Proof-of-stake has become a significant topic in bitcoin forums today. People are always debating over the new Proof-of-stake and its advantages over the proof-of-work system. Proof-of-stake is a system whereby the major stakeholders have significant control over the economic aspect of the network.
Proof-of-stake rewards the highest bidder with a new block. In the proof-of-stake network, significant stakeholders can alter the system without considering the will of the miners, and developers. Voting power is centralized in this approach, which contradicts the principle of distributing bitcoins along a decentralized ledger.
In simple terms, proof of stake is a recipe for “hyper-inflation.” Hyper-inflation ridiculed fiat currency by rewarding only the wealthy people in the society. In cryptocurrency, hyperinflation means that the more coins I own, the more coins I can mine. Proof-of-stake merely is an MLM scheme because only the wealthy can truly benefit.
Proof-of-stake is also insecure because no one has broken it despite having the third highest market capitalization. History reveals that forks do not persist after a block. So people can choose both sides of a fork.
Another significant POS disadvantage is that you can only acquire new coins from a stakeholder. This can lead to problems of distribution. For example, if the entire currency was distributed to the founders alone, they will own the most significant amount of coins. Right now, Satoshi (Bitcoin’s creator) hold the enormous amount of bitcoins. The significant stakeholders with high stakes will have more advantage over stakeholders with low stakes.
In simple terms, Proof-of-stake approach rewards the rich. Mining does not reward only the most affluent miner. Mining needs computational hardware and raw materials to fabricate the chip for mining. This means that even with little funds, you can pay the team to manufacture coins.
POS is not suitable for high volume transactions. In POW, the cost of manufacturing ETH is constant regardless of the amount. However, POS commands higher fees for high volume transactions. The fee varies proportionally according to the number of transactions the network processes.
POS claims that it will disqualify fraudulent transactions during the staking process but the fact remains that there is no way of verifying a trusted party. Also, major stakeholders do not incur any external expense. In fact, there is nothing at stake, because stakeholders do not need to agree to the rules of the protocol. In the case of a network split, stakeholders are not forced to choose any network. It will simply start off as a decentralized approach and gear towards a centralized model as major players gain major dominance over the network.
The main hassle with proof-of-stake is that first-time miners cannot obtain their first coin. There is no way of creating cryptocurrency with a fair way of distributing coins. Bitcoin miners secure the network for a small incentive. Would it be possible to create crypto where everyone who joins earns a small incentive?