Security Aspects of Proof of Stake

The security of proof of stake is discussed controversially. Here, we highlight the most salient security aspects.

Centralization

Theoretically, PoS provides a lower entrance barrier compared to PoW to contribute to the consensus. There is no highly specialized hardware necessary, and there is no significant difference in electricity costs depending on the location. This allows people with medium technical skills anywhere in the world to join the validator pool.

But the reality can look very different from the theory. If the membership in the staking pool requires a high minimum amount of coins, this can pose a serious obstacle for many users.

Another aspect of centralization is gaining and maintaining 51 % of the stake or mining power. In PoW, external miners can (theoretically) enter the market anytime by buying new hardware with fiat currency. Besides that, miners have to spend a substantial portion of their block reward to pay for electricity and hardware (and maybe workforce).

In PoS, validators receive the block reward. It is essential to notice that the block reward is the only way how new coins are generated. If validators don’t need to spend their block reward on electricity and hardware, they can accumulate it. That way, they can maintain and even strengthen their position as a validator.

Cost of 51 % attack

In PoW, the cost for a 51 % attack consists of electricity expenditures and hardware depreciation. Miners add more hardware and electricity until their costs are almost as high as their block reward. If a miner expects a block reward of, let’s say 100 coins per day, this miner will spend almost 100 coins on hardware (renting or depreciation) and electricity per day. If he spent more, he would make a loss. If he spends less, he leaves room for other miners to increase their hashing power and reap the difference.

If an attacker wants to create a longer alternative chain by mining faster (or with a higher difficulty), he needs to spend more than 100 coins per day.

In PoS, costs are different. Here, electricity and hardware are only a fraction compared to PoW. That’s why we neglect those costs for the sake of simplicity. Instead, block producers would want to earn interest on their stake. If block producers strive for an annual return of 5%, they would have a return per day of 5%/365 = 0.0137%. If there is a daily reward of 100 coins, this would attract a deposit of 100/0.0137 = 7300 coins.

An attacker who wants to launch a 51 % attack would need to stake more than 7300 coins in our example.

In Ethereum, with a daily block reward of approximately 6450 coins and a 5% interest rate, this would attract a stake of roughly 470,802 coins

This is a significantly higher amount than with proof of work and hence considered as safer.