Analysis on Decentralization of POW, POS and DPOS

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Analysis on Decentralization of POW POS and DPOS IMG 01

Since there are too many criticisms on the mining centralization, this paper will analyze the impact of the three most common consensus mechanisms on the degree of decentralization of block producers.

 

Consensus Mechanism and Indicators on Decentralization Measurement

POW, POS, DPOS and BFT-DPOS (for EOS) are the consensus mechanisms which can determine who can produce blocks and take away the rewards and commissions.

POW is known as the Proof of Work. Anyone can purchase miners to join in competitive mining activity with funding requirements instead of any administrative thresholds. They can use technological advantages and organization capabilities to increase competitiveness.

POS is known as the Proof of Stake, which can determine who can produce blocks based on the holding coins and periods. Anyone can purchase coins to join in mining activity. The amount of holding coins is the only competitive advantage.

DPOS is known as Delegated Proof of Stake, which adds an “administrative threshold” to the POS mechanism to determine who can produce blocks through community voting. After successful voting, the blocks will be produced according to the amount of holding coins. There are quantitative limits for voting, for example, only 101 block producers for bitcoin stocks and only 21 for EOS.

BFT-DPOS means adding an order of block production based on the DPOS mechanism, that is, all block producers must produce blocks in a specific order instead of producing blocks based on the amount of holding coins. Although the Byzantine Fault Tolerance (BFT) will not be discussed in this paper, it is obviously designed for extremely limited decentralization.

Now, focus on the relationship between consensus mechanism and decentralization. The decentralization here refers to the “decentralization of block producers (hereinafter referred to as nodes)”, which includes:

  • Number of nodes
  • Geographical distribution of nodes
  • Cultural distribution to nodes owners
  • Whether nodes owners are of the same interest community distribution

 

How POW Affects Decentralization of Block Producers

Due to the POW mechanism, anyone with technical, intellectual and financial advantages can join in competitive mining activity. So, there are many stories about the situation reversion of losers on bitcoin mining, such as Wu Jihan, a common university student who became a millionaire. There are also other people who become rich from mining activity.

POW can fully optimize the market competition environment based on the three forces of technology, intelligence and funds, promote the decentralization with cultural attributes of block producers. The bitcoin mining workers can be divided into two completely opposite parties: the small block party and the big block party. The bitfury belongs to the small block party while Wu Jihan in China is just of the big block party. Such a mechanism can even attract people from all walks of life around the world to join in the mining so that it can be widely distributed worldwide.

The POW mechanism can stop the block producers from falling into the same interest community. For example, the interest community of bitcoin has differentiated multiple interest groups in the field of mining activity. Some mining workers hope for long-term interests and development of bitcoin, so they want to promote bitcoin expansion to attract more users, but the expansion will reduce the commission of mining workers. However, some mining workers hope to obtain more commissions, so they object to the expansion to for the sake of better short-term benefits. Other interest groups hope to push up the commissions in bitcoin backbone to attract users to sidechains and lightning network. That’s the decentralization of full collective interests.

There is a more obvious POW which promotes different interest communities to enter the ecology. Many mining workers never know about bitcoin and what they care about is whether they can make money. They even cooperate with the pools and ask them to pay them RMB yuan through Alipay. There are also other mining workers who only focus on RMB yuan mining, or exchange the coins they have mined into RMB yuan, or store coins, or trade miners… They are different communities of interest and thus very full decentralization will be formed.

The POW mechanism has also big impact on the patterns due to intellectual and technological advantages, therefore the pressure as the industry leader has always existed. In 2014, the Ghash.io overseas once accounted for 51% of the hashrate, but it was eliminated with a few months; Friedcat once accounted for over 30% of the overall hashrate, but now it’s also been eliminated. Now, the Bitmain takes the majority of overall hashrate, but how long will it maintain the advantages? Let’s wait and see. This is also a manifestation of decentralization.

The POW on the number of nodes is an inaccurate indicator, because each block producer can build countless nodes, and they must build enough nodes around the world for competitive advantage. From this perspective, POW will promote the decentralization advantages in terms of nodes number, however, it may result in multiple nodes of the same subject, or even the same individual.

