Is the Most Popular Crypto System Broken? Let’s Talk About It!
Hey everyone, John here! Welcome back to the blog where we break down the sometimes-confusing world of crypto into simple, bite-sized pieces. Today, we’re tackling a big topic that’s causing a lot of debate behind the scenes. We’re going to look at the main way many popular cryptocurrencies, like Ethereum, keep their networks secure and ask a simple question: is it fair?
Imagine you have a group of friends all sharing a digital piggy bank. How do you all agree on who put money in and who took money out, without having a single person in charge? Blockchains solve this with something called a consensus mechanism. It’s just a fancy way of saying “a system for everyone to agree on the rules.”
For a long time, the main system was the one Bitcoin uses, called Proof of Work (PoW). This involves powerful computers solving super-hard math puzzles. It’s incredibly secure, but it uses a ton of electricity. So, a new system was created to be more energy-efficient: Proof of Stake (PoS).
But as one expert, Carter Feldman, points out in a recent article, this popular new system might have a fundamental flaw. Let’s dive in and see what he means.
The “Rich Get Richer” Problem with Proof of Stake
So, how does Proof of Stake work? Instead of using computers to solve puzzles, it asks people to “stake” their own coins to help verify transactions. Think of it like a security deposit. By locking up your coins, you get a chance to be chosen to approve new transactions and, if you do a good job, you earn a reward—more coins!
Sounds good, right? Less energy, and people get rewarded for helping out. But here’s the catch: the more coins you stake, the higher your chance of being chosen to earn those rewards. If you have 10,000 coins staked and someone else has 10, you’re going to be earning a lot more, a lot more often. This creates a cycle where the people who already have the most coins are the ones who earn the most new coins. It’s a classic “the rich get richer” scenario.
Lila: “Hold on, John. Can you explain what ‘staking’ is a bit more? You said it’s like a security deposit, but what does that mean for a regular person?”
John: “Great question, Lila! Imagine a special, high-interest savings account at a bank. By putting your money in, you’re showing the bank you’re committed, and in return, they give you interest. Staking is similar. You lock up your cryptocurrency to help secure the network. The network then rewards you with more crypto, kind of like interest. The big difference is that with many networks, like Ethereum, you need a large amount to start staking on your own (like 32 ETH, which is a lot of money!), making it difficult for the average person to participate directly.”
Why This System Can Be Risky
The whole point of blockchain and cryptocurrencies was to be decentralized. That means no single person, company, or group is in charge. Power is spread out among everyone. However, if the PoS system allows the wealthiest participants to gain more and more power, the network can slowly become centralized.
Imagine a town where all decisions were voted on, but only the five richest families got 90% of the votes. Soon, they’d be running the whole town! In the crypto world, this is a real risk. A few huge players—like big crypto exchanges or wealthy investment funds—can end up controlling a massive portion of the staked coins. This gives them enormous influence over the network, which is the exact opposite of what crypto was meant to be.
For example, on the Ethereum network, a service called Lido has become extremely popular. It lets people with small amounts of crypto pool their funds together to stake. While it’s convenient, it means Lido now controls a gigantic chunk of all the staked ETH. This puts a huge amount of power into the hands of a single organization.
Lila: “So people are in a tough spot? They either need to be rich to stake on their own, or they give their coins to a big company like Lido, which makes the network more centralized?”
John: “Exactly, Lila! You’ve hit on the core dilemma for everyday users. The options aren’t great. You can:
- Stake by yourself: But it’s technically complex and you need a lot of money upfront.
- Stake with a big, centralized exchange: This is easy, but you have to trust them completely with your coins. If they get hacked, you could lose everything.
- Use a liquid staking service like Lido: This is also convenient, and they give you a ‘receipt token’ (like stETH) that you can use elsewhere. But as we said, this makes giants like Lido even bigger and more powerful, increasing centralization risk.
It feels like a trap where all roads lead to giving more power to a small group of big players.
A Different Idea: Rewarding People for Being Helpful
So, if Proof of Work uses too much energy and Proof of Stake leads to the rich getting richer, what’s the alternative? The article’s author suggests a new model called Proof of Contribution (PoC).
The idea is simple but powerful: instead of rewarding people based on how much money they have, let’s reward them based on their positive contributions to the network. It’s a shift from rewarding wealth to rewarding action.
Lila: “Proof of Contribution? I like the sound of that! But what kind of ‘contributions’ are we talking about? Like, what does someone actually have to do?”
John: “That’s the key question! In this model, you’d be rewarded for actions that make the entire ecosystem healthier and more useful for everyone. Think of things like:
- Providing Liquidity: This is a fancy term for helping other people trade their crypto easily on decentralized exchanges. You’re essentially being a market maker, making sure there are always coins available for buyers and sellers.
- Participating in Governance: Many crypto projects are run like digital democracies. “Governance” just means voting on proposals about the future of the network. By actively voting, you’re helping steer the project in a good direction.
- Building on the Platform: Developers who create new applications or tools that run on the blockchain are making a huge contribution. Their work brings more users and value to the network.
Under a Proof of Contribution system, these helpful actions would be tracked and rewarded.
So, How Would Proof of Contribution Work?
The idea is to give each user a “reputation score.” Think of it like a credit score, but instead of tracking your debts, it tracks all the good things you do for the network. The more you contribute in positive ways, the higher your reputation score becomes.
When it’s time to choose someone to verify transactions and earn rewards, the system would favor those with a higher reputation score. It’s no longer about who has the biggest pile of cash; it’s about who has proven themselves to be the most valuable and trustworthy member of the community.
This approach is more democratic. It opens the door for anyone, regardless of how much money they start with, to earn rewards and have influence by being an active, helpful participant. It encourages a vibrant community where people are motivated to build, improve, and participate, which ultimately makes the network stronger and more decentralized.
My Final Thoughts
John: I find this idea fascinating. For years, the debate has been stuck on “Work vs. Stake.” Proof of Contribution offers a third path that feels much more aligned with the original cooperative spirit of crypto. It shifts the focus from hoarding wealth to creating value, which could lead to much healthier and more resilient blockchain communities.
Lila: As someone new to all this, the Proof of Contribution idea just makes more sense to me. It feels fair. The idea that I could participate and be rewarded for being helpful, rather than just for being rich, is really appealing. It makes me feel like I could actually be a part of the community, not just a customer.
This article is based on the following original source, summarized from the author’s perspective:
Everyone hates proof of stake, will we do something about
it?