PoW vs PoS showdown: which is more centralized?

It is argued that one of the main benefits of Proof of Stake (PoS) over Proof of Work (PoW) blockchains is that the ones using PoS reach a higher degree of decentralization. Several studies have put in doubt if blockchain based projects are as decentralized as they presume to be. The centralizing effect of big Bitcoin mining operations is one of the cases that reinforce the idea of a lack of decentralization in cryptocurrencies. Here at Pool of Stake, we believe that one of the main factors that causes this unwanted centralization is the use of PoW algorithms to reach consensus. In the following text, we compare the level of centralization of validators in PoW and PoS blockchains by analyzing their geographical location. The PoW projects we analyze are Bitcoin and Ethereum and for PoS it is Stratis and PIVX. We describe each project briefly, and then mention where the biggest mining actors are concentrated for BTC and ETH, and where the network clients are located for PIVX and STRAT.

Bitcoin

This blockchain project needs no introduction. It was the first one to exist, the most popular, the most controversial, and the one with the highest market cap, standing at $143,354,447,932 USD at the time of writing. Bitcoin validates transactions using a Proof of Work consensus algorithm. What are the locations with the highest concentration of miners? In order to locate the miners, we have a look for the mining pools with the highest hashrate. In the context of PoW blockchains, the hasrate is the speed at which a computer is completing an operation. A higher hash rate increases your opportunity of finding the next block and receiving the verification reward, thus, the mining pools with the highest hashrates are the ones verifying the most transactions. Let’s look at the data now:

The conclusion is quite straightforward for this case. Bitcoin mining is very centralized. A group of mining pools control most of the network’s hashrate, and they are mainly based in China. This raises immediate concerns. Miners secure the network and give validity to Bitcoin. A high percentage of hashrate, or a possible alliance between pools, could increase the risk of a 51% attack. So, what about Ethereum?

Note: the data obtained refers to the hashrate in the 24 hours before the time of writing.

Ethereum

This project is quite different from Bitcoin. Simply put, Ethereum is a blockchain-based decentralized platform on which decentralized applications (Dapps) can be built. The application possibilities are endless, as these Dapps can be run exactly as programed without any chance of fraud, censorship or third-party interference. Even though Ethereum is planning to switch part of its system to Proof of Stake, it currently uses Proof of Work. We have a closer look at the hashrate distribution in this blockchain:

In the case of Ethereum, we can see that some pools are distributed, but there is still an uncontested central location: China. You might ask yourself why China is such a big location for mining. The answer is cheap electricity. Coal abundant regions such as Xinjiang and Inner Mongolia provide cheap coal-fired power for these enterprises. Other areas close to hydroelectric plants also provide very cheap electricity. To add to this, the government also has an extensive electricity subsidies program. In the conclusion of this article we will talk about the threats that mining centralization in China poses, but first, we analyze the distribution of some PoS blockchains.  

Note: the data obtained refers to the hashrate in the 24 hours before the time of writing.

Stratis

If you are not familiar with the differences between Proof of Work vs. Proof of Stake, you can read this article. Due to the way PoS functions, instead of looking at hashrate to find out the most centralized locations, we just need to check the geolocation of wallets for PoS tokens. Stratis is a platform offering simple and affordable end-to-end solutions for development, testing, and deployment of native C# blockchain applications on the .Net framework. Stratis aims to provide a platform that meets the needs of existing enterprises by offering “Blockchain as a service”. The distribution of wallets looks as this:

 

We can immediately see a different picture if we compare this project to Bitcoin or Ethereum. To start off, China is not even in the top 10 rank of countries with the highest % of Stratis wallets.

PIVX

This project is an open source crypto-currency focused on fast private transactions with low transaction fees. PIVX uses a Proof of Stake protocol to secure its network, and on top of this, they use an innovative variable seesaw reward mechanism that balances the block reward size in order to create a more fair scenario between masternodes and staking nodes. The project website also talks about the low environmental impact that comes from PIVX’s reliance on PoS. The distribution looks as follows:

The case of higher decentralization is also clear in this project. We can also see that the US has the highest share of wallets. It is also interesting to see Lithuania on the list.

Conclusion

It is to be noted that PoW and PoS comparisons tend to be difficult to make, it is like adding up apples with pears. PoS wallet distribution doesn’t reflect with extenuating precision which ones are working as validators, and it is very hard to get precise data on staking wallets. Besides this, the framework created to make this comparison can still give us a valuable insight and a general picture of validator centralization in both blockchains. Please note that all the data for PoS tokens was obtained here.  

The location of validators can give us interesting insights regarding the rate of decentralization of different projects. The first thing that we can point out is this Proof of Work vs Proof Stake distribution battle is that in PoS, validators are distributed along many more countries than PoW. We can see that on both PIVX and Stratis, the US holds around a quarter of all the wallets. This does not necessarily imply centralization since it does not reflect a single holder verifying all the transactions. On the other hand, one single mining pool named BTC.com takes care of a whooping 28.57% of all the validating activity in the Bitcoin network. An additional risk is possible scenario of mining pools forming a cartel to alter the market. Mining operations are also susceptible to changes in Chinese electricity subsidy policies.  

Moving on to the Proof of Stake projects that we evaluated, the outcome is quite different. The location of wallets is distributed among more countries. It is easy to note that many of these network clients are in the United States, with 24.1% of the Stratis wallets and 27.7% of PIVX wallets. Fortunately, this does not imply increased centralization since these percentages of wallets are not belonging to a single entity.

To sum things up, our research points to high centralization in Proof of Work blockchains. A big percentage of the mining hashrate is located in China. Here at Pool of Stake, we are convinced that PoS is the future of Blockchains. Our previous research has shown that PoS adoption is increasing, and this piece of research affirms that PoS projects are less centralized and more secure than their PoW counterparts. Join us in our journey to create a safe pool for PoS coins that will further increase security in the blockchain!