The risk of corporate capture is extreme in proof-of-stake (PoS) systems as PoS transforms novel financial systems into pure plutocracies; dozens of US-based high-profile companies warned in a letter to the US Environmental Protection Agency.
The companies were firing back at the attack by Congressman Jared Huffman who recently described Bitcoin (BTC) mining as something that is “poisoning our communities”; and contributing to “air, water, and noise pollution”. According to the companies, Huffman’s letter to the EPA is “premised on several misperceptions about bitcoin and digital asset mining; that have previously been debunked or conflate bitcoin mining with other industries.”
The two biggest cryptoassets by market capitalization – Bitcoin (BTC) and Ethereum (ETH) – are using the proof-of-work (PoW) consensus mechanism; while ETH is planning to switch to PoS.
While the letter was signed by multiple Bitcoin mining companies such as Core Scientific, Argo Blockchain, Foundry Digital, and others; including one of the biggest BTC holders, MicroStrategy, multiple other, more diversified major crypto players have also signed the rebuttal. The list includes Digital Currency Group, Galaxy Digital, Grayscale Investments, SBI Crypto, Bitgo, and others.
In his letter, Huffman wrote that “Less energy-intensive cryptocurrency mining technologies; such as PoS, are available and have 99.99 percent lower energy demands than PoW to validate transactions.”
However, according to the players in the BTC & crypto industry; the reason why PoS is unsuited as an alternative to Bitcoin’s energy-intensive PoW-based mining process is that it tends to accumulate too much power over the network in fewer hands. Many crypto owners opt to store their coins with large custodians; which inevitably leads to risks and centralization in a PoS system, per the letter.
“[…] in practice these intermediaries tend to accumulate the bulk of supply,” the letter said, adding that more regulations make it ever-more difficult for new custodians to enter the market, leading to further consolidation of the industry.
“Thus, the risk of corporate capture is extreme in proof-of-stake systems”; the letter said, offering Tron (TRX) founder Justin Sun’s takeover of STEEM as one example of this.
“Put simply, proof-of-stake transforms these novel financial systems into pure plutocracies – an outcome that is incompatible for tools that are meant to be decentralized; global, and completely void of political barriers to entry,” the letter said, before adding:
“Since Bitcoin was founded specifically to disempower intermediaries, it’s imperative that it remain on proof-of-work.”
According to the letter, given that PoS and PoW are qualitatively different; it’s misleading to refer to PoS as a more ‘efficient’ form of PoW; since it does not achieve the same thing.
“A bicycle uses less energy than a plane, but it achieves something different; and so cannot be considered more efficient”; they wrote, noting that PoS does not, for instance; provide a way to achieve decentralized distribution of a digital asset, as PoW does.
Also, per the letter, PoS should be understood as an industry term of art for a shareholder-governed financial consortium.
“In contemporary PoS systems, it is the largest holders of the tokens that ultimately determine the governance of the ledger; even if ‘tokenholder’ governance is not explicitly encoded into the protocol,” the authors wrote.
However, the Ethereum community dismissed similar claims in the past.
For example, speaking with Cryptonews.com, Ethereum developer Marius van der Wijden said that the community is doing what it can to keep Ethereum’s implementation of PoS decentralized, secure; and fair for all users.
“There is the argument that in PoS only ‘the rich get richer’; but I would argue that this is even more so in PoW; as mining companies can leverage their economy of scale way better than any home miner could”; according to van der Wijden.
Meanwhile, the letter by major crypto players also went on to systematically counter each of the many points brought up in the Congressional letter; including accusations about “environmental risks and pollution” related to mining; the re-opening of closed coal and gas facilities by miners; and false statements about the energy consumption of a single bitcoin transaction.