While PoS is highly extolled for its high energy efficiency and much higher scalability compared to PoW, full decentralization remains a gray area. Technically, PoS is supposed to be decentralized in nature, as many different validators have control over its consensus. However, some factors can potentially lead to a degree of centralization on the network.
Decentralization in PoS:
PoS allows the holder of a certain amount of any cryptocurrency to be involved in the process of validation. It does, in general, encourage more participation because the validators need not buy the expensive hardware to participate in validation. The more distributed the tokens are, the more decentralized will be the network since there will be more independent validators contributing to the consensus process. At least in theory, it foments decentralization by letting a large class of users be part of the network's security.
Centralization Risks:
However, PoS does have some inherent deficiencies that can undermine complete decentralization in certain fundamental ways. Some of those are as follows.
- Wealth Concentration:
Validators are selected depending on the size of a stake. It means that the more tokens one has, the bigger the chance that he will be chosen to validate the transaction and receive the reward for that. Long term, this may lead to wealth and power concentrated in a few significant validators. The more they earn, the larger their influence would be and could potentially damage decentralization in the future.
- Token Distribution
The distribution of tokens at the time of a network's genesis may be very unequal, such that most tokens are in the hands of few individuals or organizations, who might then dominate both the validation and governance processes, making the participation of smaller stakeholders more difficult to achieve.
- Validator Participation:
Large staking entry costs also constrain the quantity of participants. In some Proof of Stake systems, the validators must stake millions of dollars in cryptocurrency to participate in creating network security and decision making, thereby excluding small token holders.
While PoS is more decentralized than PoW in terms of accessibility and energy consumption, it does not evade centralization risks most especially in the distribution of wealth and power among active validators. Suffice it to say, PoS has its advantages on decentralization but itself is not fully decentralized in practice, and these challenges need to be addressed constantly in order to keep a balanced and fair network.
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~ Nesaty
Is PoS fully decentralized? Is a great post.
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