The debate of which consensus is better proof of work or proof of stake is an ongoing debate. Even though there are advantages and disadvantages of both the consensus. Let me explain that each consensus has its own primary and secondary objectives.
The Bitcoin network utilises PoW consensus which is used for pure monetary value and preservation of buying power as a primary objective by burning a physical resource. Have you ever come across any Defi exchanges using Bitcoin network in its existence for more than 13 years?
On the other hand Ethereum was designed from the beginning to migrate to PoS consensus. The reason is simple the purpose of Ethereum is a decentralized Turing complete virtual machine.
The primary objective is to create an immutable trust-less decentralized virtual machine, monetary value is the secondary objective to incentivise people to use the virtual machine.
Ethereum has proved it’s purpose in its existence of more than 7 years, crowd funding various projects, building De-centralised exchanges, creating Non fungible tokens etc. This blog is another example of Ethereum network utility.
The main issues that arise with PoS consensus networks
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Maximal Extractable Value
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Staking Centralisation
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Prone to Protocol level Censorship
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Machine Intelligence and Entities Collusion
Maximal Extractable Value
Searcher bots run complex algorithms on blockchain data to detect profitable MEV opportunities and bots automatically submit those profitable transactions to the miners or validators.
Frontrunners are bots that watch the mempool to detect profitable transactions. The frontrunner will copy the potentially profitable transaction's code, replace addresses with the frontrunner's address, the frontrunner will submit the modified transaction with the replaced address and a higher gas price, frontrunning the original transaction and getting the original searcher's MEV.
Flashbots is an evolution of frontrunning bots with a service that allows searcher bots to submit MEV transactions to miners without revealing them to the public mempool. Over $650M of MEV were extracted through flashbots, and that number is still growing.
Even though MEV was first absorbed in PoW networks the phenomenon got magnified when we moved from pure monetary value to virtual machine utility like DEXs. Few examples are the DEX arbitrages and liquidations of assets.
MEV Auction (MEVA) and MEV Centralisation
The idea behind MEVA is instead of trying to prevent front-running, auction off the rights to order transactions, and allow the winner known as sequencer to front-run.
Users can either pay the sequencer a fee for inclusion in an aggregated block or submit transactions directly to the miners. Either way, the sequencer chooses the order in which the transactions are executed.
One key argument put forth by MEVA proponents, and voiced by Vitalik here, is that MEV is bad since it leads to mining centralisation, and MEVA reduces this centralisation risk but rather it centralises MEV.
Randomisation of the Transaction Order
Randomisation of the transaction order is another way to mitigate MEV. Validators will first pick a batch of transactions that will be committed. Then, validators will receive a random permutation, based on the hash of the current and previous block, and the ordering of the batched transactions will be performed based on the permutation. Such a mechanism can reduce the MEV and also increase the cost of performing MEV.
Staking Centralisation
With more than 4 million Ether deposited through Lido, or 32% of the total amount of the token being staked, the concentration is raising red flags. One entity holding a huge amount of Ether could raise security risks for the network.
The issue with Lido is not staking per se but it is the staking derivatives, the real culprit. Any powerful entities with vested interests can manipulate the derivatives or buy a major stake and swing the pendulum towards centralisation and collusion.
“Liquid staking derivatives (LSD) such as Lido and similar protocols are a stratum for cartelization,” Ryan wrote. “LSD protocols should self-limit to avoid centralization and protocol risk that can ultimately destroy their product.”
Marco Di Maggio, a professor at Harvard Business School and former researcher at Terra Labs, detailed the risks of liquid staking derivative’s tendency towards centralization.
Another solution put forward is by separating the functionality of validators as two different collectives as proposers and builders but the downside is we are shifting the validators centralisation to builders.
Prone to Protocol level Censorship
Tornado Cash is the perfect example of protocol level censorship on the privately managed crypto mixing platform. After the U.S. Treasury Office of Foreign Assets Control sanctioned and blocked Tornado Cash.
This can be mitigated by enabling protocol censorship resistant mechanism built in the protocol that means slashing system embedded in Ethereum’s PoS consensus mechanism.
As Ethereum co-founder Vitalik Buterin explained in a 2018 tweet: “if a 51% coalition starts censoring blocks, other validators and clients can detect that this is happening, and use the 99% fault tolerant consensus to agree that this is happening, and coordinate a minority fork.”
Machine Intelligence and Entities Collusion
Machine Intelligence collusion is entirely a research topic in itself, one classic example is MEV extraction. When we spice it with collective entities like corrupted validators and other powerful entities with vested interests it will ultimately lead to the Tragedy of the Commons. The public goods and utilities will be debased by vested entities leading to total dictatorship, surveillance and complete control of this planet.
All the organised religions, ideologies like right, left etc. throughout history are classic examples of vested entities collusion across space and time. Blending machine intelligences in the equation will ultimately annihilate the basic rights of common people, destroying Sanatana Dharma of this planet.
Eternal Natural Law should not be sacrificed at the alter of progress and scientific advancement. It will lead to a state of scientific dystopia like the witch hunting dark ages of Europe.
Building collusion resistant networks at a base protocol level is an open ended question. If we as an altruistic collective can’t find a solution how to prevent and defend against this case scenario we will become slaves to machine intelligence and the entities who manipulate them forever losing our freedom and free will.
The question we have to ask ourselves is PoS consensus networks like Ethereum or PoW consensus networks like Bitcoin will in reality enable common people to be a sovereign and be part of a collective who practise Sanatana Dharma.
Like the People who practised Eternal Natural Law across time like the Essenes of the Middle East, Greek philosophers, Chinese philosophers, Rishis and Sidhars of the ancient India, or will they be used as a tool to alien with Star war Seth’s agenda to enslave this planet and people by collusion across space and time.