As we’ve seen, Proof of Work’s prioritization of anonymity over efficiency may not make sense in an enterprise setting where we know who all the actors are. What other options do we have for determining who gets to write the next block?
Proof of Stake is a model that’s been offered for those situations where we may desire throughput – efficiency – over anonymity. In a Proof of Stake model, you get to write the next block based on what you have, not what you’ve done. Specifically, in a Proof of Stake model, the what you have is the largest stake. Stake in this context is usually the most currency on the network currently put up for the right to write the next block.
An example of a proof of stake network is the proposed network for Civil, a blockchain based journalism venture. In Civil, CVL tokens will act as both currency and votes. Want to buy access to an article? Using CVL tokens to make the purchase will be one of the options. More interestingly, if you want to dispute the accuracy of, and perhaps edit, an article, you have to use CVL for that as well. Think for a moment about the groups that wage quiet war on contentious wikipedia pages, with each group trying to make sure that its version of true is fore-fronted. In Civil, if you want to wage that kind of editorial war, you’ll have to stake some virtual currency, CVLs, in order to make the edits. If the rest of the community out stakes you, you’ll lose the right to edit as well as the currency staked. The cost of waging an editorial war will be real in this context, which should give everyone an incentive to be, well, civil.
The weakness in this mechanism becomes apparent when someone with deep pockets can outspend the rest of the market. Imagine a scenario where a fabulous wealthy individual doesn’t care how much they have to spend to make that edit. They might be able to bankrupt the rest of the market. Something similar happened with Peter Thiel’s war on Gawker, so the risk is real.
The creators of Civil’s plan for defending against this scenario appears to still be evolving, but it looks like some kind of editorial board will have the ability to step in at certain points, almost like the trading curbs that stop trading on Wall Street in situations that threaten to result in a stock market crash.
This solution is not so different from a digitized version of the decision process making that already goes on in organizations. Most organizations have a variety of formal and informal mechanisms that allow leaders to make a stake, or a bet if you prefer, that some decision is right, and that their peers will support them. When those decisions are right, or at least when their peers believe the decision to be right, the political capital of the leader in question if not the actual capital of the leader, goes up. When the group thinks its a bad idea, the leader’s capital goes down. And when a leader makes too many bad decisions, and when their political capital is depleted low enough, they no longer have a job.
The similarity to our currently established norms makes Proof of Stake models easy to understand and, hence, attractive. As a potential means of digitizing already established corporate governance process, Proof of Stake based blockchains could provide real value by making transactions more transparent and efficient, but the process will still be susceptible to the dynamics of imbalanced power. While that will be fine for many enterprise processes, it won’t always be appropriate.
In the final installment, we will review Proof of Authority in regard to blockchain, and the way trust works in a blockchain model.