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ADA is a resource that decentralizes Cardano

Published 28.3.2023

Every decentralized and public blockchain network needs some means on which decentralization is based. For Cardano, it's ADA coins. This is a finite, non-renewable resource with a non-zero market value. For PoW networks like Bitcoin, the two resources are ASIC hardware and electricity. Both resources are renewable, infinite (can be produced over and over), and have a non-zero market value. Let's take a closer look at Proof-of-Stake and Proof-of-Work and compare the advantages and disadvantages in the context of different attack vectors.

TLDR

The 51% attack is very costly for Cardano and Bitcoin and probably difficult to commit in practice. However, it is not the only attack vector against which the blockchain must be resilient. Protection against many attacks is based on decentralization. PoW miners fight among themselves and drive each other out of business. This leads to more centralization and therefore weakened security, especially against internal attacks (censorship resistance). ADA holders are working together to decentralize and secure Cardano not only when it comes to the production of blocks but in near future also within governance. Dysfunctional governance can also be one of the attack vectors.

The 51% attack is based on resource control

For both Cardano and Bitcoin, it is possible to attack the network by brute force. An attacker can try to control over half the resource, be it coins or hash rate. In both cases, the attacker has skin in the game and puts his assets at risk. If he decides to attack the network anyway, it is always a question of cost, i.e. the market value of resources.

For both PoS and PoW, it is difficult to estimate the exact cost of an attack. A 51% attack on Cardano would require owning over half the number of ADA coins used for stacking. Currently, this is roughly 12,500,000,000 ADA coins. These coins are owned by approximately 1.3M stakers who are motivated to participate in staking and therefore not sell the coins. In a bear market, they don't want to sell for less market value than what they bought them for. In a bull market, on the other hand, the coins are significantly more expensive, making the attack more costly.

The accumulation of such a large amount of ADA coins seems almost impossible, as the attacker's own regular purchases would increase demand, which would be reflected in the market value of the coins. A rising market value would initiate higher demand.

In PoS networks, if there is no attack detection and some kind of defensive mechanism, it is possible to gain control of the network forever. Cardano does not currently have a similar protection mechanism.

In PoW networks, the attack is time-limited as the resource is being consumed. The attacker can only attack up to the cost he plans to spend. If an attack is in progress, it is theoretically possible that an honest part of the miners will try to counter the attack by adding a hash rate. If the attacker is successful for a period of time, he will start to periodically earn block rewards for blocks mined, so the cost of the attack will be (at least partially) offset by the network. In other words, PoW networks usually cannot detect the attack and the rewards are paid to whoever mines the blocks in the longest chain.

Similar to PoS networks, attacking PoW networks is very costly. The attacker needs to acquire the hardware, place it somewhere, and pay the energy costs. The energy cost can be calculated through the block reward and the current market value of BTC coins. For a shorter attack, it would take on the order of several million dollars. The bigger problem for an attacker is to get the necessary amount of ASIC hardware.

A simpler attack vector may be to try to control the hash rate in large mining halls or to physically limit ASICs of big miners during the attack to increase the attacker's chance of mining the block. It is possible to plan an attack in the long term and gradually buy up older or decommissioned ASIC hardware. In a few years, an attacker may have enough cheap hardware for an attack.

Preparing for an attack on PoS networks can also take years. An attacker may buy coins very slowly to prevent the market value of the coins from increasing through self-demand.

In both PoS and PoW, the attacker can honestly participate in the production of blocks and earn rewards that help him increase his position in the network. If someone is planning such an attack, we don't really know and will only find out at the time the attack is launched.

PoW networks use physical resources while PoS networks use digital resources. If governments want to commit an attack, they can seize ASIC hardware either from miners or directly from the manufacturer. Seizing a resource for a 51% attack is much easier with PoW networks, as most hash rates today are generated by large mining halls and it is common for a large portion of the hash rate to be in a single country (formerly China) or in a few countries. It is much more difficult to find a large number of ADA holders and require them to hand over coins. Digital resource is more distributed geographically and in the hands of more people. Decentralization is higher, so attacking is more difficult.

Handling a digital resource is much more flexible, so in the event of restrictions, coins can be forwarded elsewhere or easily sold so someone else can buy them. It is expensive to move ASIC hardware and the choice is limited to countries where conditions are suitable for mining.

It is possible to attack miners through electricity. Specifically by imposing a high tax on the energy used for mining, or PoW mining can be banned. With a digital resource, this attack vector is not conceivable. Respectively, it is possible to ban staking, but it is much more difficult to enforce the law on citizens.

Bitcoin security is not about increasing the hash rate

People believe that when the hash rate increases, the security of Bitcoin automatically increases. This is only partially true.

A higher hash rate does increase the security of Bitcoin since the mining difficulty has to be increased. A higher hash rate means that it is more difficult for an attacker to acquire a majority of the network's computing power, which is necessary to carry out a 51% attack. Therefore, a higher hash rate makes it potentially more expensive and less likely for an attacker to successfully manipulate the network.

