
Is that prediction accurate?
Is that prediction accurate?
Putting aside that this is a complex game-theoretical question that can only be truly proven through real-world emergence, let's construct a hypothetical scenario that tests this based on Ari's question above.
We have two cryptos: POSCoin and POWCoin.
Both are identical except one is PoS and one is PoW.
Both have the same starting supply, issuance rate, and will increase in value 100% in 5 years.
Bob and Alice, both $-hungry VCs, want to maximize their % ownership of all coins.
Both are identical except one is PoS and one is PoW.
Both have the same starting supply, issuance rate, and will increase in value 100% in 5 years.
Bob and Alice, both $-hungry VCs, want to maximize their % ownership of all coins.
Both POSCoin and POWCoin hit Coinbase on Jan 1.
Bob buys $1m of POSCoin and immediately starts staking.
Alice buys $1m of POWCoin and hodls.
$1m represents 10% of each respective network.
Relative to one another, who ends up with greater % ownership of the network?
Bob buys $1m of POSCoin and immediately starts staking.
Alice buys $1m of POWCoin and hodls.
$1m represents 10% of each respective network.
Relative to one another, who ends up with greater % ownership of the network?
In this vanilla scenario, Bob comes out ahead in 5 years.
Let's assume Bob is guaranteed a 3% compounding yield (he's not guaranteed but let's put that aside).
In 5 years, Bob will have $2.2m and Alice will only have $2m (recall that both coins doubled in value).
Let's assume Bob is guaranteed a 3% compounding yield (he's not guaranteed but let's put that aside).
In 5 years, Bob will have $2.2m and Alice will only have $2m (recall that both coins doubled in value).
Since POSCoin and POWcoin had the same starting supply and issuance rate, Bob now owns a greater % of all the POSCoins than Alice does the POWCoins.
Congratulations Bob.
Case closed?
Not exactly...
Congratulations Bob.
Case closed?
Not exactly...
Let's look at why this scenario is wrong and doesn't reflect *real-world economics*.
1) Bob had higher risk and costs than Alice
2) Bob sacrificed opportunity cost, Alice did not (i.e., these are not closed systems for the love of Satoshi)
1) Bob had higher risk and costs than Alice
2) Bob sacrificed opportunity cost, Alice did not (i.e., these are not closed systems for the love of Satoshi)
1) Bob had higher risk and costs than Alice
In order to stake, Bob had to commit additional capital and operating expenditures (CAPEX and OPEX).
In order to stake, Bob had to commit additional capital and operating expenditures (CAPEX and OPEX).
Bob had to buy staking equipment and spend time and effort learning how to stake.
He then had to commit his coins to a staking contract and ensure that his validator node had sufficient uptime (if not he will be punished) and security to prevent against hacks.
He then had to commit his coins to a staking contract and ensure that his validator node had sufficient uptime (if not he will be punished) and security to prevent against hacks.
He had to pay electricity costs to maintain his node. If he ran on the cloud, he has to pay monthly hosting fees.
His coins are also less liquid than Alice's -- they cannot be withdrawn and sold right away (staking has lock-up requirements). In an emergency, this may cost Bob.
His coins are also less liquid than Alice's -- they cannot be withdrawn and sold right away (staking has lock-up requirements). In an emergency, this may cost Bob.
"Wow panek, that sounds costly?"
"You're right friend, it is."
How costly is difficult to measure but it cannot be denied that relative to Alice, it is *more risky/costly* for Bob to stake than it is for Alice to hodl in cold storage.
"You're right friend, it is."
How costly is difficult to measure but it cannot be denied that relative to Alice, it is *more risky/costly* for Bob to stake than it is for Alice to hodl in cold storage.
Bob is therefore being rewarded for this risk/cost. He is providing a service to the network and is being rewarded for that service. You can debate whether his reward is too high or too low, but Bob is undoubtedly providing a service that has risks/costs while Alice is not.
