Written by: Crypto_Jaygo

Proof of Stake (PoS) was first proposed in 2012. With the switch from PoW to PoS in ETH in 2022, the PoS model has reached a peak of development. The basic logic of the PoS mechanism is that coin holders pledge their tokens and become validators of the blockchain. The validator will then verify the transactions on the network and send the proof to the blockchain. If correct, the validator will receive a reward from the blockchain. The actual operation is much simpler at present. Taking ETH as an example, most users directly deposit ETH into a third-party protocol such as Lido to complete the pledge, and then simply obtain the income from staking, which is almost completely equivalent to holding stocks to obtain dividends.

This seems to be a perfect solution: lower energy consumption, less issuance, happy holders, and security close to PoW. Security is not within the scope of this article, but there are already a lot of papers discussing it. Interested friends can check it out. In fact, the security of PoS is far worse than PoW. This article only discusses the economic model of the PoS model from the perspective of currency mechanism. ETH is cited as an example in many places, but the background of the discussion is all PoS products.

No successful currency in history has been operated through a linear issuance mechanism like PoS. Shells cannot be increased in value by hoarding, but can only be mined by distant seashores; the same is true for gold and silver precious metals. To obtain new gold, it must be mined, refined and processed through heavy mining. The interest rate of gold has also been very low in history, so low that even Buffett is unwilling to hold it because it has almost no interest. Bitcoin, as digital gold, needs to be obtained through competitive mining by miners, and there is no other shortcut. Before modern times, mainstream currencies were completely obtained through third-party mechanisms.

Since entering modern times, most countries have issued sovereign currencies, but the backing of sovereign currencies is the credit endorsement of the monetary authorities of various countries. Sovereign currencies can hold national debt to achieve the growth of the amount of local currency, but it should be realized that behind this is the government endorsement, and the violent organs force the residents of the country to use their legal currency. If everyone can freely choose which currency to use, then 99% of sovereign currencies may disappear. Blockchain currency does not have the blessing of violent organs, so sovereign currencies are not a good reference object, not to mention that blockchain currency itself despises sovereign currencies.

In the PoS world, legal tender is generally the token of its project, which assumes the function of the basic currency in its ecosystem. For example, payment. Unlike gold and BTC, in the PoS system, current holders of the currency continue to obtain staking income, and new coins are almost effortlessly obtained; while outsiders have to pay real money or work hard to enter the market, which is in an extremely disadvantageous position. These two are completely unfair. Someone may want to refute me here, isn't it the same for Bitcoin and Bitcoin? My answer is: it's really not. Take gold as an example, suppose there are only two people in the system: Zhang San, a low-income household, has 0 assets, and Li Si, the richest man, owns 100% of the existing assets. In the case of gold, the new assets are fair to both of them. To obtain a new gold coin, Zhang San has to make the same effort as Li Si. Therefore, gold provides a fair playing field. Of course, Li Si can choose to sell his existing gold, but in time, his gold will become less and less, and eventually realize the circulation of assets and the adjustment of social classes. This is true for gold, and it is also true for Bitcoin. In order to obtain every extra gold coin and Bitcoin, everyone is on the same starting line.

In essence, the value storage function and the income function of currency cannot be combined. Buffett told us that to realize the preservation and appreciation of capital, we should buy stocks. But stocks are not currencies, and they do not exist as a value storage, but as a value discovery function. If we insist on mixing the two together, it will only produce stitching monsters and Ponzi schemes, rather than long-lasting and vigorous life forms. If we look at the currency attributes, the interest rate of Bitcoin is as low as that of gold, because this market is full of lenders and there are few borrowers. Except for a small number of short sellers and specific scenarios, few people will borrow gold and Bitcoin. Speaking of stocks, friends may immediately think of the Harvey Test on securities. ETH has always been at risk of being regulated as a security. From the perspective of substance over form, PoS tokens are essentially stocks, and the risk of being regulated will exist for a long time and follow like a shadow.

Regarding lower energy consumption, this is a logical paradox. The most successful currency in human history - gold, consumes extremely huge energy to mine and mine, but this is also the unique value of gold: all races and religious beliefs regard gold as a high-value product. The core factor behind this is: energy itself is the best yardstick for defining scarcity, and it is also a unified value measurement scale acceptable to all mankind. Eliminating 90% of energy consumption also consumes the long-term value persuasiveness of the product in the same proportion. By analogy, holding US dollars is itself optimistic about the crystallization of human intelligence behind the US dollar, a large amount of scientific research investment and capital expenditure; holding RMB is also because the employees on the Foxconn production line behind it assemble and produce iPhones day and night in exchange for foreign exchange. Holding these currencies is because of the energy behind them. Can you find a mainstream sovereign currency with low energy density?

