Extortion of a Staking Pool in a Proof-of-Stake Consensus Mechanism

Cryptocurrencies to date, most notably Bitcoin, have primarily relied on a proof-of-work system to validate and process transactions on the blockchain. Proof-of-work systems have, however, several limitations, such as enormous energy demands, and so are likely to be replaced by proof-of-stake systems. These systems use a mechanism that does not rely on mining power but the amount of stake owned by a node, allowing randomly selected validators to create blocks and verify blocks created by other validators. Proof-of-stake systems naturally result in staking pools where in a third party organisation operates validators on behalf of investors who have staked in the currency. Given they have oversight for a large amount of staked currency, staking pools are a prime target for malicious actors. In this paper we explore the economic implications of an attack on a staking pool. We pay particular attention to how the staking pool and clients could resolve an extortion attack by a malicious actor who has accessed relevant signing keys.