"Well panek, I'm a black belt computer nerd and all that cost and effort sounds trivial to me."
"That may be true for you Karate Kid, but not for Bob. You had to spend countless hours learning those skills. You're also forgetting the 'less liquid' and slashing/hacking risks..."
"That may be true for you Karate Kid, but not for Bob. You had to spend countless hours learning those skills. You're also forgetting the 'less liquid' and slashing/hacking risks..."
"...but even if you want to hand-waive ALL of that away (I mean, seriously, we're gonna need to call you Mr. Jazz Hands from now on) let's get to point number 2."
2) Bob sacrificed opportunity cost, Alice did not (i.e., these are not closed systems for the love of Satoshi).
Because Bob had to stake for 5 years, he could not use that capital to otherwise increase his % ownership of coins.
REMEMBER: the goal is to increase % ownership.
Because Bob had to stake for 5 years, he could not use that capital to otherwise increase his % ownership of coins.
REMEMBER: the goal is to increase % ownership.
Alice, on the other hand, is free to do other things with her $1m worth of POWCoin:
1) Nothing (hodl in cold storage)
2) Lend it at a rate that either matches or exceeds Bob's PoS yield
3) Commit it to some other investment
1) Nothing (hodl in cold storage)
2) Lend it at a rate that either matches or exceeds Bob's PoS yield
3) Commit it to some other investment
If Alice wants a return that matches or exceeds Bob's yield, she can simply lend her coins to a friend, exchange, or any other borrowing service.
In this scenario, the time/risk/cost to Alice is arguably even less than to Bob.
Alice just needs to find a reputable borrower.
In this scenario, the time/risk/cost to Alice is arguably even less than to Bob.
Alice just needs to find a reputable borrower.
Even if you want to argue that Bob can lend his coins to a staking pool at reduced risk/cost, the exercise of finding a reputable pool operator is exactly the same exercise as finding a borrower.
REMEMBER: these are not closed systems, stop treating them as such!
REMEMBER: these are not closed systems, stop treating them as such!
Alice can also commit her POWCoins to some other investment or enterprise.
REMEMBER: the goal of this game is to increase % ownership.
Alice can start a business or invest in equities, whatever she wants.
Meanwhile, Bob is stuck staking at 3% yield.
Poor Bob.
REMEMBER: the goal of this game is to increase % ownership.
Alice can start a business or invest in equities, whatever she wants.
Meanwhile, Bob is stuck staking at 3% yield.
Poor Bob.
If Alice wants to outperform Bob's 3%, it means taking on additional risk/cost.
Just as Bob took on risk/cost to get his 3%, Alice needs to take on risk/cost to increase her % ownership of the network.
How much risk/cost will likely dictate the return she can get.
Just as Bob took on risk/cost to get his 3%, Alice needs to take on risk/cost to increase her % ownership of the network.
How much risk/cost will likely dictate the return she can get.
Well friends, we've arrived at the end of our little scenario.
As I've hopefully shown, if the goal is for the rich to get richer, PoS or PoW doesn't materially change that. The rich have many options at their disposal to increase % ownership.
As I've hopefully shown, if the goal is for the rich to get richer, PoS or PoW doesn't materially change that. The rich have many options at their disposal to increase % ownership.
Of course, reality depends on specifics in terms of the PoS implementations, monetary policies, and of the various scenarios described (borrowing yields available etc.) b/w coins but by holding these things equal, we can better illustrate why this claim is wrong.
I should add that Alice is also free to exit her position if the price of POWCoin gets really high and then re-buy when it gets lower. Again, this means taking on risk, but it's also a luxury not afforded to Bob.
Bob has decided to perpetually stake. This may cost him if the price of his coin drops. But Bob has committed to getting that 3% in 5 years even if it means having 3% more in POSCoin but much less in USD than Alice.
Poor Bob.
Poor Bob.
Have a safe and happy New Years everyone!
Don't do anything too risky (like staking)!
Don't do anything too risky (like staking)!
