Shorting attack: Predatory, destructive short selling on Proof‐of‐Stake cryptocurrencies

Abstract

Summary Bitcoin introduced blockchain which is the transparent and decentralized way of recording the lists of digital currency transactions. Bitcoin's blockchain uses Proof‐of‐Work as a Sybil control mechanism. However, PoW wastes energy since it uses hash computing competitions to find a block. Hence, various alternative mechanisms have been proposed. Among them, Proof‐of‐Stake, which is based on the deposit, has been spotlighted. As opposed to Proof‐of‐Work, Proof‐of‐Stake requires nodes to have a certain amount of tokens (stake) in order to qualify to validate blocks. The “one‐sentence philosophy” of proof of stake is not “security comes from burning energy,” but rather “security comes from putting up economic value‐at‐loss.” In this article, contrary to popular belief, we point out that this value‐at‐loss can be hedged by short selling or other financial products. We propose a “shorting attack,” which makes a profit by massive short selling and sabotage to a Proof‐of‐Stake‐based cryptocurrency. The shorting attack implies that the security of Proof‐of‐Stake‐based cryptocurrency can be vulnerable by a low stake ratio.