Disadvantages of Cardano's Proof-of-Stake Algorithm
Cardano’s faces some challenges ahead stemming from its use of proof of stake. How will it overcome them?
Summary: Proof of stake has become the go-to option for blockchain platforms instead of proof of work, but it has also become no longer a significant selling point for investors. Cardano's focus on attracting environmentally-conscious investors is not paying off in certain ways, and the project is facing some tough competition from rivals as vulnerabilities in proof of stake become more apparent.
For a while now, an increasingly larger segment of the blockchain and cryptocurrency communities have expressed growing discontent with the environmental impacts of proof of work (PoW) as a validation method. Their understandable disinterest in proof of work moving forward has pushed competing cryptocurrency projects to adapt various approaches, many of which represent an abrupt departure from the status quo. Cardano is no different in this respect in that it has employed proof of stake (PoS) as a means to validate transactions.
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Why Not Keep Using Proof of Work?
Cardano and other altcoin project supporters argue that a proof of stake model is able to easily keep Bitcoin's advanced features while still proving much more efficient. The controversial yet battle-tested proof-of-work validation method requires miners to validate each block by solving challenging mathematical equations using high-end computers.
The block is considered validated once the equation has been fully solved, and the miner is then compensated for their effort. The huge amount of electricity required to power the competing computers needed to solve the block validation challenges, however, has led many to feel that that the proof-of-work protocol is an inefficient and unsustainable approach. As a result of this, growing discontent from competing cryptoprojects have investigated and ultimately introduced substitute techniques for validating transactions and certifying blocks.
What’s the Proof for Proof-of-Stake’s Usefulness?
Proof of stake has quickly risen as the primary rival to proof of work. Some questions, however, that we need to ask are:
What actual advantages does PoS provide?
What is the real "stake" that miners have in the platform?
Cardano takes a rather structured and perhaps blatantly classist approach to resolving the latter question, as owning coins or having worked as a miner for a certain length of time largely determines who should receive a chance to validate a block. This selection process is then subject to randomization. This is the equivalent of telling you that you will receive a million dollar beachside mansion in Malibu and then randomly assigning you one.
For what it's worth, the system does exactly what it promises to do, which is to validate transactions effectively. Miners are then rewarded in a manner similar to proof of work after the block has been authenticated. According to plenty of proof of stake’s core supporters, many persistent and entrenched proof-of-work-related problems can be resolved as a result of simply applying proof of stake instead.
For instance, they correctly surmise that there would be a considerable reduction in the total energy needed to make a block. They also further mention that the likelihood of a 51 percent attack would be completely eliminated. However, the devil, as they say, is in the details.
Although Cardano’s version of proof of stake, for example, may seem to provide many of the core functionality of existing proof-of-work-based protocols, to many, it genuinely does not.
We should thus begin this analysis of proof of stake by examining this statement. And so let’s start by clearly explaining that proof of stake does not in fact have the same amount of fundamental academic research as proof of work. As a result, a sizable segment of the crypto community has passively accepted proof of stake, while perhaps secretly harboring doubts about the actual stability and security of proof-of-stake-based cryptocurrencies.
We must, however, also clearly state that the issue of how to manage validation in the most efficient manner cannot be resolved through examining and understanding of the proof of work protocol alone. A thorough and ongoing analysis of the blockchain must be conducted, as it is still vulnerable to a number of serious flaws that are only now being looked into.
How to Challenge the Proof-of-Stake Dogma?
Proof of stake systems have not yet had the chance to have their weaknesses adequately investigated. Critics immediately drew attention to the fact that a proof-of-stake protocol would allow miners to follow any number of chain histories without taking any risks.
This failure, commonly referred to as the "nothing at stake" problem, is particularly egregious as it would ultimately prevent agreement on the chain from happening. Lack of agreement in this most serious form could in turn result in the ultimate form of decentralized instability: a hard fork. For the uninitiated, a hard fork is when a blockchain splits into a rival blockchain. This ever-present threat in proof of stake often gets glossed over by its supporters, who claim that by simply making a few small changes to the protocol, this problem may be quickly resolved.
Even if ceding them this argument, it nonetheless becomes glaringly apparent that even further catastrophic problems exist.
