- Ethereum disincentivizes network participation by slashing, while Cardano incentivizes staking & network validation by rewarding honest actors.
- Compared to ETH, Cardano has a superior PoS mechanism that incentives network participation.
Cardano has been running on a PoS-based consensus protocol since the Shelby upgrade in 2020. It is the first blockchain network built on peer-reviewed research and has been running without a bug since 2020. Also, it is the first proven and secure PoS-based consensus protocol.
The Ethereum Merge eventually occurred on September 15, 2022, following years of development. Ethereum’s switch to a PoS from a PoW was made possible by merging its PoW mainnet with the beacon chain (a separate PoS-based blockchain). However, most Bitcoin maximalists have been spreading misinformation about Ethereum after the Merge.
They claim that Ethereum PoS is now the industry standard for PoS-based networks. They conveniently ignore the nuances and features of other PoS-based blockchains, particularly Cardano. A proof-of-stake is a consensus mechanism that protects it from Sybil attacks. Here, the network chooses a validator to verify transactions based on the tokens they have staked in the network in the form of collateral.
A Sybil attack is a security threat where one person or organization creates multiple accounts or nodes to take control of a network. PoS increases the attack’s cost significantly since the attacker must purchase a lot of tokens to stake. It is important to note that there are variances in the PoS mechanism and blockchains use any of these variances. Hence, it’s important to contrast the differences between Ethereum and Cardano PoS.
For proper understanding, the differences between them will be based on the following factors;
- Slashing
- Locking period
- Participation threshold
- Custodial staking
Slashing
Some PoS-based blockchains use slashing as a tool to prevent malicious behavior. They also use it to enforce monetary penalties and make network participants more accountable. Ethereum validators are the most susceptible to staking penalties. If they fail, about 100 percent of staked funds are at risk.
Ninety-nine percent of the time, honest actors have been experiencing slashing because of technical errors. Even though slashing is a punishment method that results in funds’ loss, its risk far exceeds the incentive of getting yields. Thus, there is low network participation. Many people or entities would hold back from participating in the network fully.
Once you stake your ETH, you release the rights over your ETH to the Ethereum network. By comparison, Cardano’s PoS implementation doesn’t involve slashing. Cardano has a unique sharing mechanism for rewarding shareholders who behave rationally. Anyone can participate in the network and need not fear that they will lose their rights over their ADA tokens to the Cardano network. Hence, Cardano’s PoS implementation encourages more network participation than Ethereum’s.
Locking period
Ethereum has an infinite locking period. You cannot unlock your ETH after the Merge. In contrast, Cardano’s PoS has no locking period. Any ADA holder can move their ADA tokens anytime without restriction or penalty. Hence, network participation is more effortless and uncomplicated.
Participation threshold
Cardano has minimal staking requirements and allows anyone to run a validator node. This amount is 5.5 ADA (or 2.49 USD). By contrast, Ethereum requires at least 32 ETH (or $40,937) for anyone to run a validator node. Many community members won’t be able to become Ethereum validators because of this high participation threshold.
Custodial staking
Custodial staking has similarities to delegation, but you don’t own the crypto. For instance, if you have 5 ETH, you can’t participate directly in the network because of some arbitrary limit set in the protocol. If you insist on staking, you must use staking services such as Lido or exchanges such as Kraken and Coinbase.
Thus, you release the control of your ETH to exchange or Smart Contract. There is also the risk of slashing if there is a bug or the smart contract becomes vulnerable. The combination of these factors means many people are releasing control of their ETH to entities (like Lido) and centralized exchanges like Kraken.
Thus, resulting in the centralization of the Ethereum network. Right now, three entities control over 51 percent of the Ethereum network. Conversely, Cardano encourages non-custodial staking, where you can participate in the network without losing the rights to your ADA tokens. This well-planned incentive mechanism and a better user experience with staking have positively affected the decentralization of the Cardano network.
Twenty-four entities must combine before they can control over 51 percent of the network. Cardano’s PoS mechanism is better because it incentivizes network participation and leads to better network decentralization. However, Ethereum disincentivizes network participation and allows three entities to control more than 51 percent of the network.