Background
A cryptocurrency’s key characteristic is that it’s decentralized. This feature is the main reason why people use cryptocurrency, as it’s at the base of all its benefits, such as anonymity and being able to transfer money without any governmental control. However, decentralization is also the cause of a major problem, which is the lack of a central authority responsible for verifying transactions.
With Bitcoin and several other important cryptocurrencies, like Ethereum, Bitcoin Cash, and Litecoin, the solution is to use a method known as ‘proof of work’. A growing number of platforms, though, Solana, Avalanche, and Cardano to name a few, are now using a less energy-consuming alternative method known as ‘proof of stake’ (in this article we’re looking at Solana as the most notable example).
PoS vs. PoW
What is the main difference between PoS and PoW? PoW creates a consensus as to which block to add by requiring network participants (miners) to use great amounts of computing resources and energy to generate new blocks. PoS requires network participants (validators) to stake cryptocurrency as collateral in favor of the new block they believe should be added to the chain.
Why PoS?
But why create a new verification method in the first place? Well, PoS has a lot of advantages.
• To begin with, it allows for faster transactions and more scalability. Since we’re not constrained by any physical limitations (we don’t need any mining equipment or extra power), we can approve transactions at a higher rate. In terms of numbers, the Solana system is able to verify 65,000 transactions per second. Ethereum can verify 15.00 transactions in the same amount of time. Thanks to this, PoS-built cryptocurrencies will more likely be used in everyday transactions. Imagine a world where there can only be 3 transactions happening simultaneously.
• Since creating new blocks doesn’t require using any physical resource, transaction fees in PoS cryptocurrencies are much lower. A transaction fee on any PoW platform includes the cost of electrical energy consumed approving this transaction, the use of mining equipment, etc. Right now, the average transaction fee in the Ethereum network is $46.22, vs. $0.00025 in Solana.
• Unfortunately, we still largely generate electricity by burning coal and gas, which results in climate change, pollution, and harm to biodiversity on the global scale. It is said that Bitcoin’s PoW will be in part to blame for humanity’s exceeding the 2°C threshold. According to Digiconomist, making one transaction in the Ethereum network takes approximately 268 kWh. In comparison, a transaction in Solana network only takes 0.1666 Wh. In 2021 Solana Foundation has announced its carbon neutrality, which means that any effect the Solana blockchain might have on the climate can be dismissed as negligible.
Apparently, Ethereum’s popularity is its own enemy. The more people use it, the longer the transactions take and the more expensive they get. We’ll probably never have enough electricity and computing power to make global usage of Ethereum a reality. One more reminder that everything has its downsides.
What’s the catch?
There is only one major problem with the PoS method, though, of which you’ve probably already heard: its tendency towards centralization. The logic behind this issue is basically that if one consolidates a huge amount of SOL, they can influence the Solana blockchain more than would be healthy.
“A key disadvantage is that in some systems, you are only selecting validators that have the most money. This means that proof of stake is likely to be significantly less democratic in many cases than Bitcoin,” to quote Catherine Mulligan, a professor of computer science at the University of Lisbon’s Instituto Superior Técnico.
So, does Solana really have a centralization problem compared to PoW blockchains, such as BTC and ETH?
First of all, let’s dispel some myths. Actually, BTC isn’t that decentralized either. The first crypto network has three mining pools controlling almost 50% of its computing power.
But more importantly, Solana tends to become more decentralized every day. When measuring Solana using the Nakamoto Coefficient, it already scores higher than Bitcoin and Ethereum. (Nakamoto Coefficient is a mathematical concept created as a means of measuring the degree of decentralization of crypto networks).
But how can we mitigate this problem?
Well, the Solana Foundation is doing a very good job of improving Solana’s decentralization. A year ago only 300 validators operated on the Solana blockchain, now we have more than 1500. If you’ve read our “Solana: conspiracy theories” article then you already know that Solana Foundation has announced plans to support new validators until their number reaches at least 20,000.
Also, validating Solana transactions remains economically justified as long as the SOL price is high enough. And keeping in mind the crazy growth rate of Solana DeFi projects we have no doubts that SOL will continue to grow. Consequently, more crypto enthusiasts will want to become validators, leading to Solana’s decentralization.
Lastly, let’s talk about Solana stake pools. Stake pools help decentralize the network by delegating stake across many validator nodes. Each stake pool has its unique validator criteria and delegation strategy, with some pools requiring that validators be geographically decentralized and meet minimum performance criteria in order to be added to the validator set. By the way, we’re happy to be part of this process, since we’ve not only successfully launched our stake pool, but are also currently working on a project that will help every Solana user to have a stake pool of their own (but more on that later).
So, if you were having doubts regarding Solana, here are at least 3 reasons why it’s getting more decentralized as you’re reading this.
Summing up
We firmly believe that Solana has pretty good chances indeed of becoming ‘the Visa of the crypto world’ thanks to its fast and cheap transactions. Despite its centralization issues (which are very much fixable), we hope that in coffee shops of the future everyone will be paying for their cappuccinos with SOL.
