Independent developer and Bitcoin proponent Udi Wertheimer created quite a buzz on Crypto Twitter earlier on Monday after he claimed that a proof-of-stake (PoS) based yield reward system for staking is more of a penalty for non-stakers.
Wertheimer, who is a well-known Ethereum critic, believes that the PoS staking reward system isn’t exactly a yield reward. In PoS staking, a user cannot do anything with their staked ETH, while those who don’t stake their tokens and participate in other network activities aren’t rewarded.
With thEthereum Merge just a couple of days away, the sly on the PoS system didn’t really go down well with the Ethereum community, including co-founder Vitalik Buterin.
Buterin responded to Wertheimer’s criticism by claiming that Bitcoin mining is not much different from PoS staking as proof-of-work (PoW) mining “penalizes anyone who has a smaller percentage of hash power than their percentage of the coin supply.”
And PoW penalizes anyone who has a smaller percentage of hashpower than their percentage of the coin supply ☺️
(Actually, it penalizes much more than that because profit — vitalik.eth (@VitalikButerin) September 12, 2022
Wertheimer was quick to remind Buterin that miners and holders are two different sets that don’t necessarily overlap in the PoW ecosystem, while the same can’t be said for the PoS system. He explained further that with liquid staking, one could expect holders and stakers to overlap due to the flaw in the rewarding system.
Another user claimed that the yield comes from the gas fee paid by the user for transaction processing, however, Wertheimer was quick to point out that on an average fee per block only makes 1% of the total yield rewards.
people expect like 2-5% “yield”, if you count fees only they’d get 0.03% yield, so, umm, ask them if they think that’s cool i guess
— Udi Wertheimer (@udiWertheimer) September 12, 2022
Thus, the rest of the yield reward has to come from somewhere else, which many believe could come from printing more ETH, making the value of existing ETH lower and inflationary.
If ETH devs decide to print more ETH and give it to people ‘staking’, that is not yield but just token inflation at expense of holders.
1st principles: if they up staking rewards to 50%, does it mean they created a 50% yield? Nope.
ETH is great already, no need to make sh*t up https://t.co/SCaUbn9VTy
— Jordi Alexander (@gametheorizing) July 26, 2022
The Merge slated between Sept. 13–15 depending on the network hash power, will see Ethereum move to a PoS mining consensus from its current PoW one. Ethereum developers and proponents claim that the move would make the network become more environment-friendly and scalable. However, critics have pointed out the centralization aspect of the Merge and how the move can make the Ethereum network more vulnerable to security risks.