In Proof of Work (PoW) miners on the network are essential to verifying transactions and keeping the shared ledger up to date. So-called forgers have a similar function in Proof of Stake (PoS) protocols. In this series of two posts we outline the main differences between miners and forgers in a blockchain protocol. The first post will outline hardware requirements for validators in both PoW and PoS chains. In a second post we will discuss the main governance rules affecting forgers in PoS and miners in PoW.
The hardware requirements to become a validator on PoW chains and PoS chains vary greatly. It is fairly difficult for validators on a protocol to circumvent specific hardware requirements and so the hardware requirements can be regarded as the minimum investment validators need to make in order to validate blocks on the protocol.
Hardware requirements in Proof of Work
To become a miner on the Bitcoin network, the people who operate nodes need to acquire expensive hardware. Basically, there are two options for hardware to mine Bitcoin. Whereas ASICs (Application-Specific Integrated Circuits) are more efficient than GPUs (Graphics Processing Units), they can only be used to mine a singular coin. GPUs can be regarded as calculators for anything and if you so decide they can be used to mine a different coin such as ZCash or Dash.
In this sense, using an ASIC will compel the miner to stay on the network. The binding of the hardware to the specific network entails that miners have skin in the game. If the network loses value, then they also stand to lose a significant share of value. The value of their hardware is tied to the success of the network. With a GPU mining hardware the miner can exit flexibly once the value of the token drops. GPU Mining gives the miners more leverage in governance discussions as they can more easily switch protocols when their proposals are not passed.
Given the economies of scale on the Bitcoin protocol as discussed in a previous post individual miners often pool their resources for better outcomes. Rewards in the pool fall into two categories. First, miners may be rewarded proportional to their hardware contribution every time a block is found. This leaves individual miners with the risk of variance, i.e a block may not be found for a long time. The other reward mechanism is pay-per-share where the individual miners gets a reward for every piece of hardware they submit. This leaves the individual miner with no risk of variance, because they get compensated regardless of whether a block is found or not.
One of the problems of proportional pools is that dishonest individual miners may switch from proportional to pay-per-share once the proportional pool has lost its profitability. From the perspective of the individual miner this may be profitable, but it undermines the long-term trust that can be put in proportional pools.
Hardware requirements in Proof of Stake
In comparison to PoW protocols, the hardware requirements to participation on a PoS protocol are relatively low. Instead of specific hardware components stakers need to only have tokens to participate as well as certain minimum hardware requirements. Depending on how many tokens they stake they are chosen as next validators on the chain. Hardware required for staking is an 24/7 online connection on a running server and sufficient RAM space. In this post we have made an overview of pains and gains with PoS forging.
Theoretically, PoS enables wider participation in the validation of transactions. This is connected to the fact that validators no longer have to rely on expensive hardware requirements in the form of ASICs and GPUs. However, one of the considerable limitations of PoS is that a constant network connection is required for staking. Given these minimal hardware requirements there are two negative consequences for individual stakers. First, because of rising profit margins for bigger stakers, centralization is likely to occur as smaller stakers are pushed out of the market by bigger stakers.
Second, most individuals will not be able to provide a constant online connection for staking or sufficient RAM space to run all clients of their PoS coins. As a consequence they will miss out on rewards for validation, which leads to even more centralization. To counter this development some projects have implemented so-called delegated PoS (provide link to our previous article) which lets smaller token holders delegate their tokens to a bigger token holder so that they can stake on behalf of the smaller token holders. This way the smaller token holder can cash in rewards while not having to worry about constant network uptime. Another idea is to delegate PoS tokens to a staking pool which takes care of the staking even in chains were delegated PoS is not an option. Pool of Stake is such an option which allows token holders to remain in control of their tokens while staking on their behalf. This way smaller stakers can avoid the requirement of a constant network connection for staking and reap the full benefits nevertheless.
The future of hardware requirements for Proof of Stake
By now it should be clear to the community that Proof of Work in its main implementation has led to an undesirable state where small participants are seriously excluded from the validation of new blocks. As a function of significant hardware requirements PoW seems incapable of adapting in such a way that it could reestablish widespread participation in validation. The lower dependency on hardware makes PoS more flexible when it comes to building protocols that create a sustainably decentralized community of validators. Despite significant improvements over the centralized PoW protocols, we still believe that there are aspects of PoS protocols that could lead to centralization in the long term and therefore the exclusion of smaller validators. Pool of Stake is building a decentralized staking pool for smaller PoS coin holders to unite and to create together the greatest rewards possible.