How to destroy a Proof-of-Stake network in 5 steps:
1) Increase intermediation between users and the PoS network via Staking-as-a-Service third parties -- it's happening already.
The custody of the majority of staked assets centralizes around a handful of custodians.
The custody of the majority of staked assets centralizes around a handful of custodians.
2) Promote "fluid collateral" - i.e. allow these third parties to create derivatives based on staked assets, like a Mortgage-Backed-Security.
Timelocks on staked assets become irrelevant and users can buy and sell them synthetically based on a) current price and b) PoS yield
Timelocks on staked assets become irrelevant and users can buy and sell them synthetically based on a) current price and b) PoS yield
3) Ease of exchange reduces switching costs. A "synthetic staker" in one network is an exchange rate away from staking in another network.
Whales now can just chase yield and engage in "staking arbitrage" across PoS networks.
Whales now can just chase yield and engage in "staking arbitrage" across PoS networks.
4) Like bonds, the staked asset is paying a fixed yield in its own denomination, but price of what's staked (bond price) fluctuates based on opportunity cost (real yield).
At expiration, intermediaries simply adjust the collateral. After all, they make money in trading fees now
At expiration, intermediaries simply adjust the collateral. After all, they make money in trading fees now
5) The security budget (or the cost-to-attack) in PoS networks becomes highly sensitive and volatile, like the price of the staked asset.
And lower price leads to lower (more volatile) security, which further depresses price: a true death spiral.
And lower price leads to lower (more volatile) security, which further depresses price: a true death spiral.
Remember the initial forks of Bitcoin that also used SHA256?
Conceptually, it’s the same thing. Miners could switch networks based on real yields. These forks ultimately faced huge inflows/ outflows of hashing power because miners were simply maximizing profit based on yield.
Conceptually, it’s the same thing. Miners could switch networks based on real yields. These forks ultimately faced huge inflows/ outflows of hashing power because miners were simply maximizing profit based on yield.
How to address this? It's hard. One could:
1) Increase switching costs in PoS via VDF ASICs.
2) Enact a dynamic staking yield based price vol and total value at stake.
3) Try and ban "fluid collateral"?
Needless to say, each one of these carry problems.
1) Increase switching costs in PoS via VDF ASICs.
2) Enact a dynamic staking yield based price vol and total value at stake.
3) Try and ban "fluid collateral"?
Needless to say, each one of these carry problems.
I like to keep an open mind, but I've been following PoS since PeerCoin, and it seems like every new iteration of PoS solves one problem, but introduces four more.
That's why I think PoW-Nakamoto Consensus is the best we've got when it comes to long-term sustainability.
That's why I think PoW-Nakamoto Consensus is the best we've got when it comes to long-term sustainability.