However, security is not just about the hash rate. It depends mainly on the cost of ASIC hardware and energy. If the cost of ASIC miners and power is low, it becomes easier and cheaper for a potential attacker to acquire a majority of the network's computing power, which could lead to a decrease in security. The hash rate may be a completely irrelevant figure compared to the real cost of an attack.

It is important to note that the hash rate is not only influenced by the market value of BTC coins but also by technological advances. The efficiency of ASIC hardware is constantly increasing. Newer hardware is usually more efficient and can be cheaper. This is often the reason why the hash rate is increasing even in a bear market. Technological advances are having a greater impact than the declining market value of coins.

If the efficiency of ASIC miners increases, it can have both positive and negative impacts on network security. On the one hand, if the efficiency of ASIC miners increases, it may become more expensive to acquire the necessary computing power to commit an attack, thereby increasing security. However, if the efficiency of ASIC miners increases, it may also lead to more big miners joining the network, which could increase the overall hash rate, but also make it easier for a single entity to acquire a majority of the network's computing power, which could decrease security.

Consider the following scenario. ASIC hardware efficiency will increase by 50% and be approximately 50% cheaper. Miners will gradually start replacing older ASIC hardware with newer hardware, increasing the hash rate. However, an attacker can buy more efficient hardware more cheaply and thus gradually gain a stronger position.

Miners only connect new ASIC hardware to the network if it is profitable to do so. Once profitability approaches 0, it is not worth mining more. The block reward is a fixed reward and determines the amount of energy that gets consumed (the cost of the ASIC hardware must also be taken into account). A given amount of paid energy will generate a certain amount of hash rate, which depends on the efficiency of the hardware.

In PoS networks, it is not possible to increase the efficiency of stacking against others through some technological advantage or by negotiating better terms than the competition. ADA coins have constant equal power in the network consensus which neither grows nor declines. The market value of the physical resource (energy) has only a negligible role for stakers.

PoW miners are constantly fighting among themselves and driving each other out of business. The economy of scale plays a big part in this. It is easy for the big miners to squeeze out the smaller miners because they get richer faster and can expand their business more easily.

Mining is a tough business in which the best win. This has one major drawback. Although they all together form a perfect protection against a 51% attack, fighting between miners reduces decentralization. Ironically, this also reduces Bitcoin's security from the perspective of other attack vectors. A growing hash rate does not automatically mean that network security is growing. You need to look at the details. If decentralization is reduced through competition, this is not ideal in terms of the need to eliminate single points of failure.

Blockchain security is about decentralization

Defending against a 51% attack is important but economically very costly. However, it is not the only attack vector and it is necessary to consider blockchain in a broader context. The 51% attack is almost unrealistic for individuals (plus there is a lack of incentives) and states will attack the blockchains in other ways. Especially through laws, sanctions, taxes, regulations, and other things.

In a decentralized network, it is desirable to have a diverse set of stakers or miners that participate in the production of blocks. This ensures that no single entity has too much control over the network and that the network remains resistant to attacks and censorship.

In addition, it is necessary to think about governance. Decentralization is not only about block production but also about who has control over changes in the source code and where they are able to force or prevent specific changes.

Large miners with economies of scale are able to drive smaller competitors out of business. The struggle between miners is gradually leading to an increasing centralization of mining. Once centers of power emerge in a network, it ceases to be decentralized. Single points of failure must not arise in a decentralized network. Why? Because centers are easy to attack. If the center of power is an entrepreneur who owns huge mining halls that can be discovered from space, he is a very easy target for anyone, including governments.

Is Cardano more resistant to the emergence of centers of power? We can conclude that it is the case because the stakers are not competing with each other and cannot drive each other out of business. If you hold ADA coins, you can keep a stake in the Cardano network forever and no one can take it away from you. No one can stop you from staking or creating your own pool. If you own the required number of coins to produce blocks, no one can ever take that option away from you. Cardano distributes staking rewards proportionally. Big stakers grow at the same rate as small ones. It can be said that the stakers are working together in protecting the protocol.

Everyone gets rich equally fast, as any ADA earned as a reward can be used immediately for staking. There is no need to set aside coins and wait for the opportunity to invest just like PoW miners wait to save up to buy new ASIC hardware.

In the introduction, we said that the network is controlled by the one who is able to invest in the resource. A whale with a huge amount of money can always come along and it doesn't care if the money buys ADA coins or ASIC hardware and energy.

While mining is exclusive, staking is inclusive. If we allow as many people as possible to participate in decentralization and earn rewards, the network is more likely to remain resilient to attacks. Cardano's decentralization grows as ADA coins are gradually distributed. Bitcoin decentralization decreases as miners compete with each other. Today, it is common for the largest to have a 5 to 10% share of the hash rate. In the beginning, people mined on their computers. The decentralization of Bitcoin was much higher. Today, we are basically just waiting for a single miner to gain dominance.