A prediction: For decentralization, the highest priority of PoS tokens is price stability. Decentralization, anti-censorship and low fees are no longer the core demands of POS projects, so they are not prioritized and become a distant prospect. Decentralization is a thankless task, which does not improve efficiency and may also anger the investors behind it, so the project party will not only not mind, but will even deliberately downplay its importance. Reducing transaction fees and costs has become less important, because enough tokens need to be burned to ensure that the economic model of the entire project does not collapse.

Once interests come into play, the once impossible triangle of "decentralization, security and scalability" becomes less important. More importantly, and perhaps relatively hidden, is the triangle of: investor interests, coin price stability and control. For the value of project tokens, stability is paramount. Because those with voting rights are also large coin holders, a stable coin price can generate a sufficiently high level of income, and in order to ensure that the control of the project is not lost, the original coins must continue to be held. Observing the main institutions of ETH, we can see a clear tendency to hold coins and a demand for income.

But the core issue here is how to maintain this mechanism. No need to pay money to miners, saving a lot of costs. However, a system of continuous issuance requires continuous investment of wisdom and resources. The core of burning tokens is that someone continues to invest and innovate, and these investments play a role in stabilizing the price of the currency. However, the premise that someone is willing to invest wisdom and resources is the stability of the token price itself. After all, no one is stupid and is unwilling to invest their limited energy in a declining ecosystem. So the two are mutually dependent. New investment brings new hot spots, which attract a large number of users and transactions and bring prosperity to the ecological environment; otherwise, it spirals downward.

Early developers and investors of blockchain, whether BTC or ETH, have achieved a leap in wealth. However, in terms of mentality, the holders of the two are slightly different. Holding BTC is very painful, and you have to be a believer like Michael Saylor, or you have to constantly endure the inner torment of "I should have sold it when I knew it was 60,000!", but every time you sell BTC, there is one less, and once you sell it, it will be gone. Holding ETH is much more comfortable, dividends are constantly received, and there is a daily holding income, so just eat the dividends. Under the incentive mechanism of the two, which one do you think will be more motivated to continue to contribute?

Another feature of PoS projects is pre-mining. For example, about 60% of ETH tokens are pre-mined. Part of the pre-mining is given to investors, part to the team, and part to the foundation. One of the tasks of the foundation is to continuously sell tokens to the market, which requires a steady influx of funds to take over. Once such takeover funds are insufficient, then entering a downward death spiral is an inevitable dilemma.

Once we give up decentralization, we are back to the old path of centralization. Although we all have the private key of the wallet on ETH, how much difference is there between our NFT and the paid avatar on Tencent QQ before? QQ is a completely centralized blockchain protocol, is it okay to understand it this way? Looking at ETH, the king of PoS, more than 60% of the verification nodes are built on cloud servers, and most of them are Amazon. We are worried that Ma Huateng will tamper with our data and take away our QQ avatar, but we can't trust Bezos to ensure the security of our blockchain assets.

One person’s opinion: PoS has no future. The current status of ETH, the representative of PoS, is that there is no other smart contract public chain that can reach the same height as it. ETH’s strength is better described as its weakness among other competitors and challengers. Once a new public chain can emerge in the current decentralized field, the former fortress of ETH will face the possibility of collapse.

MakerDAO's departure to Solana may set a precedent for leaving the ETH network. Considering MakerDAO's important position in the Ethereum ecosystem, its departure has a huge demonstration effect. This directly led to Vitalik's anger, and he sold off his MKR holdings. Later, he bluntly stated in the discord that MakerDAO had gone astray. Whether it has gone astray or not, I don't know, but what I know is that ETH has been hurt. PoS encourages small circleism, but new resources need to continue to enter to maintain the normal operation of this system. Now that someone wants to withdraw, it will be even more difficult to maintain this basic foundation. If I were Vitalik, I would probably be so angry that I would curse, but Vitalik has a good personality and only stopped at that point.

The decline of most projects is not completed in one day, but a slow and long process. This will give many people opportunities and make many deep-seated problems less acute, entering a state of boiling frogs in warm water. However, people will gradually wake up, realize the problems, and take measures.