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One of the core principles that has fueled the cryptocurrency industry’s thriving economy is that digital assets do not require a centralized authority. However, consensus algorithms like Proof of Work (PoW) and Proof of Stake (PoS) democratize governance by allowing users to maintain the integrity of network data themselves. However, both decentralized governance models face their own problems when dealing with decentralized transactions. LongHash looked at various data and explored the influence of major players or stakeholders on Proof of Work (PoW) and Proof of Stake (PoS) cryptocurrencies to analyze the degree of centralization of each project.
Computing power distribution of PoW projects
Proof of Work (PoW) is the governance model used by most of the industry’s leading cryptocurrencies, including Bitcoin and Ethereum. This may change in the future, as Ethereum developers are currently planning to use Proof of Stake (PoS).
Different cryptocurrencies utilize proof of work (PoW) in very different ways. In theory, proof of work (PoW) can democratize decision-making on the network. Many industry supporters are very cautious about the threats posed by the PoW model, such as mining pools that have taken up a large portion of the network's computing power, making it possible for them to profit for themselves. In the past, LongHash analysis showed that just a few mining pools could take up a large portion of the network's computing power. We conducted a new round of research on the hashrate distribution of several PoW star projects, including Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC). According to the chart on June 13, 2019, Bitcoin (BTC) has the widest hashrate distribution.
Among all Bitcoin mining pools, BTC.com is the largest contributor of computing power, accounting for about 17.9%. F2Pool (13%), AntPool (12.5%) and BTC.TOP (10.9%) follow closely behind. The two largest BTC mining pools together account for 30.9% of the total network computing power.
On the other hand, for Ethereum, the two largest mining pools account for 49.09% of the network’s computing power. Ethermine is the largest mining pool among the three major networks of Bitcoin, Ethereum, and Litecoin, accounting for 27.09% of Ethereum’s total computing power.
The largest contributor to Litecoin’s hashrate is Poolin, which accounts for 21.2% of the network’s hashrate. In comparison, the two largest Litecoin mining pools account for 37.2% of the hashrate.
The proportion of collateralization rate of PoS projects
There are many difficulties in comparing the decentralization levels of proof-of-work (PoW) and proof-of-stake (PoS) cryptocurrencies. The most fundamental difficulty is that the two governance models differ greatly in how they achieve consensus.
Unlike the Proof of Work (PoW) model, the Proof of Stake (PoS) governance model is based on the digital currency ownership of participants. Those who are considered to have a large stake also need to take more responsibility to maintain the security of the network. For more information, read our guide to Proof of Stake (PoS).
Because PoS blockchains do not emphasize "mining" digital currencies like PoW blockchains, considering the computing power of mining pools is not a good choice. Instead, we studied the number of votes that validators have in their respective networks.
In this category, our options are quite limited. Only a few of the top currencies in the cryptocurrency market today have adopted the PoS model. In addition, popular assets like EOS and TRON utilize a revised version of PoS - Delegated Proof of Stake (DPoS), which functions very differently from PoS.
We looked at Cosmos (ATOM) and Tezos (XTZ) because both of these currencies operate on a PoS consensus algorithm and are currently in the top 20 by market cap.
For many PoS cryptocurrencies, the largest voting rights holders are PoS mining pools, which is also the case with Cosmos. For Cosmos, the stake.fish mining pool has the most influence. At the time of our data generation, the stake.fish pool accounted for 7.92% of the overall network votes. “Proof-of-Stake (PoS) blockchains have validators who create, propose or vote for blocks to be added to the blockchain,” the Stake.fish website explains. “These validators require powerful hardware to run, which needs to be online 24/7 and has a variety of security features.”
This type of validator allows users to “stake” assets and earn financial rewards. In practice, this means that users can store assets without spending a specific amount of time. Users are usually rewarded for new blocks created by their staked assets.
The operation of bakers (i.e. people who produce blocks) in the Tezos system is similar to the operation of PoS mining pools, as these bakers act as validators for the network. As shown in the chart, the main contributors to Tezos voting power are bakers from the Tezos Foundation. Together, they account for about 23.33% of the voting power of the entire network.
However, the Tezos Foundation will not use its power to influence the network, according to a statement from the Tezos Foundation: “Now that a new proposal period has begun, the Foundation has decided not to participate in the first part of the vote.”
According to the project’s Twitter post, Tezos only had its first non-foundation baker in July 2018. Over time, the network has become more decentralized. Relatively speaking, the Tezos Foundation had more than 31% of the network’s voting power in March of this year.
