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In the escalating legal barrage from the US Securities and Exchange Commission (SEC) against titans of the crypto realm, Binance and Coinbase, a discerning pattern emerges: Proof-of-Stake (PoS) tokens seem to be in the crosshairs, while Proof-of-Work (PoW) tokens elude scrutiny. Steven Lubka, Managing Director of Swan Bitcoin, says that the SEC’s focus on PoS tokens, such as Solana, Cardano and Polygon, is due to their association with central issuers, whereas PoW tokens, including Bitcoin and Litecoin, operate on an open mechanism without centralised issuance.
PoW tokens, utilising mining processes that necessitate hardware and energy consumption to validate blocks, remain conspicuously absent from SEC lawsuits. This is despite SEC Chair Gary Gensler’s opaque stance on cryptocurrencies and his singular acknowledgement of Bitcoin as a commodity.
Insiders, such as Vineeth Bhuvanagiri of Emurgo and Brent Xu, CEO of Umee, speculate that the SEC’s criteria might stem from the popularity of certain coins. However, Gensler’s motivations remain shrouded in mystery, as no official explanation has been given.
As the SEC continues its assault on crypto institutions and PoS tokens, it’s prudent to remember that, with the erratic nature of regulatory machinations, the apparent safe harbour for PoW tokens could be ephemeral, the ever-changing landscape warrants vigilance and adaptability for stakeholders in the dynamic cryptocurrency domain. Read more here.
The importance of creating a true digital commodity akin to Bitcoin, but with its limitations addressed is one of Splitchain’s core internal goals and has been for many years. Increasing public and regulatory attention on topics like this is one of the reason’s the product team has spent so much time focusing on this incredibly hard line to follow.
Zucoins: Avoiding 51% Consensus with Direct-Correlation Proof-of-Work
Zucoin’s underlying Splitchain protocol is forging a different path from the traditional blockchains’ consensus models, considering itself a ‘truth network’. It aims to avoid the age-old “majority rule” in transaction settlement processes.
Splitchain relies on the mutual confirmation of ‘truth’ by both transacting parties. This novel approach strengthens resistance to majority manipulation, which makes blockchain networks vulnerable to 51% attacks.
At the heart of the Splitchain protocol is Direct-Correlation Proof-of-Work (DC-PoW). In contrast to common Proof-of-Stake (PoS) systems like Ethereum, Cardano and Solana, or Proof-of-Work (PoW) systems like Bitcoin and Litecoin, DC-PoW mandates that coin holders contribute to the network proportional to their holdings. In effect, coin ownership implies a responsibility; the more coins you possess, the more work is expected. More is more.
Currently, this is optional and coins are not locked or burnt, at least while the protocol continues to be developed out for ongoing decentralisation efforts. Delegation is allowed and by default, coin holders can delegate responsibilities to willing participants. This increases ease of use for those who just want to use the network, but is balanced against the amount they use it and how much self-control they want. It’s a bit like a website. You can have a company that hosts it for you, or you can run the website yourself. The latter involves more work, but it’s better if you want more control (hence why businesses often do it, or at least work with a trusted IT partner).
Splitchain, the backbone for Zucoins, flips the conventional blockchain model where the network nodes do the heavy lifting. In Splitchain, nodes primarily cache data, while the peer wallet app does the bulk workload of validation and processing the transaction. Coin holders must be productive or face costs. Coins are the sole value items on the network and they dictate the amount of work one is expected to contribute.
The same applies to key parts of modern economics. It’s like owning a large supermarket. If you owned a huge supermarket, you wouldn’t stock just 5 bananas and nothing else. A smaller, more efficient local grocery would eventually win customers as they have more of what their customers want in one location. The main way the big stores win (with everything else being equal), is often to have even more convenience and variety in one location. With more items owned, comes more expectations from the people around it. This naturally incentivises those with more, to do more, else they risk competition from an army of smaller, more efficient players. The point of this is to create balance and fairer opposing forces on the network, that upholds settled truths in the system, without needing a consensus mechanism.
This is different to Bitcoin mining, as that is a race to the bottom. In this sense, a race to the cheapest access to energy sources, which is usually in the Middle-East. If you know a guy who has their own oil field, mining Bitcoin can become very profitable very easily, as the input energy costs are so low. This is really, long term, a likely way Bitcoin will go. It’ll be dominated by people with access to cheaper energy than everyone else. DC-PoW encourages the big guys to lift their weight in fair proportion to keep the network going as the little guys do, as an act of cross-network coordination, instead of mindlessly competing for cheapest sources of energy.
And just like in the physical economy, there are many more smaller businesses keeping things going vs the much fewer larger multinational corporations. So, should the big guys start to mess up, well, there should naturally be enough small players to counteract these forces.
We’ll have more details on this topic when more is ready to be revealed. So subscribe to this newsletter if you haven’t already. 🙂
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All the best,