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Ethereum’s Revolutionary Proof-of-Stake (PoS) Protocol and it’s Battle Against Centralization

JAN 6, 2021
6 MIN

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After years of anticipation, the release of Ethereum 2.0 is finally upon us. On December 1st, the Ethereum 2.0 genesis block launched, ushering in the shift from proof of work (PoW) to proof of stake (PoS). Although some other PoS protocols have been functioning for years now, Ethereum’s migration from PoW to PoS represents the culmination of years of research and the biggest stress test on staking mechanisms yet. I’m not going to go into detail about how PoS works in this article; however,  Consensys has a great article that dives into the intricacies of how this new consensus model works.

Proof-of-Stake (PoS) has some clear-cut advantages of PoW that I’ll highlight quickly:

  • PoS is MUCH more ecologically efficient than proof of work and leaves a significantly smaller carbon footprint than PoW mining. Currently, the global Bitcoin network is consuming more than seven gigwatts of electricity. Over the course of a year that’s equal to around 64 TWh or terawatt hours of energy consumption. That’s more than the country of Switzerland uses over the same time period!
  • Decentralization in protocols that use PoW has come under attack in recent years, as the companies that have control of the newest and most efficient mining hardware (called ASICS) have almost a total monopoly on the incoming BTC supply. You can check out the state of mining for BTC  here. PoS removes mining from the consensus mechanism and makes the constant chase for the newest mining hardware obsolete. Although PoS will also have its challenges to avoid centralization (staking cartels, centralized exchanges holding huge amounts, etc.), the consensus mechanism is much better suited for a more decentralized process.

However, PoS does have one flaw that prevents the protocol from achieving its full potential. Setting up your own ETH 2.0 node is both too complex and expensive for the average person to participate comfortably. As I mentioned above, one of the premier issues with PoW is that it encourages centralization by making the participation in the consensus process prohibitively expensive through the constant influx of new ASIC hardware. In its infancy, PoS consensus faces some similar uphill battles to prevent centralization.

Here’s a brief breakdown of what’s currently necessary to run an ETH 2.0 node and be involved directly in securing the network (you can learn more here):

– A three year commitment to staking 32 ETH and maintaining a validator node

– 32 ETH (plus <1 ETH for gas costs)

– $717.12 (three-year reserved instance pricing for an m5.xlarge instance) + 120 (one year’s cost of 100 GB of storage, conservatively assuming nearly full storage capacity) = $837.12 paid over the course of the year to AWS

– MetaMask Extension

– Infura Account

– Configured AWS instance (three year commitment, can be less but you save money with more time and you are locked in) with hardened security features

– Import verification keys, run Teku, setup monitoring

At the current ETH price, 32 ETH is about $16,000. Combined with the fact that anyone who wants to stake on ETH 2.0 must hold that amount in the ETH deposit contract for three years makes this is quite the commitment for the average person! On top of that, the technical knowledge needed to get started and avoid big mistakes is a real impediment (although it’s much more user-friendly than setting up a BTC mining rig). Unfortunately, if improvements aren’t made to make the barrier of access slightly lower, we’ll see a huge amount of centralization as most users will just opt to keep their funds on exchanges that will stake for them. In addition to losing out on staking rewards and not having full autonomy over your funds, keeping your PoS coins on exchange gives the exchanges huge voting power in any changes to the protocol that need to be made later. In PoS, the beauty of the consensus model is that each coin you hold represents your voice in the direction and security of the protocol.

So how can we fight the impediments that threaten to make ETH 2.0 more centralized and give power back to the average user?

Services like  Lido, aim to help PoS maintain a more democratic balance. With Lido, there’s no minimum staking requirement and all staked tokens are totally liquid, with no required lockup time. Lido users receive a uniform stream of staking rewards returned to them, which keeps users liquid and able to allocate funds to other investments or just pocket the returns. By using the stETH token, Lido’s native token that represents the staking rewards earned from contributed ETH, users can also directly participate with other DeFi protocols (lending, yield farming, etc.) to take maximum advantage of their capital.

If you’d like to learn more about how Lido works in detail,  check our their blog, here!

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