Staking Pool Centralization in Proof-of-Stake Blockchain Network

Abstract

Proof-of-Stake consensus algorithm solves major drawbacks of PoW blockchain network including high energy consumption and low transaction capacity. However, PoS still faces centralization problems like PoW. In this paper, we propose an economic framework for PoS blockchain network based on staking pool optimization problem and evaluate stake concentration in the network. We prove that stake concentration is encouraged in a finite staking pool PoS blockchain network, but continued consolidation among staking pools is limited and a stable equilibrium always exists where no staking pool has incentive to deviate. Further, we prove that lower pool fixed cost and higher transaction fee raise stable equilibrium pool number and lead to higher network decentralization level. As an extension, we show that wealth discrepancy exacerbates stake centralization while tilted stakeholder selection function mitigates stake centralization.

Keywords: Blockchain, Proof-of-Stake, POS, Cryptocurrency, delegated-Proof-of-Stake, Stake Concentration

JEL Classification: G10, D46, E42, L86