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Talking about PoW and PoS: Power and Wealth Distribution in Encrypted Economy



Note: The original author is Ryan Watkins

The following is the full text compilation:

Imagine that you are designing a new economic system from scratch. You decide everything from resource allocation to property rights to how the entire system will ultimately be governed and controlled. How would you design it?

In fact, there is no right answer. This is the question that philosophers, statesmen, and economists have grappled with when designing institutions for centuries. In any case, in doing so, these architects sought to satisfy society's shared ideals such as liberty, opportunity, equity, and security.

Whether blockchain architects know it or not, they face similar problems when designing blockchains. Like companies, markets, and governments, blockchain is an institutional technology. They not only regulate the supply and distribution of scarce digital assets, but also provide a governance system for a wide variety of social, political and economic activities. Ultimately, the blockchain may grow to become the foundation of the global economy and usher in a new economic system. But before that ambition can be realized, they must first answer the most fundamental questions about the distribution of power and wealth.

Matt Wallace, an influencer in the cryptocurrency community: Dogecoin will exceed $1 by the end of the year: Golden Financial News, Matt Wallace, an influencer in the cryptocurrency community, said that I am very confident that Dogecoin will exceed $1 by the end of the year , if not, I will delete my YouTube channel. [2022/6/16 4:30:31]

With that in mind, how have blockchain architects fared so far? The results have been mixed.

The original idea behind token sales was for the community to fund open source projects and receive ownership in return. Many older smart contract platforms took this idea to heart, distributing a large portion of the token supply to the community in this way. For example, projects such as Ethereum, Cosmos, Tezos, and EOS have allocated more than 70% of their token supply to the community.

However, things seem to have changed since then, with supply allocations for those newer projects less generous. Whether it is more and more venture capitalists looking at the blockchain as a company seeking greater ownership distribution, increased regulation or the erosion of early egalitarian ideas, many new companies entering the smart contract space, such as Binance, Solana, Both Flow and Avalanche have higher internal allocations. In these cases, insiders owned more than 40% of each project’s token supply, which is even more extreme when foundation distributions are also taken into account.

RSS3 launched the second round of early incentive airdrops for the community: Golden Finance News, Web3 information infrastructure protocol RSS3 tweeted to announce the opening of the second round of early airdrop rewards. This round of airdrops will have more than 5.4 million $RSS3 tokens airdropped to the community For the token holders on the chain, the official will conduct the airdrop according to the interaction of the token holders on the chain.

It is reported that the first airdrop of RSS3 early incentives will open the receiving channel on March 15, and this announcement is the second part of the early incentives. In addition, the airdrop collection channel has been opened, and the collection channel will be closed at 4:00 pm on April 27, 2022, Beijing time. [2022/4/20 14:36:01]

In an ideal world, blockchain architects would not need to decide on the distribution of initial tokens. Instead, they can supply directly from scratch and fairly issue new tokens on an ongoing basis to those who contribute resources to it. This is how Bitcoin was born, and every coin ever issued was distributed to miners because they played an important role in securing the Bitcoin blockchain.

The encrypted charity platform The Giving Block launched a large donation customized service for high-net-worth individuals: According to news on December 16, The Giving Block is an online platform that allows non-profit organizations and charities to accept digital asset donations. The platform has launched a customized service for large cryptocurrency donors.

In a statement Wednesday, The Giving Block said it partnered with crypto taxation startup Taxbit, New York-based accounting firm Friedman LLP and Ren, targeting individuals, institutions and advisors seeking to reduce tax risk when donating cryptocurrencies. A service is launched.

Pat Duffy, co-founder of The Giving Block, said Private Client Services simplifies the existing donation process, allowing “high-value donors to quickly and securely make large donations to their favorite charities while reducing their tax bill.” (Cointelegraph) [2021/12/16 7:43:34]

However, with focus on the asset class and profit expectations for new projects, such a fair launch may no longer be possible. Today, a Bitcoin-like product launch will attract tens or even hundreds of millions of dollars in funding seeking early access to a new project, leaving early contributors with no incentive to accumulate profits in the project and to continue contributing to the project. contribute.

