Imagine a world where everyone has a magic coin. This magic coin can make more coins, but the rate at which it produces more coins depends on how many coins you already have. This is the world of cryptocurrencies, and the magic coin is a metaphor for the process of mining or minting new coins.
The Tale of Two Systems: Proof-of-Work and Proof-of-Stake
In this world, there are two main ways that these magic coins work: Proof-of-Work (PoW) and Proof-of-Stake (PoS).
Think of PoW as a mining competition. It's like a bunch of people trying to solve a complex puzzle, and the first one to solve it gets a reward. The more powerful your computer (or your "mining pick"), the better your chances of solving the puzzle first. Bitcoin, the most famous cryptocurrency, uses this system.
On the other hand, PoS is more like a lottery. The more coins you have (or the more "lottery tickets" you hold), the higher your chances of being chosen to create the next block of transactions and earn some new coins. Cryptocurrencies like Cardano and Decred use this system.
The Quest for Egalitarianism
You may be asking yourself, "Which system is more equitable?" This is the juncture where the concept of 'egalitarianism' comes into play. In our story, a system is egalitarian if everyone has an equal chance to earn more coins, regardless of how many coins they already have.
Some people argue that PoW is more egalitarian because anyone with a computer can participate. It's like saying anyone with a pick can join the mining competition. But here's the twist: not all picks are created equal. Some are more powerful than others, and those with the most powerful picks (or computers) have a better chance of winning the competition. So, in reality, the rich (those who can afford more powerful computers) still have an advantage.
On the other hand, PoS has been criticized for being "the rich get richer" system. After all, the more coins you have, the higher your chances of winning the lottery. But remember, in PoS, everyone knows the odds, and the odds are proportional to the number of coins (or tickets) you have. It's like a raffle draw where you can buy as many tickets as you want, and each ticket has an equal chance of winning.
The Unexpected Hero: Proof-of-Stake
Contrary to popular belief, the research paper "Cryptocurrency Egalitarianism: A Quantitative Approach" shows that PoS can be more egalitarian than PoW. It's like finding out that the lottery is fairer than the mining competition because, in the lottery, everyone has an equal chance of winning per ticket, while in the mining competition, those with more powerful picks have an unfair advantage.
Let's dive a bit deeper into why Proof-of-Stake (PoS) might be the unexpected hero in our story.
The Lottery and the Mining Competition
Remember our analogy of PoS being like a lottery and Proof-of-Work (PoW) being like a mining competition? Well, it turns out that the lottery might be fairer than we initially thought.
In the lottery (PoS), everyone knows the odds, and the odds are proportional to the number of tickets you have. This means that if you have 10 tickets and I have 1 ticket, you're 10 times more likely to win than I am. But here's the key: each ticket has an equal chance of winning. Your 10 tickets don't have any special advantage over my 1 ticket. They're all just... tickets.
In the mining competition (PoW), however, those with more powerful picks (or computers) have an advantage. They can mine faster and more efficiently, increasing their chances of winning the competition. This means that the rich, who can afford more powerful computers, have an advantage.
The Rich Club Myth
One common criticism of PoS is that it could lead to a "rich club" where the wealthy refuse to share their assets with outsiders. But the research paper argues that this is a misguided argument. In a free market, anyone has the ability to acquire both monetary assets and computing power. So, just as anyone can buy a mining pick (or computer) to participate in PoW, anyone can buy a lottery ticket (or stake) to participate in PoS.
The Egalitarian Curve
The research paper presents something called an "egalitarian curve" to compare PoW and PoS. This curve shows the return on investment (ROI) for different amounts of capital investment.
In PoW, the ROI is capped by the best available machine. If you can afford to buy the best mining product, you achieve the best possible ROI. If you can't afford the best product, you buy a less profitable machine and achieve a lower ROI. As the investment grows, the return on investment approaches its maximum limit.
In PoS, however, the egalitarian curve is perfectly egalitarian. Each coin has the same probability of being chosen to create a block, regardless of how many coins you own. This means that the ROI is the same for all users, regardless of their capital investment.
So, contrary to popular belief, PoS can be more egalitarian than PoW. It's like finding out that the lottery is fairer than the mining competition because, in the lottery, each ticket has an equal chance of winning, while in the mining competition, those with more powerful picks have an unfair advantage.
The Moral of the Story
The world of cryptocurrencies is complex, but it doesn't have to be. At its core, it's about creating a fair system where everyone has an equal chance to earn more coins. And as our story shows, sometimes the system that seems less fair at first glance (like the lottery or PoS) can turn out to be the fairest of them all.
So, the next time you hear about cryptocurrencies, remember our tale of magic coins, mining competitions, and lotteries. And remember that in the quest for egalitarianism, the unexpected system might just be the hero of the story.