Logo
Cardano Ecosystem

Cexplorer

10/28/2022

·

283 views


ADA holders have control of the Cardano network just like Bitcoin miners

PoS has become the dominant network consensus mechanism, as Bitcoin is the last to use PoW. It is important for the crypto community to compare the advantages and disadvantages of each protocol. Bitcoin mining pool Poolin halted withdrawals in...

ADA holders have control of the Cardano network just like Bitcoin miners

PoS has become the dominant network consensus mechanism, as Bitcoin is the last to use PoW. It is important for the crypto community to compare the advantages and disadvantages of each protocol. Bitcoin mining pool Poolin halted withdrawals in a liquidity crunch. Let's take a look at how miners have reacted to this and what ADA holders could do when something similar happened in the Cardano ecosystem.

TLDR

  • PoW and the PoS implementation in Cardano are very similar in many ways.
  • The number of blocks that pools produce is determined by the amount of resources delegates give them.
  • The Cardano network can limit the size of pools. This supports decentralization. In the Bitcoin network, there is a pool with a 30% hash rate.
  • The delegates of the hash rate have to trust the pool operators that they will be rewarded. In the Cardano network, the payment of rewards is a fully automated process.
  • Delegates can choose another Cardano pool to delegate ADA to at any time, just as hash rate delegates do in the case of Bitcoin.
  • Regardless of the type of resource delegated, be it digital coins or hash rate, the network is controlled by the delegates.

How pools and delegates operate

Cardano's PoS has many similar principles to Bitcoin's PoW. One of these similarities is the existence of pools and a group of people who delegate a resource to the group of pools. In the case of Bitcoin, miners delegate a hash rate to pools. In the case of Cardano, ADA holders delegate coins to pools.

Delegates can voluntarily choose which pool they delegate to. In both cases, the choice can be changed at any time. In the case of Cardano, it is necessary to mention epochs lasting 5 days. Delegates can make the change immediately, but the change will be reflected with a delay. In the case of Bitcoin, the change will take effect immediately. In both cases, if a pool does something delegates disagree with, they can weaken a pool's position and strengthen another pool.

Pools are responsible for block production. The more resources delegated to a pool, the more blocks the pool will produce. Once delegates delegate a resource elsewhere, this will negatively affect block production. This, of course, will also reduce rewards, as the network pays rewards to those who produce blocks.

The fundamental difference between pools in Bitcoin and Cardano networks is that Cardano economically incentivizes delegates to start delegating to another pool from a certain pool size. Ideally a competing pool. This increases the decentralization of the network. A pool can reach a certain saturation point. Once the pool is saturated the rewards decrease. Pools in the Bitcoin network have no such constraints, so they can easily have a 30% share of block production.

When delegates don't trust the pool

In September 2022, one of the largest Bitcoin mining pools, Poolin, suspended withdrawals from its wallet service in an effort to stabilize assets and preserve liquidity. In general, miners tend to withdraw bitcoin rewards from the pools’ wallets every 24 hours. However, some mining pool companies incentivize clients to leave the rewards in their wallets for a longer time with lending products. Poolin has probably run into liquidity problems due to the market downturn. The result is that miners cannot collect rewards for the hash rate provided. This can get them in trouble for paying electricity costs.

Poolin had a 10.5% share of block production. Miners started delegating the hash rate to other pools after the problems were reported. Poolin's share dropped by more than half to below 5% share.

Let's take a look at the differences between pools in Bitcoin and Cardano networks.

The Bitcoin protocol has no built-in support for the existence of pools. Pools came about organically a few years after Bitcoin was launched. Bitcoin still pays a reward to whoever solves a computationally challenging cryptographic problem. Miners delegate the hash rate to the pool and pool operators pay out the rewards they receive to their blockchain address. It is an off-chain process operating on trust between miners and pool operators.

The Cardano protocol has built-in support for pools and delegates. The process of delegating and paying rewards is automated and fully under the control of the protocol. It cannot happen that a pool operator withholds rewards from delegates since it is an on-chain process.

It is important to note that if any pool in the Cardano network behaves inappropriately, the delegates can do the same as the miners. Stakeholders could delegate coins to another pool. Pool operators are thus financially incentivized to behave fairly and ensure that block production is 100%. All ADA coin holders have control over block production.

Cardano does not have coin locking or slashing. Everyone, pool operators and stakeholders, is rewarded for a job well done. In the Bitcoin network, pool operators set their profit. In the Cardano network, there is a fixed and variable reward component, so it works relatively the same.

Hash rate or coins?

