Three Cons of Proof-Of-Stake Crypto Projects

Three Cons of Proof-Of-Stake Crypto Projects

The crypto space has undergone many changes in key areas in the last five years. The changes have seen the space develop new and more efficient technologies that have further streamlined the digital transition. Proof-of-Stake is one such development regarded as a game-changer in the industry. This development is set to change how cryptocurrencies work for the better. However, while true, the system holds some disadvantages. In this guide, we will explain and air out the cons of the Proof-of-Stake system.

The Proof-of-Stake Mechanism

Proof-of-Stake (POS) is a term coined for a new mechanism developed to facilitate the cryptographic recording of cryptocurrency transactions. The mechanism may occur in several forms that all deviate from staking. This mechanism is integrated into the verification process, a vital trait of the decentralized system built on blockchain technology. 

The process entails users who stake their coins as the basis of checking and writing transactions onto new blocks on the shared network. The users, in this case, are referred to as validators. The validators perform other vital functions, such as checking the coin’s activity and storing records on the network. While validator selection is random and secretive, the chances of being selected as a validator increase, given how much an individual will stake.

Developers built PoS to replace the Proof-of-work system (POW), the first system built for cryptocurrencies. The POW system came with the initial cryptos such as Bitcoin and Ethereum. Due to the blatant issues that came with using POW, the POS was conceptualized and incorporated into new networks. However, while lauded as an energy-efficient alternative, The POS system has three major faults that must be addressed. 

The Cons

Security Issues

Of the flaws exhibited by the Proof of Stake system, security is the main problem facing the mechanism. During the launch of cryptos, the POW mechanism was lauded as the safest method of validating transactions. However, upon its replacement, the POS mechanism failed to replicate the same high standards of security set by its predecessor. The POS mechanism has instead created loopholes that, when exploited, place added risk on the owners’ assets. The POS mechanism is faulted because it may allow hackers to exploit the staking delegation. This loophole can allow hackers to hold the staking power while simultaneously attacking the blockchain network. 

The 51 percent attack concept is one such security issue that reflects the mechanism’s vulnerability. In this concept, individuals can acquire the majority stake of a given token and stake them. 

The malevolent individual can then create false transactions and exploit the system making away with stolen funds. However, this concept is expensive and may be difficult to implement on developed networks. Additionally, the POS system may also punish holders who may attempt to attack the network. This configuration may cause validators on the network to lose all their staked coins when noted to make attacks on the network. 

Unregulated Control 

In the Proof of Stake system, the validation is done by users who stake their coins in the energy-efficient process. However, while this process may seem highly favourable, it disadvantages smaller holders. Since individuals earn the right to validate coins by staking, those who stake more coins are accorded more freedom on the network.

In the network, validators do more than check coin activity, verify transactions, and store records. These individuals can also vote on outcomes that affect the token in question. Thus, under this pretext, the control of the network can be bought by individuals with enough capital. This mechanism results in the users with deeper pockets gaining an unfair advantage and influence over the coin. 

The outcome can result in monopolized decision-making favouring the large holder’s interests while being bad for small-scale holders. This outcome can make tokens disadvantageous to small-scale users, which may remain unchecked under the monopoly.

Special Requirements 

The Proof of Stake mechanism may require holders that stake their coins to fulfil some special requirements. These requirements may, at times, affect the level of control that individuals that stake has over their assets. In some cases, staking requirements may impose restrictions on the tokens’ owners in question. In some cryptos, staking requires that the staked coins be locked up for a given period. This requirement will, in most cases, outline a minimum period that validators need to have their funds locked. While such requirements may have been implemented to limit interference, they may become disadvantageous to holders staking their coins.

Author’s Take

Due to the needs of the current crypto space and the environment, the Proof of Stake mechanism is here to stay. This outcome is evident given ethereum’s transition in the upcoming merger. The mechanism features some great advantages that make it a suitable alternative to the Proof of Work system. 

However, developers must work out issues like the ones discussed above. As things stand, developments will resolve most of the users’ concerns. Given that the POS system is relatively new, there exists much room for growth. Therefore, it is safe to say that the mechanism will be improved and adopted on a large scale. However, this outcome will depend on the issues being ironed out by networks.

Julius Mutunkei

Julius is a blockchain reporter skilled at synthesizing all crypto-related information to make articulate texts easy for anyone to grasp. With a beginner's level certificate in Financial Analysis, Julius can read, interpret and report crypto findings to help investors exercise the best judgment in their decision-making process. When he is not caught up in the crypto frenzy, Julius likes playing a game of FIFA with his online buddies.