The Stake Weight Problem -- What on Earth do we keep talking about? Simplified.

I hope to explain in the simplest terms a problem with the Gridcoin Proof of Stake system which has encouraged several proposals to be developed and presented. I do not intend to talk about the proposed solutions.

It should be noted that this is a problem that plagues multiple blockchains and does not present any immediate security issues, however it is still a known issue that must be fixed.

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Definition:

The Stake Weight Problem is the problem presented when a Proof of Stake system does not encourage entities to keep their coins connected to the network.

Explanation:

Bitcoin is a peer to peer network which compiles blocks through a process known as Proof of Work. The details are not important for this discussion, but in general, the more processing power working on building blocks, the stronger and more secure the network. There are benefits and drawbacks to a Proof of Work system. The drawbacks inspired the creation of a protocol known as Proof of Stake.

In general, a Proof of Stake system uses the balance, or stake, of a node to compile a block and add it to the blockchain. We can surmise, accurately, that the more stake actively working on building blocks, the stronger and more secure the network. There are benefits and drawbacks to a Proof of Stake system, some of which are similar to Proof of Work systems and others which are unique. For this discussion, we will be focusing on one:

In order to encourage nodes to participate in any blockchain system, rewards are distributed to the node which successfully compiles a block and adds it to the blockchain. The cost to a node for building a block in a Proof of Work system is the investment cost of hardware, the depreciation incurred by continuous operation of this hardware, and the electricity consumed by the operation of this hardware. The cost to a node for building a block for a Proof of Stake system, such as Gridcoin, is the time, hardware requirements, electricity required, and security issues involved with leaving a wallet with a balance connected to the network. Needless to say, the costs of a Proof of Stake system are much lower than those in a Proof of Work system, however they still exist. It is understandable that, given the opportunity, an entity would rather receive a reward without exposing itself to the cost of staking, or creating, a block. Currently, this is exactly how Gridcoin's reward mechanism works.

Each coin in Gridcoin is guaranteed 1.5% interest per year whether it is working on creating blocks for the blockchain or sitting in a wallet not connected to the network. Beyond that, the reward for staking a block is equal to the fees collected from the transactions compiled in that block. Without getting into details, trust me when I say that the reward is tiny. This means that an entity with Gridcoin can collect its 1.5% interest without contributing to the creation or maintenance of the blockchain. We cannot blame entities which do this as it is the fault of the system. What we can do is change the system.

A blockchain that suffers from the stake weight problem does not have a significant portion of its balance held on active nodes. This presents issues which I do not intend to get into for this article. In short, a blockchain with low stake weight is less secure than a blockchain with high stake weight.

I hope that helped introduce a few of you to a major problem present in many Proof of Stake blockchains, Gridcoin being no exception. If you want to know more, do some research and ask the community!

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Thanks to @barton26 for proofreading this article.