In general, whoever gains dominance over the source is not necessarily interested in attacking the network because they want to keep a lucrative business. While this is true, from a decentralization perspective we cannot be satisfied with this. The emergence of centers of power is a vulnerability, and the point of decentralization is to make sure that such places do not emerge at all. Accepting centers of power is essentially a betrayal of the principles of decentralization.

Does it matter who holds the source?

There is one fundamental difference between PoS and PoW networks that few people realize and yet is very important. PoW miners are businessmen who only care about profit. They are not necessarily fans of decentralization or Bitcoin. Their relationship is based on profit. Stakers are coin holders. While their relationship may also be based solely on profit, there is a difference. In the case of Bitcoin, there are two separate groups, namely miners and BTC holders. The two groups may have completely different interests. In the Cardano ecosystem, all ADA holders are also stakers. It is only one group.

The interests of coin holders may differ. However, it can be assumed that they will selfishly want the best for themselves first and for the protocol second. ADA holders essentially own the protocol. They decide on the pools that will produce the blocks and in the future, they will also decide on governance. The defenses against transaction censorship are controlled by literally all ADA holders. It doesn't work that way for Bitcoin. Miners are primarily interested in maximizing profit, and although their business is dependent on the existence of a protocol, their interests may be fundamentally different from BTC holders. In important decisions or votes, it is not the BTC holders who decide, but the miners who can secure the network with their hash rate and thus essentially exercise the power. The BTC holders cannot secure or decentralize the network.

Let's take a concrete example. Should LN transactions or NFT transactions take precedence when creating a block? A regular bitcoiner would probably say let the fees decide. There's a catch, though. What if the fees go up and LN transactions don't make it into the block because NFT totally fills up almost all the blocks?

Miners want NFT fees and may not be interested in LN transactions at all. Users, i.e. BTC holders, may not like NFT and mainly want to send transactions. However, BTC holders have no decision-making power. Perhaps it is possible to make a hard fork. But what chain will win? That will be decided again by the miners. They can even attack a competing chain, destroy it, and continue to secure Bitcoin with ordinals. Do most BTC holders actually want Bitcoin with Ordinals, or without this functionality? This is ultimately a relatively useless question, as there is no way to vote and enforce the majority opinion.

Do you see the problem? The decision-making process is not democratic, because the minority decides. There are significantly more BTC coin holders than dominant miners.

ADA holders will have the right to make decisions on such complex issues and the majority will have the opportunity to assert its opinion. Should a similarly complex issue arise, the ADA holders will decide and not a small group of entities with big power (centers of power).

Advantageously, Cardano's decentralization is built on a digital resource that anyone can own, forever. Some may argue that it is unfair when 1 Lovelace = 1 vote, but nothing fairer can be created (yet) if the system is to remain decentralized.

The emergence of decentralized governance is a complex process for Cardano, but it is doable. Decisions and changes to the protocol should not result in the creation of Cardano Classic or Cardano Cash. There is no point in splitting the community. It makes even less sense to create ghost coins and ghost chains. Functioning governance can keep the community together and allow the problems of the protocol and its evolution to be solved.

A poor governance model may result in some attacks or abuse of power. 51% attack is an external form of attack, but the protocol must also be resistant to internal attacks. A team, or just a part of a team, may want to assert its selfish interests. Furthermore, a group that controls a significant portion of a resource may attempt to do so. The more distributed the resource, the higher the decentralization. If governance is not working, the only solution to problems is to do nothing. Decentralization is the best protection against both external and internal attacks.

Conclusion

People sometimes think that one network consensus is significantly better than another. The reality is that both PoS and PoW have strengths but also weaknesses. Many people judge protocols only through their resilience to 51% attack, but it turns out that more important is, for example, resilience to transaction censorship or regulation. States will not participate in the 51% attack because it is much easier for them to ban things, regulate things, tax things, etc. These attack vectors will not necessarily lead to the demise of blockchain networks, but they may weaken their decentralization. Dependence on electricity presents many attack vectors that states can exploit. ASIC hardware manufacturers can invent an extra-efficient chip and keep it for their own mining only, thereby starting to control the network completely. ADA coins are a digital resource with a capped amount that is very difficult to attack, yet very good for decentralization. Sooner or later, the networks in which centers of power will emerge will become vulnerable.

It is said that the weakness of PoS networks is independence from the physical source. At the moment it seems to us to be rather an advantage, even considering the security budget problem. One of the attack vectors may also be to prohibit banks from investing in cryptocurrencies. This would dramatically reduce the market value of the coins. In the case of PoW, the security impact could be much higher than in the case of PoS. Time will tell if PoS can be considered as secure as PoW. Both PoS and PoW consensuses have some weaknesses and it is good to know about them and work to eliminate them.

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