Proof of Stake: Ethereum's Big Mistake That Threatens Its Future.

23 Sept 2023

Originally Posted: Publish0x

Before I start, I want to say that this article is just my personal opinion and I don't mean to offend anyone who is a fan or defender of Ethereum. I respect the vision and work of the Ethereum developers, but I also believe that there are some critical aspects that need to be analyzed honestly and objectively.

Ethereum is one of the most popular and successful cryptocurrencies that exist, being the second most valuable cryptocurrency in the world, behind Bitcoin. At the time of writing this article it had a market capitalization of over $191,844,486,238, a trading volume of $3,559,889,337, a circulating supply of 120,228,095 ETH and its price was around $1,595.67. rising 0.81% during the last 24 hours (all-time high: $4,891.70 dollars).

Its main attraction is that it offers a decentralized platform to execute smart contracts and decentralized applications (DApps), which allows the creation of all types of innovative services and solutions on the blockchain. However, to solve some important challenges such as scalability, security, energy consumption and governance of Ethereum, the transition was made from a consensus mechanism based on proof of work (PoW) to one based on proof of stake (PoS), "The Merge" update.

Proof of work is the system used by Bitcoin and other cryptocurrencies, where miners compete to solve complex mathematical problems to validate transactions and create new blocks. This process requires a large amount of electrical energy and specialized hardware, resulting in high operational and environmental costs. Proof of stake is an alternative system, where validators do not need to use their computing power to secure the network, but only need to stake a certain amount of coins (in this case, ether) to participate in the consensus process. This reduces energy consumption and the risk of attacks by 51%, but also introduces new problems and risks.

One of these problems, for me the fundamental one, is the loss of the decentralized essence of cryptocurrencies. By requiring a minimum investment of 32 ether (about $51,000) to become a validator, a barrier to entry is created that excludes most ordinary users and favors large ether holders. This can generate a concentration of power and wealth in the hands of a few, which goes against the principle of democratization and distribution that inspired the birth of cryptocurrencies.

Additionally, relying on the value of ether to maintain the security and incentive of the network creates a dependency on the market and its fluctuations. This can affect the stability and reliability of the system, as validators may be tempted to sell their coins when the price rises or leave the network when the price falls. It also opens up the possibility of manipulation by those who own the most, who can influence the price and consensus at their convenience.

Another problem is inflation and the unlimited supply of ether. Unlike Bitcoin, which has a hard cap of 21 million coins, Ethereum has no hard cap and continues to issue new coins every year. This can lead to a loss of value and purchasing power of ether in the long term, impacting users and validators. Furthermore, by not having a clear and defined monetary policy, Ethereum is subject to arbitrary and discretionary changes by its developers, which can generate uncertainty and legal insecurity.

In my humble opinion, I see these problems as an analogy to the current monetary system, where central banks have control over the issuance and regulation of fiat money. These banks can create money out of thin air, manipulate interest rates, inflate or deflate the economy, bail out private banks or bankrupt companies, and intervene in the market according to their interests. This generates distortions, inequalities, crises and corruption, which harms citizens and small savers.

I have no doubt that Ethereum is an innovative and revolutionary cryptocurrency, but it also has its flaws and contradictions. By seeking scalability and efficiency with proof of stake, it moves away from the reason cryptocurrencies were created: to be a decentralized, transparent, fair and democratic alternative to the traditional monetary system. Therefore, I think it is important to be critical and aware of the risks and limitations of Ethereum, and not get carried away by fanaticism or opportunism. To speculate in the market with ethereum: ok, good, no problem; to HODL: not even playing. However, you do not have to share my views, everyone is the owner of their money and can do with it as they please.


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See we need a bit of history lesson here. POS was not only a power consumption + security decision, it was also a decentralisation decision. See POW is centralising. Very centralising. Bitcoin, the largest blockchain in the world suffers from it, and Ethereum, as smaller chain, was even worse. There's not a good solution either. It's in the economic interest of miners to centralise. Add in the fact there is a very low disincentive for fraudulent transactions under POW (unlike the huge risk of slashing in POS) then you get a system that large enough miners can easily start to defraud should they see the opportunity.
Good Article 👍
Ethereum's shift to a Proof of Stake (PoS) consensus mechanism was a significant decision aimed at addressing scalability and environmental concerns. While it has its challenges, it also represents the community's commitment to sustainability and efficiency. The future will determine if it's a mistake or a necessary step towards Ethereum's continued growth and relevance in the crypto space.
great post
It's evolution
Leaving the Proof of Work consensus algorithm was one of the worst mistakes Ethereum made
Great article, thanks for the write up