Users are bracing themselves for a major systematic shift from a proof-of-work model to a proof-of-stake as the Ethereum community anticipates the long-awaited launch of Ethereum 2.0. As a reminder, in PoW networks, miners have to compete with one another to solve complex mathematical problems to validate a block. The first miner to solve the problem is rewarded with the block reward. Whereas in PoS networks, token holders (validators) need to “stake” or risk their tokens to validate transactions. Validators who verify honest transactions are rewarded with newly “minted” tokens but are punished (“slashed”) for allowing false or incorrect transactions to go through.
As the promise of a PoS system becomes a reality, the industry is preparing itself for a more secure and efficient way of achieving the same goals once provided by the PoW system. PoS systems consume exponentially less power and systematically increase decentralization by lowering the barrier of entry to network participation. While the transition from PoW to PoS may be initially difficult for the community, keeping these five principles in mind will make the transition easier for everyone.
Stake principle – Staking and delegating have the potential to create incredible and viral economic growth opportunities not only for 2020 but also for the years ahead. So far, staking is the most underappreciated trend of 2020 and is seen by many as a minor trend. In the months to come, with the impending launch of Ethereum 2.0 and Skale going MainNet, staking more will become more popular and accepted in the mainstream. Ultimately, with great DApps, performant blockchains, and staking/delegation-based networks, there is a potential to build a massive new digital economy.
Total stake principle – The total stake will matter much more to validators than the stake in particular networks because a security compromise will lead to a massive withdrawal of delegators across all the networks this validator delegates to. Furthermore, reputation based on performance will be a critical component for validator decision making; and poor performance in any one network will lead delegators to assume poor performance across all networks.
Equal security principle – Most major networks will see an overlap in validators because they will want to diversify their investments. This means that the security of Ethereum 2.0, Skale, Cosmos, etc. will be very much the same because validators for one major network will want to diversify their offerings and income by validating across multiple major networks. The overall effect is the creation of a stronger, more stable set of networks with reliable validators who delegators can look to work with.
The geographic influence principle – Country-specific regulations, taxes and personal ties will cause validators to gain delegators based on geographic affinity. It also means that within each geographic region, validators will mine multiple networks simultaneously. The result will be geographically diverse validators focused on their given geographic region offering delegation services across multiple networks.
Delegation wins – Networks with delegatable tokens have a significant advantage over those with non-delegatable tokens since there is a separation of capital from professional expertise. By allowing those with capital to participate in the network, you can dramatically increase its decentralization by allowing more actors to become involved. Expertise has the potential for a dramatically more centralized and less secure network, but by using delegatable tokens, you give both delegators and validators the opportunity to develop a symbiotic relationship within the larger Ethereum community.
It also creates a good checks and balances system within the network. If validators do not follow certain staking rules, both validators and delegators risk incurring financial penalties. This motivates delegators to choose to delegate their tokens to validators who consistently provide top-level service with integrity and good faith. The co-dependence of these two parties ultimately makes for a cooperative and supportive system.