Highly respected equity research analyst and investment strategist Lyn Alden criticized Proof-of-Stake (PoS), and said earlier today that Ethereum’s transition to PoS (which is expected this year) would change it from a commodity to an equity.

In a Twitter thread, Alden talked about both Bitcoin, which uses Proof-of-Work (PoW), and Ethereum, which is currently using PoW on the main chain but plans to fully transition to PoS later this year.

She went on to say:

  • Consensus mechanisms that don’t involve work… instead involve governance. Work is the only thing that can reduce or eliminate governance. Proof-of-Work systems can be a commodity. Proof-of-Stake is inherently an equity. I like equities. But equities aren’t commodities…
  • If you think that means I’m “pro-bitcoin and anti-ethereum” as some do, remember that ethereum is still proof-of-work for good reason. Thus, I kind of respect it…
  • Either way, bitcoin is the commodity. It’s the digital asset that achieved a distribution pattern, decentralization, and immutability to be considered a commodity rather than an equity. Some hard forks are commodities too. Most digital assets are equities, and analyzed as such.

In a blog post published on her website in November 2021, Alden talked in more detail about “the trade-offs of proof-of-stake as a consensus mechanism.”

Alden wrote:

Proof-of-stake is a system where holders of the cryptocurrency lock up or ‘stake’ their coins, and use them to vote on the valid blockchain, and get rewarded with more coins for successfully creating new blocks. Instead of committing electricity and processing power to create new blocks on the blockchain, they’re committing their stake of coins to do so.

Proof-of-work is simple, because there is no need to punish bad miners that try to validate the wrong chain or make invalid blocks that don’t fit the rules of the node network. Their punishment is simply that they spent electricity on blocks that weren’t valid or weren’t included in the longest eventual chain, and thus lost money. They self-inflict their own wound, and thus it rarely happens on purpose. There is a tangible connection between the blockchain and real-world resources.

Proof-of-stake is more complex, because there is no connection to real-world resources and the system needs a way to punish stakers that improperly vote on the “wrong” chain. In addition, they need a way to make sure stakers aren’t voting on all possible chains (which can’t be done with proof-of-work, because it takes real-world resources for each one). So, proof-of-stake is a much more complex system that will try to take away stakers’ coins if they vote improperly, and has ways of checking to see if they are voting on multiple chains…

With a proof-of-stake system, the more coins you have, the more voting power you have, and those with the coins are also the ones earning the new coins from staking. Since they don’t need to expend resources to stake, they can simply increase their overall staking amount as they earn ongoing coins from staking rewards, and exponentially grow their influence on the network over time, forever. Network dominance tends to lead to more network dominance, in other words.

It would be like a political system where you get a vote for every hundred dollars you have, and then also get paid a dollar by the government for casting each vote. Mary the high school science teacher with $20,000 in net worth gets 200 votes, and earns $200 from the government for voting. Jeff Bezos, with $200 billion in net worth, gets 2 billion votes, and earns $2 billion from the government for voting. He’s a more valuable citizen than Mary, by a factor of a million, and also gets paid more by the government for already being wealthy.

That’s not a system many folks would like to live in. Eventually it would likely consolidate into an oligopoly (if it wasn’t already), with a handful of multi-billionaires controlling most of the votes and ruling everything. If it gets too centralized, that kind of defeats the purpose of a decentralized blockchain.

Instead, that proof-of-stake system mainly works well for stakes in centralized private property, like corporations. In a corporation, each share is worth a vote for proposals and board seats, since the owners decide what the company will do in proportion to their ownership. These are voluntary organizations; shareholders, customers, and employees can go to a different corporation if they don’t like the rules. That’s different than a national election, which is supposed to be a decentralized platform. And it’s different than money or legal tender as well.

So, I don’t consider the proof-of-stake model bad for other cryptocurrencies to use in terms of experimentation, if they are more like a corporation. In fact, proof-of-stake can increase the cost of attacking the protocol, since an attack or group of attackers would need to acquire a lot of the coins (unless they find and exploit a bug due to the greater attack surface, or somehow steal the coins). There are certain Defi projects or platforms, for example, that can operate like a company and use proof-of-stake to be efficient and costly to attack, if all goes well. They’ll be prone to centralization, but if they’re voluntary services competing with other proof-of-stake services, that can be okay. If their service isn’t good, people can go elsewhere. In general, we have no problems with companies being centralized, because they are companies.

“Instead, proof-of-stake mainly seems less suitable for a decentralized and censorship-resistant global monetary asset, especially when considered along with the issues that I’ll describe in the second half of this article about stablecoins. Proof-of-stake is inherently equity-like rather than money-like, compared to proof-of-work.”


The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

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