So proof of stake may make theoretical sense, however does it actually make financial and economic sense, particularly when income by ways of staking rewards can't currently be easily used/ spent today, but in many countries are these rewards are being subjected to income tax almost immediately.
You could always opt to not stake but then are you not effectively being punished against the many that are? Or you when it comes to taxation you could always call Singapore home like Vitalik as you pay no income tax or capital gains tax on crypto… but for the vast majority this isn't feasible. Currently if you're accumulating the likes of ETH, you'd be sitting on a stack of ETH watching a supply get diluted with ethereum rewards which if you don't take you miss out on and if you do receive you'll most likely receive a income tax bill, for an asset that you can't currently easily spend, hasn't been the greatest store of value recently and possibly face more taxation by ways of capital gains if you do. I'll elaborate further below but your TDLR for the moment is that whilst we're currently still in the adoption phase, retaining all the value within a crypto ecosystem system for growth such as Bitcoin via PoW is better store of value and more tax efficient as more often than not the only tax due will be on disposal. Until ETH is treated, accepted and taxed like cash, I believe for the majority of retail investors staking rewards are more of a penalty against than a reward for and the resultant taxation a hindrance and minefield.
Further detail
For those unaware, two of the most dominant consensus mechanisms in crypto are:
Proof of Work (PoW) refers to a consensus mechanism used to verify transactions and add new blocks to the blockchain. It requires network participants, called miners, to expend computational effort to solve complex cryptographic puzzles.
Proof-of-stake (PoS) is a consensus mechanism used in blockchain networks to verify transactions and secure the network. It involves participants "staking" their cryptocurrency as collateral to validate transactions and create new blocks. Instead of relying on computational power like proof-of-work (PoW), PoS incentivizes validators to behave honestly and securely by rewarding them with tokens for their contributions.
Today much of PoW mining is almost on an industrial scale and competitive as it's difficult and expensive. Whereas PoS is (either directly or indirectly) is relatively easily and open to almost all. Ultimately… PoW it's very hard to be "rewarded" and only a minority are however with PoS it's very easy and the majority "rewarded".
Many have suggested that means staking isn't actually rewarding the majority, rather penalizing the minority who don't stake. As time goes on, I believe more and more will come to this conclusion. Particularly when considering taxation which I'll touch on later.
Bonus Example
If your employer "rewards" you a one off bonus, it's often because they've made money. You feel it's a bonus because it's not been given, often unexpected, not routinely issued, subject to change and typically for a targeted minority.. it's proof of your hard work.
If on the other hand your employer took some of their profits and gave almost everyone a reward, all of time, without them putting in the work, that was universal and routinely expected… then most would consider thats not a "reward" more like part of everyone's pay. In this system, is actually anyone being rewarded? Surely those that don't accept/ or are paid the bonus are effectively being penalized for not accepting/ receiving it?
Accumulation/ Growth Vs Income
When it comes to investing, two main strategies are accumulation for growth or income.
Income investing is a strategy focused on generating a consistent stream of income from investments, such as dividends from stocks, interest from bonds, or other interest-bearing accounts. The primary goal is to create a reliable cash flow that can supplement or replace other sources of income.
Accumulation investing is a strategy where any income generated by an investment (like dividends or interest) is reinvested back into the same investment rather than paid out as cash. This means the total value of your investment increases not just from the initial investment, but also from the compounding effect of reinvested income.
At the corporate level businesses also do their own form of income/ growth investing. They can either pay out profits and reward shareholders by ways of dividend or they can keep and reinvest profits within the business and go for growth.
In simple terms if we consider staking rewards like income and a system that doesn't pay out rewards like like growth/ price appreciation, when it comes to tech growth firms not paying a dividend and reinvesting profits has proved more economically streamlined and more tax advantageous. In very simple terms, you could argue this has been replicated with bitcoin price appreciation against the ethereums staking reward model. However unlike cash income which has real utility and often little or no tax, staking rewards have little utility and often subject to higher tax.
Ultimately I think whilst an amazing technical achievement and theoretically great, I don't think the Ethereum community particularly Vitalik paying tax at Singapore rates has really fully appreciated the current economic and financial limitations that exist and pose in the near future. I believe this is the reason why my are seeing less value in some projects than more.
