Bitcoin supporters claim PoS rewards are not “returns,” Vitalik fires back

Independent developer and Bitcoin supporter Udi Wertheimer created quite a buzz on crypto-Twitter earlier on September 12, after he claimed that a proof-of-stake (PoS) based return-for-stake reward system is more of a punishment for non-stakers.

Wertheimer, who is a well-known Ethereum critic, believes that the PoS staking reward system is not exactly a yield reward. In PoS staking, a user cannot do anything with their stake ETH, while those who do not stake their tokens and participate in other network activities are not rewarded.

With the Ethereum Merge just a couple of days away, the slyness of the PoS system didn’t sit well with the Ethereum community, including co-founder Vitalik Buterin.

Buterin responded to Wertheimer’s criticism by arguing that Bitcoin mining is not much different from PoS efforts, as proof-of-work (PoW) mining “penalizes anyone who has a smaller percentage of hashpower 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 ☺️

(It actually penalizes a lot more than that because profit < income, but you get the point)

— vitalik.eth (@VitalikButerin) 12 September 2022

Wertheimer was quick to remind Buterin that miners and holders are two different sets that do not necessarily overlap in the PoW ecosystem, while the same cannot be said for the PoS system. He further explained that with floating staking one could expect holders and stakers to overlap due to the flaw in the reward system.

Related: Ethereum Merge: How Will the PoS Transition Affect the ETH Ecosystem?

Another user claimed that the return comes from the gas fee that the user pays for transaction processing, but Wertheimer was quick to point out that an average fee per block only accounts for 1% of the total return.

people expect 2-5% “return”, if you only count fees, they’ll get 0.03% return, so, umm, ask them if they think that’s cool, I think

— Udi Wertheimer (@udiWertheimer) 12 September 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 developers decide to print more ETH and give it to people who “stake”, it is not a return, but only symbolic inflation at the expense of the holders.

1st principles: If they increase the rewards to 50%, does that mean they have created a 50% return? No.

ETH is already great, no need to find https://t.co/SCaUbn9VTy

— Jordi Alexander (@gametheorizing) 26 July 2022

The merger, which is planned between 13.-15. September, depending on network hashpower, will see Ethereum move to a PoS mining consensus from the current PoW. Ethereum developers and advocates claim the move will make the network more environmentally friendly and scalable. However, critics have pointed to the centralization aspect of the merger and how the move could make the Ethereum network more vulnerable to security risks.