On 19th July, Charles Hoskinson of IOHK delivered a talk at the Cardano Blockchain Meetup, post the World Blockchain Summit in Singapore. He introduced the community with his personal views on multiple cryptocurrency related topics. Here, the CEO answers an extremely significant question of how Cardano can avoid the centralization of its ADA token.
Cardano uses a Proof-of-Stake [PoS] protocol called Ouroboros, which is used to legitimize transactions on a ledger. A question was asked about ‘how this system can prevent centralization whilst the existence of whales and billionaires in the industry who claim a majority and large stake pools’.
To this, Charles drew a comparison between the mentioned scenario and a plutocracy and said:
“So you have a plutocracy and at the end of the day, you have to have somebody be in control of the system and so the first question you ask is… Do the custodians of the system care about the system thriving growing and surviving or are they mercenaries?”
He further explained the great social experiment of the Roman Empire. Back in the history, the empire was fearsome because of its powerful military that was carefully designed and balanced by ‘just the right incentives’ for the preservation of the state. Hoskinson continued to explain:
“Then somewhere along the way, the dynamics changed and the soldiers went from citizens who were really vested with the system to mercenaries who really didn’t give a shit about the Roman Empire. It was just how much money they could make. So the problem with mercenaries is they’re not loyal and when facts and circumstances changed they could be on the other side. In fact it’s exactly what ended up happening”
According to Charles, where a group of people is given control of the system, the ‘why should they care’ for the system factor should be carefully determined. Currently, the answer in the cryptocurrency space is anything synonymous with Bitcoin. Here, he cited:
“…so right now we have things like Bitcoin with the proof-of-work. Why do they care is because we pay them to care.”
Furthermore, the people of this system get their power from ‘meta’ or outside of the system, which is the mining hardware. The crypto-expert then explained the issues regarding Proof-of-Work [PoW]. In PoW, the mining hardware can be used on more than one cryptocurrency, depending on the miner’s choice. If these cryptocurrencies have almost the same values and a miner gets enough money, they can overtake the other chain.
Charles supposed the chains as A and B, and revealed the problem in detail:
“Now let’s introduce another factor called derivatives. So what if you could short sell that chain [A]. What if you could get options to crash that chain. So then you have a perverse incentive to conduct what’s called a Goldfinger attack. So what you do is you’d say I’m going to short. I’m going to double spend and destroy [A]. I’m going to basically shut that chain down.”
He added that in this way, the miner trying to manipulate the market will make a windfall profit. Moreover, they are also possessing the incentive to use the same miners and the same technology that kept the chain originally secure to destroy one of the two chains.
On the other hand, the PoS protocol does not allow one to manipulate the system as one could in PoW. This is because one has to first buy the tokens to have any control over the system. Ironically, in that process of attempting to control the system, one is actually destroying the tokens for that same system. According to Charles:
“It’s like saying you can make good money by burning your own house down.”