With the exception of Cosmos and Tezos, other PoS-based cryptocurrencies are still in the early stages of development and adoption, so it may take some time for these assets to be tested on the same scale as top currencies such as Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).
Centralization Risks of PoW Projects If an asset is truly decentralized, then no centralized institution can control its future development trend. This is not just a matter of principle. In a proof-of-work (PoW) blockchain, a single mining pool controlling the vast majority of computing power is more likely to lead to a 51% attack.
This type of attack occurs when one entity gains control of the majority of the network, thus being able to manipulate future transactions on the network. Therefore, for Proof-of-Work (PoW) currencies, it is very important that the hashrate is evenly distributed.
From the perspective of fund security, it is very difficult to launch a 51% attack in the Bitcoin and Ethereum systems, so we can say that compared to centralized banks or central bank systems, PoW represented by Bitcoin can ensure security through a decentralized model (ignoring small currencies that do not have enough miner support).
From the perspective of the decision-making system, the disadvantage of the Bitcoin system is that the various participants are quite fragmented. Miners, coin holders, and core developers are each different groups. Because there is no consistent interest (coin), overall decision-making and promotion of upgrades are quite slow. The main codes are provided and promoted by bitcoin core, so such a decision-making system is relatively centralized.
From the perspective of checks and balances, some PoW supporters can definitely produce a check and balance result just because the interests of the participating groups are inconsistent. If there is a good governance system in the initial design, such as the Decred reform and the governance system proposed by Nervos, from this perspective, PoW supporters have the right to say that they are more decentralized.
In addition, PoW has another big disadvantage. Because China has a manufacturing advantage, that is, China can control most of the mining machines, which is very unfavorable to the internationalization and decentralization of PoW projects.
While some innovators are aware of the risks of PoW centralization, some believe that proof-of-stake (PoS) tokens are particularly vulnerable. According to an expert very familiar with the topic, it is particularly important for PoS tokens to maintain decentralization.
“In the PoW network, there is a serious separation of power between users (holders) and validators (miners), which we have been aware of as early as 2017. At that time, Bitcoin users called on miners to activate SegWit and cancel SegWit2x, even though many people believed that miners had more control over the network,” said Wang Qiao, head of product at Messari.
He went on to add: “In PoS networks, the holders and the stakers are often the same person. So, there is less separation of power.”
Centralization Risks of PoS Projects
Proof of Stake has had the concept of one coin per stake from the beginning. The coin is both equity and voting rights, which means that this design is more supportive of governance.
From the perspective of fund security, PoS also faces the threat of 51% attack. We have mentioned in previous articles that it takes a very high cost to attack the PoS blockchain. In other words, PoS is relatively reliable in terms of fund security through the decentralized protection of economics.
From the perspective of the decision-making system, PoS itself better supports governance. Each system has its own governance process and voting system. The main issue that everyone is arguing about is whether the PoS mining pool over-represents the voting rights of ordinary people. In some blockchains, such as Cosmos, the first few nodes occupy the majority of voting weights, and the miners and governance decision-makers are the same. Will there be problems with such a system?
In fact, most of the current PoS blockchains belong to representative politics, which is more in line with the current social political participation system. Ordinary people do not have the time and energy to participate in politics, and nodes participate as elites on behalf of ordinary people. This is the case with Tezos and Cosmos. Tezos has its own evolutionary and process-based governance process, while Cosmos gives ordinary people the final voting right (that is, if they are not satisfied with the node vote, they can change the resolution, and changing the resolution can overwrite the node voting result).
The biggest problem encountered by the PoS blockchain will be how to distribute the initial tokens and how to solve the problem of the rich getting richer in the future. Currently, we can see that the purpose of many innovative token distributions is to avoid centralization. Different blockchains have also proposed solutions to reduce the benefits of large nodes. Whether the PoS project will eventually be controlled by large nodes remains to be seen.
Conclusion
The centralization problem is something that every blockchain has to face. The above article analyzes the computing power distribution of the PoW mining pool and the proportion of the mortgage rate of the PoS mining pool, just to give everyone a clearer presentation.
Centralization is a problem that all projects cannot avoid, both in real life and in blockchain.
LongHash objectively analyzes the advantages and disadvantages of PoW and PoS, studies the game process of "centralization" and "decentralization" in their respective development processes, analyzes the reasons and pros and cons, and helps investors clearly see the essence of the project and make rational decisions. |
