Question RE: The move to staking

Questions
#1

When this move happens, how will the network be able to process and verify transactions without the use of miners?

I.e. where will this computing power come from? My understanding is that the incentive for mining will vanish at which point all miners will move to other currencies?

Does this not leave the network vuilnerable due to its small size? and also if this will be carried out by servers at nimiq, would this not reduce the decentralised nature of the currency?

I am curious, as I am skeptical of staking as a concept and am somewhat disapointed that Nimiq will be making this move. It seems to be a popular decision but I personally cant see the positives.

Thanks in advance

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#2

Thanks for the question!

Watch this video (until 8:00 minutes) for a quick comparison between proof of work and proof of stake. There are also many more videos explaining the differences and similarities.

In short: in staking, miners are called validators and they still get block and transaction fee rewards, just like in mining. So there’s still the same kind of profit to be made in staking. The difference is, that stakers (validators) don’t need to buy mining equipment, so have no ongoing costs! They only need to lock up their NIM to ‘proof their stake’.

While with mining, finding the next block is a gamble and a race (that’s what the computing power is needed for), in staking the block producers are agreed by all as part of the consensus. So it’s pre-dertermined in each epoch who is producing which block, therefore it’s not a race and blocks can be produced much faster, too!

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#4

Hi,

Thanks for the response. The video was very helpful for my understanding of how the network will operate.

My primary concern is that due to the inflating price, keeping the funds in staking will only be sustainable for those who have large sums of money that they can afford to have tied-up. This in turn will cause a similar situation to what is occuring now with mining bitcoin, where only those with large amounts of ‘power’ will be able to participate.

Currently, any person who owns or wishes to invest in a GPU, which can be scaled easily as desired, can participate in the Nimiq network and earn a reward. However as time goes on with staking, individuals will need to lock greater amounts of their funds into (most likely) a staking pool, or their own masternode, which causes an inherent risk due to the loss of ownership and lack of liquidity… For me, this does not seem a desirable option.

Even though this is true for mining pools, the risk appears lower. If somehow a mining pool is compromised the worst that can happen is the loss of a few hours of income, however if the same occurs for a staking pool, an individual’s entire holdings could potentially be stolen.

I also feel that mining is a hobby activity which will also disapear with this.

I understand that there is no 100% perfect system, and despite my skeptecism, I am hopeful that Nimiq will prosper in the future.

Best of luck.

#3

Hi @UserNim,

Those are valid concerns. Centralization is somewhat subjective, for instance Bitcoin has more that 60% of miners concentrated in China, I wouldn’t call that exactly decentralized. On the contrary if Bitcoin was proof-of-stake, probably most percentage of validators would be concentrated in US and Europe, where people can buy BTC more easily and have relatively more purchasing power.

So, how do PoS and PoW work?

In PoS the network is secured by people with the most stake (coins or tokens), they are the ones that decide which transactions are included in each block. A malicious actor would have to purchase more coins than those collectively held by most people, which would increasing the price, thus making more difficult to get the stake needed. Then when the network is attacked they would lose money if the price dumps or their reward is slashed (burned). Attacking the network would be attacking their own stake, and there isn’t much incentive for doing that.

In PoW, the network is secured by computational power. Those with the faster or cheaper hardware can have the majority of computational power. Malicious actors can attack the network without having a considerable stake, and they can always perform an attack since they don’t lose that power in the process.

And how does PoS compare to PoW?

Some people say PoW is wasteful, while others say …and so is Christmas lights. Meaning, those concerned about all that energy wasted by PoW should try to do something about Christmas lights too. Seriously speaking though, most energy in PoW is coming from renewable sources these days, but there is still the centralization of mining power in places where hardware is cheaper for PoW, and in places where people have more purchasing power in PoS, so it’s and open discussion if your are concerned about centralization of the network. Something that should have a more noticeable impact, however, is the effect in price. With PoW there is always a downward pressure on the price, i.e. the more people mine the more the price moves downwards. Other way to see this is, the more the price increases, more equipment that could be inefficient or expensive to maintain could be used in mining. With PoS, the opposite is true, the more people is trying to use their stake for validation, the more the price increases as a consecuente of those coins being temporary removed from circulation.

Conclusion

PoS could be more beneficial than PoW for those with a stake in the network.

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#5

Hi, Thanks for the response!

I feel that the region of where the most individuals are based is not such an issue. This is because these are all individual actors who are competing with each-other as much as anyone else. The only thing preventing a swing towards a more diverse spread is that people are not as interested in opening such large operations in western areas, possibly due to the
higher costs.

I see the benefits that you have outlined, and do agree with the need to limit unsustainable energy usage, however as you point out, few people seem to also have this issue with data centers and other large energy use case scenarios - and renewable energy is becoming more common and ususally, more cost effective also.

A key concern is the entry barrier and nature of tying-up funds for extended periods seems undesirable in what is a highly volatile market.

I am looking forward to seeing how POS projects develop over the next few years, but feel that the sense of entrepreneurship and involvement within the network will decrease and involvement will essentially be equivalent to opening a hedgefund, with a similar barrier to entry.

Best wishes

#6

I want to address some of your concerns about staking in Nimiq in particular.

My primary concern is that due to the inflating price, keeping the funds in staking will only be sustainable for those who have large sums of money that they can afford to have tied-up.

In Nimiq 2.0 your funds are only locked up for one epoch at most. We expect epochs to be 6-12 hours (still to be decided). So, anyone who is staking will be able to get their funds back in less than a day.

Currently, any person who owns or wishes to invest in a GPU, which can be scaled easily as desired, can participate in the Nimiq network and earn a reward. However as time goes on with staking, individuals will need to lock greater amounts of their funds into (most likely) a staking pool, or their own masternode, which causes an inherent risk due to the loss of ownership and lack of liquidity…

In Nimiq 2.0 the minimum amount to become a validator will be 10.000 NIM. At current prices, that’s 45$. And we can always reduce that amount in future upgrades, if the price increases a lot. But the minimum amount to delegate your stake is only 1 NIM.
Buying a GPU is much more expensive than 10.000 NIM (and will always be more expensive than 1 NIM) and is much harder to sell, so the barrier to entry is actually higher with mining than with staking.

If somehow a mining pool is compromised the worst that can happen is the loss of a few hours of income, however if the same occurs for a staking pool, an individual’s entire holdings could potentially be stolen.

The same is true in Nimiq 2.0. You cannot lose your holdings, whether you are delegating your stake or running your own validator. Stakes never get slashed (only rewards) and staking pools don’t have access to your funds.

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