There exist a minimum of three new vulnerabilities that are still being woefully underreported if not outright ignored. The first vulnerability can occur on a single node and does not need any kind of stake. The second vulnerability, which is a variation of the first, allows a malicious entity to establish an "apparent stake" even though they actually have none. The third vulnerability is one that permits an attacker to falsely increase their stake through the use of self-spends. Self-spends are a type of spending or churn that an individual does on oneself; doing so allows them to arbitrarily save falsified numbers onto specific victim nodes—kind of creating unwilling zombies, if you will.
Any of these vulnerabilities are troubling to say the least, but when combined, these security weaknesses reveal serious, glaring, and endemic issues with the proof-of-stake protocol.
Is Proof of Stake Driving Cardano’s Adoption Difficulties?
Among a few, the first difficulty Cardano that faces is that simply improving the present ecological impact of cryptocurrencies through the use of proof of stake might not be sufficient to create interest from investors and traders.
All businesses face challenges in capturing both investor’s hearts and wallets. For a cryptocurrency project, this issue is exacerbated, as it is impossible to overestimate the significance of the "network effect" when it comes to generating the passionate base and hype necessary to propel a cryptocurrency’s valuation. This increased valuation, after all, is why validators aim to validate.
It's the promise of stacking an appreciating asset that inspires organizations and individuals to take on the costly risk of validating the blockchain’s data. Cardano, much like other altcoin projects, operates in the same way a gold mine operated in the 1850’s. The more reward available or possible, the more miners, and the more miners, the more developers, the more owners, and ultimately the more end users.
Bitcoin is generally seen as less of a direct competitor to Cardano because it is being utilized more and more as a "store of value." There is no doubt or even argument that these two competing cryptocurrencies can live side by side. The bigger threat to Cardano, aside from its potential proof-of-stake issues is actually from Ethereum, which already has a sizable advantage in many ways, in addition to now offering many of the same proof-of-stake advantages that Cardano does.
The gap in terms of investor preference and trust between the three remains evident when we look at current market caps. Cardano now has a market cap of around $14 billion, compared to ETH's $230 billion and BTC's astounding $585 billion (the last of which broke one trillion during the last crypto bull run).
Cardano has gathered a loyal base thus far but, as they say, if you’re not growing, you’re dying. And when presented with a considerable difference in the number of users and the volume of traffic on each platform, developers may still choose an up-and-coming, less well-known, more accessible platform if it allows them a greater reward for validating.
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Building Up and Increasing Proof of Stake’s Capabilities
The second dilemma that currently plagues Cardano is that it still lacks numerous features, which serves to further compound the first problem of it being boring to some investors. Cardano, as with most cryptocurrency projects, is in a constant state of development—a fact that has even been acknowledged by the company's creator. Although Cardano supports smart contracts, with Ethereum 2.0, writing the code for Etheruem’s contracts has become inherently a lot easier.
Many critics have also highlighted that there is a lack of popular decentralized applications currently deployed on Cardano. Make no mistake about it, the platform has a tremendous amount of appeal in theory. There just isn't as much there yet in terms of how it actually operates. Both of these problems regarding Cardano’s continued insistence on using proof of stake provide substantial business opportunities for upcoming and existing cryptocurrency competitors. Cardano, though popular enough, is also in an extremely precarious situation.
ADA-USD has a market cap that is less than one-tenth of that of ETH-USD. Cardano loyalists are quick to argue that the current lack of widespread exposure results in a bigger pool of possible investors, which will ultimately raise its price. They further argue that Cardano will mature and improve drastically by 2025 in a way that attracts more buyers and boosts confidence.
As critical as this all might seem, we are nonetheless big fans of Cardano, as we believe that it has a great deal of potential as a cryptocurrency. In the best-case scenario, it could very well still become the cryptocurrency investment of this decade. And yet, as optimistic as we are, there still remains a lot of work to be done regarding some of the glaring weaknesses in proof of stake—and perhaps even more importantly, in confronting the challenges for its ecosystem and developers to need to be overcome.
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Conclusion: Proof of stake has rather quickly become the default consensus mechanism alternative to proof of work for cryptocurrency projects. However, proof of stake appears to be no longer a selling point for many investors. To make matters worse, Cardano is also facing stiff competition from competitors as certain vulnerabilities in proof of stake become increasingly evident. As always, feel free to share your thoughts on Cardano, proof of stake, and other trending cryptotopics in the comments section!
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