BIGG Digital Assets Q3 financial report: comprehensive income of 2.3 million Canadian dollars, currently holding 500 bitcoins: news on November 30, BIGG Digital Assets (BIGG), the parent company of Canadian cryptocurrency brokerage company Netcoins and Blockchain Intelligence Group (BIG), Released the third quarter financial report, the main contents are as follows:

- As of November 29, 2021, BIGG's cash and cryptocurrency holdings are approximately CAD 73 million and the company has no debt. BIGG currently owns 500 bitcoins, worth about 37 million Canadian dollars;

- Netcoins currently hosts approximately CAD 90 million in client assets, an increase of approximately 80% from CAD 50 million on June 30, 2021, and registered users have now exceeded 100,000;

- BIG's compliance suite (QLUE and BitRank) now supports 8 blockchains;

- From September to October, both Netcoins transaction volume and monthly revenue increased by more than 30%, and it is expected to continue to accelerate in the fourth quarter. (Globe Newswire) [2021/11/30 12:40:25]

As a result, many projects choose to mint some, if not all, of their token supply at genesis in order to set aside a portion of the supply for core contributors and early backers of the project. This is how Ethereum got started when it pre-mined its supply and launched a public sale for early backers to fund the project.

This issuance model has important implications when considering consensus algorithms. Projects using Proof-of-Work (PoW) issue new tokens more widely than those using Proof-of-Stake (PoS). PoW miners need to make significant upfront and ongoing investments in their mining operations in order to remain competitive. This competition naturally compresses profits over time and causes many miners to be forced to become sellers for a period of time in order to remain profitable. Therefore, most of the new coins that are mined end up being distributed on the market, rather than accumulating on miners' balance sheets.

The PoS function is different. In a PoS system, little ongoing investment is required to acquire new issuance. Once token holders have acquired their tokens and staked them into the PoS system, they have the right to a percentage of all future token issuance for a network. This perpetuates its proportional ownership of the network and removes the distributional effect of the new issuance process in PoW.

This phenomenon has important implications for how power and wealth accumulate over time in a cryptoeconomy when considering that most tokens in a PoS system not only hold rights to new issuances, but also network fees and voting rights.

"We're trying to build permissionless, open technology. Most of the process is open, but the most closed and secretive part remains early-stage funding...Under this veil of opacity, wealth and power have been distributed in the past Unbalanced same norms and structures are at play. If we don’t openly discuss what happened in the early days of cryptonetworks, then we are bound to repeat the social mistakes of the past...where capital accumulates, power accumulates." - Chris Burniske

In many ways, blockchains are more like governments than corporations. Like governments, blockchains manage property rights, enforce contracts, and even have social contracts and governance systems. In the future, we may use these blockchains as a reliable public infrastructure for the global economy.

But that vision is compromised when wealth and power are concentrated in the hands of a limited number of insiders. Token holders in a PoS system can directly control the blockchain, such as which votes are passed, which upgrades are promoted, which transactions are included, and how much transaction costs are ultimately required. This amounts to the richest people in America directly and formally controlling the U.S. government and the Federal Reserve simply because they hold the most dollars.

When a group of people finally control a blockchain, we lose everything interesting about them. A blockchain that can be shut down, manipulated, disrupted and restricted is useless. People around the world have lost trust in many of the institutions that govern our lives today. Why would they adopt a new, more unfair system?

Source: Edelman Trust Barometer 2017

The desire for more distributed power and wealth in the blockchain is not just an ideological appeal, but a practical one. Blockchains that are trustworthy and neutral (not favoring any one stakeholder group) are more likely to scale globally and thus attract more capital and high-value transactions. The more power and wealth is concentrated in a blockchain, the more users need to trust those in power to act in their favor, and thus the less willing they will end up using it. Projects that centralize power and wealth from the start, and offer token holders the ability to lock in their ownership through staking, may find it difficult to escape this fate.

But maybe only time will tell.


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