How Centralized Are Proof of Work and Proof of Stake Cryptocurrencies?By Jack Filiba
One of the core principles driving the cryptocurrency industry is the idea that digital assets do not need centralized authorities in order to thrive.
Instead, consensus algorithms like Proof of Work (PoW) and Proof of Stake (PoS) can democratize governance by putting users in charge of maintaining a network’s integrity.
However, both governance models face challenges when it comes to staying decentralized. Through looking at data from a variety of sources, LongHash explored how much network influence major participants or stakeholders hold over PoW and PoS cryptocurrencies.
Hashrate distribution across Proof of Work coins
Proof of Work (PoW) is the governance model employed by the majority of the industry’s leading cryptocurrencies — including Bitcoin and Ethereum. This may change in the future, as Ethereum developers are currently planning to leverage PoS.
Different cryptocurrency implementations vary in their approach to PoW. In theory, Proof of Work is able to democratize how decisions are made on a network. Many industry proponents are wary of threats to this paradigm, such as individual mining pools accounting for enough of a network’s hashrate to be able to make decisions that are self-serving. In the past, LongHash analysis showed that just a few mining pools can account for the majority of a network’s hashrate.
Our new analysis of popular PoW implementations considered the hashrate distribution across Bitcoin, Ethereum, and Litecoin. At the time our chart was produced on June 13, 2019, Bitcoin had the most hashrate distribution of the three currencies.
Of any Bitcoin mining pool, BTC.com was the largest contributor to the network’s hashrate (around 17.9%). It was trailed by F2Pool (13%), AntPool (12.5%), and BTC.TOP (10.9%). Combined, the largest two BTC mining pools accounted for 30.9%.
When it comes to Ethereum, on the other hand, the two largest mining pools accounted for 49.09% of the network’s hashrate. In addition, the pool Ethermine was the largest individual hashrate contributor out of any Bitcoin, Ethereum, or Litecoin pool. It accounted for 27.09%.
Litecoin’s largest hashrate contributor was a mining pool called Poolin, which accounted for 21.2% of the network’s hashrate. In comparison with Bitcoin and Ethereum, the largest two Litecoin mining pools accounted for 37.2% of its hashrate.
How decentralized are PoS cryptocurrencies?
There are many obstacles preventing comparisons between the level of decentralization exhibited by PoW and Proof of Stake (PoS) cryptocurrencies. The most fundamental obstacle is that the two governance models differ widely in their approach to achieving consensus.
Unlike in a PoW model, PoS governance is based on the token ownership of participants. Those considered to have a significant “stake” in the network may be granted more responsibility in upholding its integrity. For more information, read our comprehensive guide to Proof of Stake.
Since PoS chains do not place an emphasis on “mining” tokens in the same way as PoW chains, considering the hashrate of mining pools was not an option. Instead, we looked at the amount of voting power that large validators hold in their respective networks.
In this category, our options were limited. On the market today, there are only a small number of top-ranked coins that have adopted the PoS model. Moreover, popular assets like EOS and Tron leverage a modified version of PoS known as Delegated Proof of Stake (DPoS), which functions quite differently.
We looked at Cosmos (ATOM) and Tezos (XTZ), as both coins operate in a way that is heavily based on the Proof of Stake consensus algorithm. In addition, both are currently ranked in the top twenty coins by market cap.
For many PoS cryptocurrencies, the largest holders of voting power are often staking pools. This is the case for Cosmos, as a pool called stake.fish is its most influential single stakeholder. At the time that our data was produced, it held 7.92% of the network’s overall voting power.
“Proof of Stake blockchains have validators who create, propose, or vote on blocks to be added to the blockchain,” stake.fish’s site explains. “These validators are required to run robust hardware that is online 24/7 with multiple security features in place.”
These types of validators allow users to “stake” their assets in exchange for a financial reward. In practice, this means that users store assets without spending them for a specified period of time. The reward that users receive is typically derived from the new blocks that their stake helped create.
When it comes to Tezos, its “bakers” operate in a similar way to staking pools, as they serve as the network’s validators. As our chart shows, several large contributors to Tezos’ voting power are bakers that belong to the Tezos Foundation. Combined, they hold around 23.22% of the network’s voting power.
However, according to a statement from the Tezos Foundation, it will not be using its power to influence the network:
“The Foundation has decided not to vote during the first part of this process, the Proposal Period, which is now taking place.”
According to the project’s Twitter, Tezos only had its first non-foundation baker in July of 2018. Since then, authority over the network has become more distributed over time. For comparison, the Tezos foundation purportedly held more than 31% of the network’s voting power in March of this year.
Aside from Cosmos and Tezos, many other cryptocurrencies based on the PoS model are still in their infancy in terms of both development and adoption. As a result, it may take some time for these assets to truly be tested on the same scale as top coins like Bitcoin, Ethereum, and Litecoin.
Both PoW and PoS coins face the risk of centralization
For an asset to truly be decentralized, no central party can be entirely in control of its future. This is more than just a matter of principle. In the case of Proof of Work blockchains, a mining pool holding the majority of a cryptocurrency’s hashrate would make it vulnerable to a 51% attack.
This type of attack refers to a situation where an entity has a majority of control over the network, thus granting it the ability to manipulate the network’s future transactions. As a result, it is important for Proof of Work coins to maintain a significant hashrate distribution.
While innovators are already aware of the risks of centralization in PoW ecosystems, some believe Proof of Stake coins may be particularly vulnerable. According to one expert familiar with the topic, maintaining a distribution of authority is especially important for PoS currencies.
“In PoW networks, there is a significant separation of power between the users (i.e. holders) and the validators (i.e. miners),” explained Qiao Wang, who serves as the head of product for Messari. “We saw a glimpse of that in 2017, when Bitcoin users pushed miners to activate SegWit and to call off SegWit2x, even though many thought miners had more control of the network.”
“In PoS networks, holders and stakers tend to be the same people,” he added. “As such, there’s less separation of power.”