Vitalik Buterin’s Seven Deadly Crypto Sins: Centralized Proof of Stake
In the following series, BTCManager will be walking through, in detail, seven questions posed by the co-creator of Ethereum. These seven questions are some of the most relevant features of this booming ecosystem. From centralization, as in this week’s installment, to governance and everything in between. The series was inspired by a discussion between Buterin and a WeChat group called “Mars Finance Global Family.”
To get started, have a look at the first installment related to Bitmain’s move to centralization and the threat of 51 percent attacks.
Many Monopolies on the Horizon
The economics of society is such that as markets of scale continue to grow, the rewards for conducting immoral actions follow suit. This leads to a Highlander-style of takeovers as companies gobble each other up in billion-dollar transactions. In the first half of 2018, global companies spent $1.2 trillion on mergers in acquisitions to realize the efficiencies of operating on a larger scale.
Already, Bitcoin-based companies are seeing this effect, with companies like Coinbase using its’ gains to acquire several companies. In an effort to get listed as an SEC-regulated securities exchange, the San Francisco crypto giant has spent hundreds of millions of dollars in acquisitions and development. It is their view that they can become a centralized American exchange for crypto securities. From their blog, they state:
“Ultimately, we can envision a world where we may even work with regulators to tokenize existing types of securities, bringing to this space the benefits of cryptocurrency-based markets — like 24/7 trading, real-time settlement, and chain-of-title.”
Bitmain is seeking to grow as well. By filing for a 14 Billion Dollar IPO, the Chinese firm is looking to be a centralized player in the mining space. It is entirely possible that they will be a significant player in the AI space as well. Bitmex research “unboxed” Bitmain’s IPO and revealed the reasons for their strategy:
“In our view the primary motivating factor for the IPO is simply that Bitmain’s competitors are also planning on doing them and the industry is fiercely competitive, as Bitmain’s loss making prices indicate. Rival Canaan Creative are planning on an IPO and Bitmain are unlikely to let them obtain such a funding advantage.”
Rakuten, a large Japanese e-commerce firm, is acquiring a Bitcoin exchange. In seeking to become the next “Amazon” for Asia, Rakuten has already established a “Blockchain Lab” and is making big movies in the P2P payments space and a wide variety of other payment services. They acquired the exchange so that they can become a centralized exchange for the Asian market. From their press release:
“Rakuten Group decided to acquire everybody’s bitcoin shares so that it can realize the early registration as a cryptocurrency exchange and develop cryptocurrency services to customers by combining the know-how of everybody’s bitcoin as a cryptocurrency exchange, and the know-how of Rakuten Group as a provider of various financial services.”
Silenced by the One
The unfortunate part of centralization is that it brings on significant risks. In the first, censorship is a paramount concern when it comes to cryptocurrencies. The Federal Reserve, for example already practices censorship over society at the behest of the government. Even as states permit marijuana sales, the central bank and the U.S. Department of Justice exert its’ control over society by acting as the gatekeeper to monetary systems.
Those that are working for these centralized systems often argue in favor of it. For example, Morgan Wright, an “expert” with the U.S. State Department, says that the government should design a cyberweapon to destroy cryptocurrencies:
“On the other hand, it might be time for us to take a page out of our own playbook and design a new cyber weapon. Instead of targeting centrifuges, we should consider targeting [crypto]currencies. Iran clearly hasn’t gotten the message. Maybe ‘Transaction Declined’ will get their attention.”
Anytime that a system becomes centralized, the risks rise that a single bad actor could act to the detriment of billions of people. Therefore, it is vital that a decentralized system continues to pursue it’s original ethos, lest it become a community’s single point of failure.
As a result of the Proof of Work (PoW) consensus mechanism, the economies of scale have led to a five billion dollar mining industry that is unfortunately centralized after a fashion. Not only that, but it also points to the risks of a 51% attack.
In light of this, Vitalik Buterin asks, how can Proof of Stake (PoS) based currencies, such as Dash, EOS, and Ethereum’s Casper, avoid the risks of centralization?
My Way or the Highway
In a lengthy Reddit post, a Redditor goes into great detail about how centralization would lead to problems with PoS:
“This isn’t an issue of comparing one person with 100 ETH and the guy next door that holds 200 ETH. It’s more like the guy holding 100 ETH compared to Staking business next door that’s holding 100k or 1M.”
Although this exact scenario has been corrected with programming, the risks present a reality in which a bad actor can come along and take over a coin.
There are still plenty of theoretical attack vectors that could compromise the PoS cryptocurrencies, but it seems that the latest programming has mitigated many of those vectors in the various coins.
Ethereum’s next generation of code, Plasma and Casper, will work together to prevent any centralization attacks. One of the main points is that any attack performed by a bad actor will have significant costs associated with it thereby detracting from the motivation of the attack. Furthermore, if the attack does happen, Ethereum has an active development team that can initiate programming changes quickly, much in the same way that Microsoft releases security updates.
Dash has been criticized for its’ Masternode network. However, with 4,700 masternodes running globally, it would be complicated and costly to attack the Dash network. As explained by “Solarguy2003” on Reddit:
“Let’s say you’re a bad actor, and you have a lot of money. You decide to do a 51% attack by purchasing 2400 Masternodes. First off, that would take 1.2 Billion dollars if no price appreciation happened. But price appreciation would happen…So in real life, it would cost 12 to 120 Billion dollars if not more to attempt such a 51% attack.”
EOS has been heavily criticized for a small number of block producers as only 21 nodes are responsible for producing blocks. Those 21 nodes are voted in by EOS token holders. The largest shareholder is the creator of EOS, Block.One, and they have participated in voting and being a block producer.
Even if they can’t attack it from within, they may try to attack the coins from the outside. As Richard Heart noted on Twitter, a large trader made a considerable trade all at once on a premium exchange:
“Someone just added 12,500 [bit]finex shorts over the last 4 hours. Long short ratio sits at 56% short 44% long. Total shorts 33.3k. Which is weird because Some giant hidden bid buyer ate up all the sells and [bit]finex is at a premium over all other exchanges. Weird stuff.”
Even though cryptocurrencies have a lot of promise for developers of the next generation of infrastructure systems, similar developers have spent the majority of their time developing security measures against the most common human sin of greed.
So what is being done to protect against that?
Other People’s Money
Even as developers create more and more code to ward off these attacks, various systems are being constructed to ward off the worse of these attacks. The APWG Cryptocurrency Working Group, for example, is working to unify the global response to cybercrime. They are a non-profit organization with more than 2,200 member companies and agencies worldwide dedicated to fighting Internet phishing and fraud.
Group IB offers a comprehensive cybersecurity system for cryptocurrencies. Many Fortune 500 companies have used their services, and they are partnered with Interpol and Europol. They have protected many ICO’s including the 1.2 billion dollar WAVES offering.
Even beyond these companies, several organizations are researching the use of AI and blockchain to combat fraud. In a recent development, Microsoft is developing an AI/ML tool to combat fraud in Healthcare. Over time, these tools can be adopted for general use as well.
As the industry matures, it is very possible that companies and organizations will continue to practice what they do best: Centralize the control over a blockchain. The underlying tools for the many cryptocurrencies have built-in controls against those centralization risks. It is important that the community continues to advocate for a decentralized future as this remains our best counter for human greed.