In both cases, the delegates have control over the network, despite the fact that Bitcoin uses a physical resource to delegate while the Cardano network uses digital coins. What is the difference?

The key question is who can become a delegate. In the Bitcoin network, it is only those who can afford to run ASIC miners. In the Cardano network, those are all ADA holders. Bitcoin separates the group of miners from the group of BTC holders. So the network is controlled by a small group of people, mainly the owners of large mining halls. It can be expected that as adoption grows, the number of coin holders will grow. The number of coin holders will always be higher than the group of miners. With Bitcoin, it will always be the case that the majority must trust the minority. BTC holders must trust the miners and pool operators. In the Cardano network, every ADA coin holder is also a staker (miner). So the network is controlled by basically everyone who uses it or has some relationship to it expressed through coin ownership.

It can be argued that building decentralization on the basis of digital resources (coins) is worse, as users can hold coins on exchanges. This is true and is a form of centralization. However, in the case of Bitcoin, this centralization has also occurred. The economy of scale, which favors entrepreneurs at the expense of small miners, is mainly to blame. Many people mine through cloud mining services, which is basically analogous to holding coins on a centralized exchange. In both cases, a third party can misuse the resource.

What is important is what the future trend will be. Mining will tend towards further centralization and it is hard to imagine that people will start mining from their homes. It is more realistic that people will hold the coins in their private wallets. ADA holders can have control of the network essentially through their mobile phones and HW wallets, whereas in the case of Bitcoin they have to invest in ASIC miners and electricity to gain control. The first option seems better to us. Economically it is cheaper to get an HW wallet than an ASIC miner.

"Not your keys, not your coins" is the mantra of the cryptocurrency space and centralized exchanges are considered the enemy. This mantra is in line with what the PoS network needs.

Cardano has the advantage over Ethereum in that staking is more accessible to small delegates. You just need to pay a refundable fee of 2 ADA and a transaction fee of 0.20 ADA. You can literally get a small piece of control over the Cardano network with just a few USD. 32 ETH is a huge barrier to entry that will make people think about how and where to stake. Cardano and Ethereum are PoS networks, but their features are fundamentally different in detail. Ethereum does not have protocol-level support for pools and the ability to delegate. It makes sense that people would want to stake through third parties. People should know that in the case of Cardano, there is no reason to use centralized exchanges for staking.

Conclusion

All ADA holders have control over the production of blocks in the Cardano network. This may be important in the event of a regulation. It is easy to freeze cryptocurrencies that are held on centralized exchanges. If you have the coins in your possession, no one will take them away. If regulators tried to force pool operators to censor transactions, for example, you as ADA holders can immediately delegate to another pool that won't agree to censorship. Cardano has thousands of pools that are operated by people from all over the world. ADA holders decide which pools will produce blocks. Keep that in mind. The more people control the network the less chance someone will be able to stop the network. Finding the big mining halls will be a much easier target for regulators than going after all the coin holders. All you have to do is delegate over a private network and then there is nothing to trace you by. ADAs are the key to freedom.

AD

World’s First Multi-Token ISPO — By Genius X - Starts on 12th of September, epoch 363!

Genius X, a revolutionary launchpad and business accelerator helping Web3 startups attain speed, scale, and edge, is thrilled to announce the world’s first Multi-Token ISPO.I WANT TO KNOW MORE!


Read Original Article on Cexplorer

ORIGINAL SOURCE

https://cexplorer.io/article/ada-holders...

Disclaimer: Cardano Feed is a Decentralized News Aggregator that enables journalists, influencers, editors, publishers, websites and community members to share news about the Cardano Ecosystem. User must always do their own research and none of those articles are financial advices. The content is for informational purposes only and does not necessarily reflect our opinion.


NotifyLog - One stop tool for events tracking and analytics

More from Cexplorer

See more
The number of Cardano pools must never decrease
Cexplorer
The number of Cardano pools must never decrease

last Wednesday at 8:37 AM

·

11 views

Related News

See more
WingRiders Governance Token

Featured News

See more



    DEFAULTENGLISH (EN)SPANISH (ES)RUSSIAN (RU)GERMAN (DE)ITALIAN (IT)POLISH (PL)HUNGARIAN (HU)JAPANESE (JA)THAI (TH)ARABIC (AR)VIETNAMESE (VI)PERSIAN (FA)GREEK (EL)INDONESIAN (ID)ROMANIAN (RO)KOREAN (KO)FRENCH (FR)CZECH (CS)PORTUGUESE (PT)TURKISH (TR)
NotifyLog - One stop tool for events tracking and analyticsWorld’s First Multi-Token ISPO — By Genius X