However, the POW mechanism will naturally evolve in the direction of resource optimization, which is easy to promote the birth of tycoons and form a huge advantage over small mining workers to endanger their survivals. Therefore, POW tends to develop toward the specialization of block production. That’s the inevitable result of economic operation, which is reflected in the increasing threshold of mining economy, scale and corporatization. It will reduce the number of block production entities against decentralization.

 

How POS Affects Decentralization of Block Producers

Let’s talk about POS mechanism now.

Block producers under POS mechanism need to hold enough coins with enough period. Only the holders of large number of coins can become the block producers. Under the POS mechanism, the advantages of technology and intelligence are not so various, so only the capital advantage can form the threshold.

Therefore, the POS mechanism is very weak in promoting the decentralization of interest community, which may make the same interest group monopoly the block production. They can be simply classified as coin hoarders.

Therefore, the cultural distribution of block producers also tends to be similar.

The number of nodes and geographic distribution will also result in serious centralization due to the concentration of coin holders, so that over half of the coins are controlled by some company and half of the blocks are produced by it. Theoretically, it’s conducive to launch 51% attack, but in fact, it’s rare to occur since the attack is against the interests of the holders themselves.

Under the POS mechanism, another decentralization, decentralization of coin holders, will be endangered due to the behavior of mining with fundraising. For instance, the wallet company will encourage users to save their coins into offchain wallet by dividends. Under such mechanism, large number of coins will flow into offchain wallet and the users with private keys will be less and less. So it will lead to serious centralization.

The centralization of holding coins is very risky. For instance, the theft of wallet company may make large number of coins controlled by some malicious guys, so that the system may lose many users as a result of the incident of theft. The users will complain of the coin theft and naturally refuse the system forever.

Under the POW mechanism, there is no relationship between coin mining and holding, so it will not result in the centralization of the coin holders.

 

How DPOS Affects Decentralization of Block Producers

DPOS means adding a restriction on POS mechanism. The block producers are not completely dependent on the number of coins and holding years. Instead, it is attached with “voting” and the coin holders can vote for the block producer or cancel particular block producers by canceling the voting.

The DPOS is designed to realize limited decentralization instead of complete centralization, that is, it will ensure a certain number of block producers to be produced by voting. For instance, there are always at least 101 block producers of bitcoin stocks theoretically, it’s impossible to have only one block producer. For EOS, there are at least 21 block producers.

But in fact, this design of DPOS mechanism cannot guarantee enough real block producers, because some individual or entity may control multiple nodes. For example, half of LBTC nodes once were controlled by f2pool. During the startup process of EOS, it is also suspected that some individual once virtualized seven nodes.

The decentralization of block producers generated by DPOS mechanism is very similar to that of the POS, so the aforesaid analysis about POS is also completely suitable for DPOS.

 

Block Producers and Developers

According to the aforesaid analysis, it’s unreasonable to blame POW centralization. Meanwhile, some people also accuse of POW of wasting energy, which has also been explained before.

Some people also blame POW in that the mining workers prevent system protocol being upgraded.

Since POW is far more effective than POS and DPOS to promote the decentralization of block producers, different interest communities may appear in the same system with different requirements on the evolution direction of the protocol, therefore the protocol evolution of POW becomes even more difficult.

That’s also an important reason for the birth of POS, because they believe the mining workers should be prohibited from intervening in protocol evolution, not because POW may endanger the decentralization.

In fact, the decentralization is just reflected by the slow evolution of POW protocol, while the centralization is reflected by the rapid upgrade of POS.

The slow protocol evolution is just the result of decentralization, which owns both advantages and disadvantages. The advantage is high security and the system will not suffer from any errors due to the mistakes of individuals or specific groups. The disadvantage is the slow evolution process.

 

Summary

POW can result in some big companies such as the Bitmain, but so far, POS and DPOS have not yet result in some well-known companies. So, it will depend on your own preferences.