The excess return on capital from depositing bitcoin mining rigs in the cool of one’s basement has probably disappeared for good. What struck me about early bitcoin mining was that households suddenly had something akin to a mineralogical resource. That resource was later removed by a combination of the bitcoin’s ever increasing mining difficulty and those with the capital to mine from remote mega-farms. For moviegoers, we had all struck oil (bitcoin) under the house, until Daniel Day Lewis showed up one day and drank our collective milkshakes.
Let’s talk about fairness. Is it fair that most of today’s cryptocurrency mining power resides in the hands of five to ten organizations, primarily in China? Probably not, but then — a small collection of super-major mining conglomerates also over-represent the world’s gold mining capacity. So, do we care about mining concentration given the risk adjusted return of mining gold (or bitcoin) these days? Both assets only seem worth mining when their respective prices spike. Day to day, NVidia and Caterpillar both price their mining gear to leave prospectors with just barely enough profit to justify the gamble. Watch the struggle of the miners on Yukon Gold, or ask a friend who sold his bitcoin mining rig on e-bay because it was no longer worth the elevated power bill.
So, now what? Mine something else and be early to it. OK, good plan — but the problem is that if we as a community repeatedly add today’s bitcoin electrical lode to the planet we’ll slow roast ourselves no matter how much we focus on maintaining “Tesla superiority.”
Don’t get me wrong, the Proof of Work mining approach is important and we need it to make the crypto ecosystem function. However, for future design implementations remember this: proof of stake good, slow roasting bad.
The basement may no longer store a lucrative oil reserve (or easy bitcoin) but if your society and central bank possess collective financial virtue, you may enjoy interest on money — and in some cases may earn interest in excess of the rate of inflation. Yes, I know it’s not much of a rate today (about 1–2% vs a long run historical average of 6% across societies), but the point remains that it’s only the central bank who is going to try to “drink your milkshake.” Because the real interest rate today is flat to negative, you might say that the fed is very slowly sipping your milkshake.
Enter “Proof of Stake”
The Ethereum blockchain is moving to Proof of Stake “forging” instead of Proof of Work “mining.” In the spirit of that transition, with MonetaryCoin, if you own coins, you can tell the blockchain you won’t use them for a while, and will then be paid interest on those coins in the form of more coins. The outcome is reminiscent of a savings account in that one can measure the expected yield on a MonetaryCoin with the same precision as that of a bank time deposit. By way of reminder, the number of monetary coins is initially capped at 1% of M2 and new MonetaryCoins are only available if the subject economy grows (coins in circulation x % GDP growth = new coins available to mine in the period).
But again, what about fairness? As with a bank, if you deposit a lot of cash, you can earn more interest than a person who has deposited less. The Monetary Protocol can’t do much about the concentration of wealth in the world, but one can reliably say that a person with ten thousand mining rigs has zero advantage over someone with a laptop. Why? As above, just owning coin creates mining power.
All “PoS” implementations confront five widely agreed upon problems:
- Initial Distribution
- 51% Attack
- Nothing at Stake
- Long-Range Attack
So, how does MonetaryCoin approach each problem? In some cases Ethereum itself solves the problem in advance of MonetaryCoin launching onto its own blockchain. Like all crypto projects today, MonetaryCoin and the Monetary Protocol are the happy (and grateful) inheritors of insights developed and shared by an astonishingly talented and generous crypto community.
If PoS forging means that the only way to forge a coin is to already have a coin, how does one allocate the initial coins in the spirit of fair play? First, give people enough time to find out about the distribution. Second, if they do find out about it and decide to participate, try to make sure they can participate on terms reasonably similar to those of earlier participants. Third, allocate enough coins to start the forging process, but not so many that one discourages mining altogether.
Concentration in the initial distribution is no guarantee of concentration in later time periods. A lot of participants will sell coins after getting them in the initial distribution, so just because a stakeholder gets a lot of coins in the distribution does not mean that individual will stick around and forge. He or she may simply sell to a wide variety of others and retain only a small portion (or sell entirely).
A stakeholder with the lion’s share of coins can dominate the collection of rewards by continually surrendering them in return for more coins. The example would be that of a miser who starts out with almost all the money in existence and then proceeds to keep all his money in a bank that never lends any of it and pays him interest. This kind of malicious attack, while ultimately self-defeating, would be critically disruptive nonetheless.
To discourage a single actor or handful of actors from acquiring an excessively high initial network stake,the first 10% of coins are distributed over approximately six months.Although each of the first seven windows of distribution offer double the reward of those windows that follow, the windows that follow account for over nine of the ten percentage points distributed. The remaining 90% of coins will be available to the community for Proof of Stake forging.
If a stakeholder has more than half of the mining power on a blockchain, that stakeholder may re-write the blockchain to conceal spending the same money twice. MonetaryCoin enjoys an initial advantage because it transits the Ethereum network; therefore a 51% attack on any one MonetaryCoin (MERO for example) would be an obvious (and astonishingly expensive) attack on Ethereum, one of the world’s largest and most heavily surveilled blockchains.
Should the Monetary Foundation later construct a blockchain governed by the Monetary Protocol and abstract away Ethereum (via pitchfork etc.), that action would require a careful study of stakeholder concentration. For example, the Gini coefficient for Ethereum owner centralization, measured by wallet address, is 0.76, but that does not necessarily make the network more vulnerable to 51% attack.
Nothing at Stake
Although it’s never happened, a “Nothing at Stake” attack is an important theoretical problem that requires thoughtful design. In plain language, if one creates a duplicate/fork blockchain then double spending may be achieved through a series of elaborate steps. While MonetaryCoins are on Ethereum, a “Nothing at Stake” attack would have to fork Ethereum itself. If the attack were to take place after Ethereum had transitioned to PoS (i.e. Caspar), the attacker would to overcome Caspar’s defenses in addition.
What are Caspar’s defenses? Here is one. If a stakeholder wants to validate blocks in return for a reward, that stakeholder must surrender coins. This goes back to our bank interest example — but Caspar is more concerned with security than solely return on capital. A given “validator’s” entire deposit can be deleted if 2/3 of all other validators (weighted by deposited coins) agree the validator in question has attacked. It would be as if a depositor tried to rob a bank in broad daylight, and everyone could watch the security video after the fact. If 2/3 of other depositors (weighted by their deposit amounts) agree a depositor was the robber on the video taken by the branch security camera — the bank takes the money in the robbers account.
In a long range attack, a forger attempts to start a blockchain fork not five or ten blocks behind the head of the main chain, but hundreds or thousands of blocks back. This can generally be solved with time-stamping by the Ethereum blockchain and does not directly affect MonetaryCoin today.
Just because commercialized crypto-miners drank our milkshake and the US Fed sips our milkshake doesn’t mean that crypto-miners and fiat depositors can’t otherwise earn a return to maintain their Tesla superiority.
MonetaryCoin has practical solutions, helped by Ethereum, to the five classical objections to Proof of Stake forging. Proof of stake forging…good, slow roasting planet…bad. The MonetaryCoin Series (MERO and MCHI) offers proof of stake forging today, in advance of the Caspar implementation. By spending on coin instead of gear you just may escape those rigs in the basement for a laptop by the pool.
MonetaryCoinERO (MERO) is traded here:
MonetaryCoinCHI (NYSEARCA:MCHI) is traded here:
Disclosure: I am/we are long MERO, MCHI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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