Survival of the Poor: Incentivizing Decentralization to Strengthen PoS Blockchain Consensus Security
TL;DR
This paper analyzes one of the most commonly deployed consensus protocols, namely Proof of Stake (PoS), from a security perspective and proposes and analyzes an alternative incentive mechanism for PoS by utilizing theories on optimal taxation from behavioral economics, which demonstrates the optimal balance of incentives between earning potential and blockchain network sustainability.
Abstract
While blockchain technology has the potential to become one of the enablers of distributed applications and autonomous organizations (DAOs) with its decentralized structure, practical implementations reveal the existence of power and resource concentration at various levels. This concentration raises serious security concerns regarding the core consensus mechanisms, which regulate block creation and the interaction between the nodes of blockchain, potentially preventing the realization of the technology’s full potential. To this end, in this paper, we analyze one of the most commonly deployed consensus protocols, namely Proof of Stake (PoS), from a security perspective. We demonstrate how PoS inadvertently encourages the concentration of power, which may cause some users to leave, thereby endangering blockchain security. Specifically, in PoS, nodes with higher stakes have a greater likelihood of being selected as block proposers, leading to power concentration among a small group of users. This situation increases the risk of collusion and compromise of the consensus mechanism. To address these issues, we propose and analyze an alternative incentive mechanism for PoS by utilizing theories on optimal taxation from behavioral economics. Our proposed model bases the block proposer selection process on a modified and relatively more balanced distribution. It offers preferential treatment to low-stake holders while also integrating a reputation mechanism to mitigate potential Sybil attacks encouraged by equitable rewards. Using a game-theoretic model, we demonstrate the optimal balance of incentives between earning potential and blockchain network sustainability for both high- and low-stake holders. We also conducted extensive performance analyses, including real data from Uniswap, which showed that our proposed mechanism can mitigate inequality and provide an appealing solution for keeping the users in the network to sustain the security of the consensus mechanisms and thus the secure and sustainable operation of blockchain applications.