Proof of Stake and How Crypto Exchanges can Break It

Proof of Stake and How Crypto Exchanges can Break It

It has been a while since my last article, thanks to the current busy semester.

Anyway, there actually was something shocking that happened several weeks ago. That is, Binance participating as one of the Super Representative in Tron. As you probably know, Binance is currently one of the biggest cryptocurrency exchanges in the world that focuses on crypto-to-crypto trading. If you look at the detail of the centralised crypto exchange businesses such as Binance, they actually have two major services: as a trading platform and as a wallet service provider. Not only do they allow users to trade crypto coins in their platforms, but they also need to store the coins and tokens on behalf of the users.

The first service is trivial. Namely, they only need to create an order book for each trading pair and let the users play with them. The system records the orders and executes those orders if matching buys and sells orders are found. However, the second service is quite difficult actually. It requires massive cybersecurity protections; many crypto exchanges have failed big in this service, and the total loss probably has exceeded USD 1 billion all around the world.

I would just focus on the wallet service that an exchange provides. When an exchange has become a monster like Binance, they eventually collect an enormous number of coins from all of their users. How is it related to Proof-of-Stake (PoS)? PoS is considered as an alternative solution to the popular Proof-of-Work (PoW). The idea was first coined by King and Nadal when they developed a coin called PPCoin or Peercoin. The fundamental idea of PoS is to replace the massive energy consumption required by PoW by utilising the coins inside the system itself. Therefore, PoS is considered as “greener” compared to PoW. In terms of security, PoS is supposed to provide an equal security guarantee to the system’s integrity as PoW does.

The other major difference between PoW and PoS is that PoW relies on external factors, while PoS relies on internal factors. Mining equipment and electricity are two deciding factors for the success of any miners in PoW, while in PoS, coin ownership is everything the miners need.

Now, think about those gigantic crypto exchanges. They collect a massive amount of coins of major cryptocurrencies, including those that use PoS, such as Tron. If they decide to participate in the consensus, it is likely that they will dominate all PoS systems (or its variants such as Delegated PoS or DPoS), where other regular players will become minorities. All public consensus mechanisms such as PoW and PoW requires that there should be no party that controls more than half voting power (of any means). If the rule is violated, then 51% attack occurs and the power that controls the majority of the voting power becomes the new ruler of the system. That is what we never want in any cryptocurrencies (well, probably other than Ripple).

Binance-Tron Case

Although I mentioned that Binance now dominates Tron’s Super Representative votes, they probably have not yet reaped the full benefit of controlling the majority of votes in a PoS system.

Here is the current top 5 of Tron Super Representatives.

If you see in the screenshot above, Binance controls more than 59% of all votes with more than 12 billion TRX being staked or one-sixth of all coins in circulation! There is also a huge gap between Binance on the first position and Sesameseed on the second spot, where Sesameseed controls a mere 2.36% of votes!

However, it is interesting that Binance does not dominate the block producer chart.

Although I am sure that the reward should be closely related to the number of votes an SR has, as Justin himself said in this article, I still could not find any proofs regarding the matter. Probably something is wrong with the system, I don’t really know. In theory, with that many votes, Binance should dominate the block producer chart. Mulders wrote an interesting article that discusses several PoS methods that can be easily understood. It turns out that Tron has anticipated voting domination by rotating the Super Representatives. The solution might not be in favour of the rich stakers, though.

Conclusion

PoS is probably dead with the existence of crypto exchanges if the consensus mechanism is not modified just like in Tron. However, the modified version of the consensus mechanism might lower the interest of rich players that want to gain more out of their wealth in the cryptocurrency industry, more specifically by staking their coins.

However, we will see whether crypto exchanges can shed some more examples for us, so we can learn from their successes in dominating PoS-based systems.

Leave a Reply

Your email address will not be published. Required fields are marked *