Compounding of Wealth in Proof-of-Stake Cryptocurrencies
This addresses the 'rich getting richer' issue in PoS blockchains, which is critical for fairness and decentralization in cryptocurrency systems, though it is incremental as it builds on existing reward allocation methods.
The paper tackles the problem of wealth concentration in proof-of-stake cryptocurrencies by introducing the notion of equitability to quantify stake amplification, showing that existing reward allocation methods lead to poor equitability. It proposes a geometric reward function proven to be maximally equitable under honest behavior, with bounds for strategic actions, enabling a systematic framework for designing incentive systems.
Proof-of-stake (PoS) is a promising approach for designing efficient blockchains, where block proposers are randomly chosen with probability proportional to their stake. A primary concern with PoS systems is the "rich getting richer" phenomenon, whereby wealthier nodes are more likely to get elected, and hence reap the block reward, making them even wealthier. In this paper, we introduce the notion of equitability, which quantifies how much a proposer can amplify her stake compared to her initial investment. Even with everyone following protocol (i.e., honest behavior), we show that existing methods of allocating block rewards lead to poor equitability, as does initializing systems with small stake pools and/or large rewards relative to the stake pool. We identify a \emph{geometric} reward function, which we prove is maximally equitable over all choices of reward functions under honest behavior and bound the deviation for strategic actions; the proofs involve the study of optimization problems and stochastic dominances of Polya urn processes, and are of independent mathematical interest. These results allow us to provide a systematic framework to choose the parameters of a practical incentive system for PoS cryptocurrencies.