This is a response to the article "Staking - centralization risk".
The Steem situation is a shitstorm. I'm not going to debate that much, besides the fact that I want to point out that:
- The fact that Justin could buy up Steemit and gain a large position in the staking shares, shows that PoS chains are indeed vulnerable when their marketcap is relavitely low. (But the same goes for low cap PoW chains, since the hashingrate for such projects is usually quite low, which means that big miningfarms could take over projects just like Justin did with Steem.)
- Steem was not very decentralized in the first place, since Steemit already influenced the chain significantly. (Which is obviously the reason why Justin bought Steemit.)
To draw the conclusion that Staking results in an automatic and definite higher risk of centralization is not a realistic conclusion.
Hashrate distribution in PoW chains
Let's look at the exchanges that stake your coins and compare them to miningpools in PoW. If we look at the BTC hashrate distribution we see that 4 entities control 55% of all hashingpower:
- Poolin: 14.7%
- F2pool: 18.7%
- AntPool: 9.8%
- BTC.com: 12.1%
We see that Bitmain operates both Antpool and BTC.com, which are combined good for 21.9% of BTC hashing power. So in reality there are 3 parties that control over 55% of all BTC hashingpower. Centralized much?
Compare PoW to PoS
If we compare numbers, and take Tezos for example, we see that the 3 biggest (and only relevant) exchanges in the staking-game, take (combined) barely 20% of all stake. 5% of that are bonds and 15% are delegated coins, free to move at any time. That is way less than the 55% of hashingrate that the 3 biggest pooloperators in BTC take.
To counter the argument that miningpools take up a decentralizing position in hashingrates would be that people can leave the miningpools and move over to smaller pools to improve decentralization. However, the same can be said for people who hold PoS coins on exchanges. They can withdraw their coins and move them towards smaller exchanges. So the argument for people to actively take action to equalize the rate of influence on the network, can be made for both hashrate distribution in PoW chains, and stake-share in PoS chains.
This centralization risk in PoS chains is actually less likely than in PoW chains:
- It is just as easy to move away from an exchange that forms a threat to decentralization in PoS as it is in PoW to move away from dominant pools. But if people want to go full solo and to start up a full node, it is a lot easier to start up your own node in PoS. The investment to set one up yourself is much smaller (less expensive hardware and less electricity). So you can make a lighter decision to start up a PoS node yourself with less financial risk in PoS chains. This way you can stake yourself and earn the full rewards yourself.
- In DPoS or LPoS (For example Tezos) it is even easier to move away from exchanges completely. You don't need to start up your own node to earn stakingrewards in LPoS or DPoS because in these PoS variations, you can delegate you coins to Stakers without the need of an exchange. For DPoS and LPoS chains, while you don't have to set up a node, the option for holders to delegate actually reinforces the argument of setting up a personal node if you plan to go long: if you start to stake yourself, you can attract people to delegate their stake to you, which gives you the opportunity to collect a percentage of their rewards in return.
- The incentive to delegate your coins instead of staking them on an exchange, is quite high among people who understand the popular phrase "not your keys, not your coins". You don't own your coins when you keep them on an exchange. The risk that you end up a victim of exchange hacks is not to be taken lightly. Other risks are changes in regulations or certain rules in the Term of Conditions that would be reasons for exchanges to lock your account. We all read those stories regularly online. The advice for anyone who's not making any profits with active trading always is: do not hold your coins on an exchange. Just delegate them from your personal (hardware) wallet.
- To stake a large percentage of a chain, you need to buy up all those coins first. If you start staking them, you automatically go long on that project: your stake will be fixated for a fixed period of time and you will not be able to sell swiftly. This means that PoS creates a natural incentive to act in the interest and value of the chain. If we take Tezos with an 1.8 billion dollar marketcap as an example again, you can see that is it financially unrealistic for any party, to accumulate an amount of coins that would decentralize the chain. But if someone would be able to do so, it would be financial suicide to use it to take centralized actions. One of Tezos' points of value lays in the fact that it is the most decentralized PoS chain at this time of writing.
If we compare this to PoW chains, we see that there is nothing at stake for miners. If one project fails, they aim their nodes towards other chains and continue happy mining without looking back, while the failed project goes down.
Is exchange staking a high risk for centralization? Theoretically it sounds feasible, but reality the answer is no. At least not more than hashingrate distribution in PoW. And if we would answer the question positively, then BTC is one of the most centralized chains in this space.