Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
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Featured on homepageNewsBitcoinOpinionHere’s Why Bitcoin Needs Proof-Of-Work and NOT Proof-Of-Stake
Featured on homepageNewsBitcoinOpinionHere’s Why Bitcoin Needs Proof-Of-Work and NOT Proof-Of-StakeHere’s Why Bitcoin Needs Proof-Of-Work and NOT Proof-Of-Stake
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A prominent crypto figurehead thinks Bitcoin needs proof-of-stake to stay afloat. The precise opposite is true.
Ben Armstrong – a crypto investor and YouTuber of over 1.45M subscribers – had a bold take for Bitcoiners this Sunday. As stated to his 792k Twitter followers, he predicted the premier blockchain would “have to change” from using proof-of-work (POW).
The creator claimed that an ever-growing environmental lobby would eventually get “too loud” for the mining industry to persist. Meanwhile, he cited proof-of-stake (POS) as a far more energy-efficient alternative consensus mechanism. This mechanism is used today by blockchains such as Solana and Cardano and will soon be used by Ethereum.
“I think, eventually, proof-of-work is going to die,” he said
However, numerous prominent Bitcoiners responded in disagreement with the investor. Critics ranged from Best Business Show host Anthony Pompliano to Microstrategy CEO Michael Saylor and many more.
Granted, most community members know Bitcoiners can be reasonably abrasive when speaking with critics of their protocol. However, things get especially heated when such fundamental pieces of it – like proof-of-work – are targeted.
But there’s a reason for that. Proof-of-work is a frequently misunderstood tool in mainstream crypto coverage. Even the broader crypto community often underestimates POW’s unique benefits, alongside POS’s notable drawbacks.
Let’s review some of these hidden benefits and why proof-of-stake cannot do Bitcoin the same justice.
But first, a recap:
Summary: Proof of Work and Proof of Stake
POW and POS are “consensus mechanisms” – systems for determining which blockchain version is valid.
Both protect a blockchain network from block spam and create economic consequences for producing blocks that violate consensus rules. These could include blocks that are too large or contain double-spent transactions. The incentive structures are different with each mechanism, however.
Proof-of-Work
On POW chains, nodes must solve a computationally tricky math problem by generating guess answers called “hashes” to create a block. The first node to find a solution may make the next block and earn its associated block reward + transaction fees. Nodes engaged in this contest are called “miners”.
The faster a node can generate hashes, the better its odds of mining the next block. However, a faster hashrate entails greater, costlier power consumption or computational “work”. Hence, hashes are regarded as “proof of work” from their associated miners.
Proof-of-Stake
By contrast, POS chains do not require nodes to do complicated arithmetic. Instead, they need only temporarily lock up a “stake” of the blockchain’s native cryptocurrency with the network. The larger one’s lockup, the better his odds of being selected by that network to construct the next block. Once again, if a valid block is built, the staker earns all fees associated with the league.
However, if an invalid block is constructed, POS nodes are stripped of their reward. They also lose part of their stake as punishment.
Meanwhile, POW chains will remove the block reward and feature an implicit “punishment” from the nodes’ sunk energy costs.
Given these facts, POS networks/ communities often market their mechanisms as superior to Bitcoin. As the argument goes, POS provides all the incentives to keep nodes honest without a massive energy footprint.
This is an oversimplified comparison and fails to acknowledge all of the side-effects of each mechanism.
Why Bitcoin Uses Proof-Of-Work
Here’s why Bitcoin is secure under a proof-of-work and would be insecure under proof-of-stake.
1. POW Incentivizes Renewable Energy
Contrary to common criticism, Bitcoin mining will likely be a net positive for the environment long-term.
A study by Jack Dorsey’s Square (now Block) and Cathie Wood’s Ark Invest suggests that Bitcoin could help stabilise renewable energy grids. Solar and Wind sources often struggle with generating energy surpluses during low demand.
At these times, Bitcoin miners could help absorb excess energy from those grids, making otherwise wasteful energy economically productive. This could make renewable energy technologies more profitable long-term and incentivize their growth.
Despite Bitcoin’s extensive energy use, about half of it comes from renewable sources. Such sources are more efficient than non-renewables like coal and have become more common since China ejected its coal miners.
Notably, the Bitcoin mining industry can reach geographically isolated renewable sources in ways other energy users can’t. El Salvador’s use of regional Volcanoes for Bitcoin mining is a premier example of this.
These arguments can easily withstand statements from regulators wishing to ban Bitcoin on environmentalist grounds. Even if they still do, miners may move to more welcoming jurisdictions, and the hash rate will quickly recover.
2. POS Creates Inequality; POW Does Not
As mentioned, POW’s punishment against bad-faith nodes is implicit, whereas POS’s is explicit. Technically, miners always incur costs for mining blocks, while stakers only incur costs for mining invalid blocks.
Therefore, if network nodes operate honestly across time, a POS chain will encounter a critical inequality problem. The more crypto one holds, the more he can obtain through staking. This creates a passive, one-dimensional process for mining blocks in which wealthier nodes are mathematically immune from being overthrown.
POW chains have far less of a tendency toward this inequality. Though more powerful miners may earn more Bitcoin, they still constantly incur costs. When Bitcoin trades low and hash power is high, miners must sell their coins to cover those costs. Finally, environmental circumstances or technological development could overthrow overly dominant miners.
By selling the coins, miners spread Bitcoin on the open market, preventing the supply from centralizing around themselves. Nate Madrey – research analyst at CoinMetrics – has credited this process with making Bitcoin’s supply more equally distributed than other cryptos.
Inequality has critical implications for a cryptocurrency designed to be neutral, global money. Wealth inequality is a top predictor of crime and can harm the competitiveness and productivity of a healthy free market.
Critically, inequality in a POS system heightens the possibility of a 51% attack. If any group of participants accumulates over 50% of the network’s funds, they may completely take over the chain. This is the antithesis of the decentralization Bitcoin strives for.
3. POW Leads To Fair Coin Distribution
To create a neutral and decentralized currency, it’s essential to ensure the distribution is as “fairly” as possible. It must not, by design, benefit anyone participant in an outsized way.
Since POW creates blocks without using the system’s internal currency, distribution can take place in a purely competitive manner. Since its inception, all newly-created Bitcoins have been delivered through block subsidies as rewards for miners’ energy use.
Such a system is incompatible with POS networks. These networks must feature premises that disproportionately reward VCs and project insiders.
This isn’t just an ethical issue but a regulatory one. Largely thanks to Bitcoin’s proof-of-work, it has managed to escape classification as a security by the SEC. Conversely, pre-mined cryptos like XRP and Ether are in much more dangerous waters. Their ICOs greatly resemble securities offering in the eyes of chairman Gary Gensler.
Today, many recognize Bitcoin as a commodity by the CFTC and as currency by former SEC chairman Jay Clayton.
Conclusion: Don’t Touch Bitcoin’s Fundamentals
Given the conservative bias of Bitcoiners, the likelihood of a network hard fork changing its consensus mechanism is extremely low. Rest assured, however, that Bitcoin’s current mechanism is both satisfactory and necessary.
Every piece of Satoshi Nakamoto’s creation is highly synergistic, serving a more significant part of the whole than we usually realize. By swapping out a component like proof-of-work, Bitcoin would sustain damage in many underappreciated ways. For example, it would stop incentivizing renewables, lose its fair distribution, and create inequality if operating by proof-of-stake.
Written by
Andrew Throuvalas
@andrew
476 posts
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