Dr. Craig Wright, who recently reaffirmed that he is, in fact, Satoshi Nakamoto, has tried for the past several years to help the cryptocurrency community understand the differences between proof of work (PoW) and proof of stake (PoS). He has shown why PoW is the better alternative and why PoS needs to be avoided, but some are still missing the big picture. In a recent Medium post, Wright, with some assistance from Ryan X. Charles, explains things once again and, hopefully, more people will now catch on.
PoS is not decentralized, at least not as it is meant to be defined by the blockchain. Wright points out that a share of a company, also referred to as a common equity, offers the same position whether it’s on the blockchain or elsewhere. He asserts, “If we take Apple Inc., we will find that the distribution of shares is more widely distributed than systems like Ethereum. In other words, Apple stock is more decentralised than the so-called decentralised cryptocurrency.”
This isn’t just conjecture; Wright backs it up by providing the definition of a security per U.S. laws. Section 2(a)(1) of the 1933 Act, 15 USC [U.S. Code] 77b (2017) says of securities: “The term ‘security’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”
Put simply, a security is an investment contract. These contracts can legally be registered electronically (also referred to as a dematerialized contract) or through a book entry. This, accordingly, shows that a token issued on the blockchain is a type of security.
Wright explains, “In consequence, ETH acts as a security token as it is purely an investment designed to allow others to profit through the capital gains of a held token. At present, two pools control 53% of the Ethereum network. Moving to a proof-of-stake system allows the top 1% of active holders to control the entire system. The US Supreme Court has distinguished Forman from Howey through the motivations of the buyers.”
Ethereum has incorrectly defined PoS in an attempt to bolster its end game. Its own material states that the node will only “contribute to the network if it is left running online. This is essentially the idea behind PoS: merely holding the asset will contribute to the network.” This promise, according to Wright, prevents a small shareholder from amplifying the amount of ETH returned as a dividend. This shows that some shareholders could potentially manipulate the network and “Ethereum validators act as if they were preferential shareholders with a dividend.”
Wright acknowledges that Ethereum may currently be a commodity, but that it is being converted into a security, with only certain stakeholders deciding the token’s fate.
PoS is not able to offer the same securities provided by PoW. It also doesn’t provide the true benefits of the blockchain and is a “simple equity that is designed to facilitate bucket-shop trading as it manipulates fools and misleads regulators.” PoW exists for a reason and has already been identified as the proper method to be employed by blockchains. As has happened too often, many developers believe they don’t need to adhere to the original design of crypto and continue to bastardize their projects to suit their own needs, not the needs for which digital currency was developed – to be a peer-to-peer alternative to fiat.
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