Why Bitcoin uses Proof of Work (and not Proof of Stake)

1 68
Avatar for cryptacritic
4 years ago

Many people new to the crypto space ask the common question "why does Bitcoin use Proof of Work instead of something else, like Proof of Stake?" On the surface, it seems that Proof of Stake requires less energy and must therefore be better for the environment, so all else equal it must be better, right?

Well not so fast! There's many reasons why Proof of Stake is not fundamentally equal to Proof of Work, and there's many merits that Proof of Stake lacks that Satoshi Nakamoto wanted to see in his invention. In this short article I'm going to cover the top five reasons why Bitcoin uses Proof of Work instead of Proof of Stake.

Reason 1: The "Nothing at Stake" problem

Ironically, under Proof of Stake, there is an economic problem with not having enough at stake during a network split. Let me explain it in simple terms: If the network undergoes a community and chain split, those who stake will receive 1:1 equal portions of the original and the forked coins, and will therefore be able to remain a governing force on both chains even if they have partiality towards one or the other. This is unlike on Proof of Work, where mining on one chain necessarily incurs an opportunity cost towards being able to mine on the other.

Additionally, having the ability to govern two chains imply that both chains hold some level of legitimacy. But the intention of Bitcoin was not to become a million fractured ledgers, it was meant to become a single global ledger, interoperable with all people, and not requiring third party financial institutions.

Reason 2: Getting away from "Rule by the Banks"

Under Proof of Work, the individuals who make money from the network proceeds are individuals who invest in real-life capital and equipment, specifically, very powerful computers and large sources of electricity. However, under Proof of Stake, no such investments are required, and instead, all you have to invest in the network coin itself, and perhaps weaker computers. And you don't even have to invest in the Proof of Stake coin itself to have power over the system, as a Bank, Exchange, or other liquidity provider, simply holding tokens gives you power over the network.

And here lies the problem with Proof of Stake: In order for banks to regain power, they don't even have to invest into the system, all they have to do is borrow and hold coins for other people, and they instantly get all their political and monetary power back. With Proof of Work, you cannot simply hold others' money and gain monetary power, you must invest in hardware equipment and electricity and you must risk losing money, and then you get monetary power. Banks aren't banks because they've got large server farms with state of the art computational technology, banks are banks because they've got a lot of money.

Thus Proof of Stake is a reversion to rule by the Banks, and we can already see it with centralized cryptocurrency exchanges controlling most of the network on every Proof of Stake governed coin.

Reason 3: Proof of Stake is a reversion to a Barter Economy

As explained in Reason 1, having a lack of assets at stake during network splits incentivizes participation in multiple cryptocurrencies. Once you become willing to participate in two cryptocurrencies, the temptation to participate in a third and fourth cryptocurrency becomes exponentially greater. Psychologically, individuals value aesthetics and consistency, and if you don't believe that a single global ledger is valuable, then you're more likely to want to believe that utilizing many ledgers is good for a broader appeal to decentralization and perhaps even personal financial diversification. Because Proof of Stake incentivizes participation across multiple currencies, it brings us back to the old failures of a disoriented barter economy.

A barter economy is any economy lacking a reference currency, and instead is just people trading different assets of relative value for other assets they wish to consume or trade again. Barter economies are inherently inefficient, because there are costs associated with trading between different currencies, including monetary, temporal, and psychological costs. The monetary costs are fees you pay to centralized third parties or even a DEX that needs fees to establish liquidity, the temporal or opportunity costs is the time you lose in the act of trading between different currencies, and the psychological costs include waste of precious brain power due to having to decide how much of each separate currency to hold, when to buy and sell, and a plethora of other things that shouldn't be wasting a person's time. There is also the Economic Calculation Problem, because there's no way to establish a Unit of Account in a barter economy, there's therefore no objective way to measure societal wealth. The Economic Calculation Problem negatively affects barter economies almost as badly as it effects centrally planned and socialist economies, because the lack of objective market signals causes a lack of economic coordination to fix resource shortages and manage resource surplus.

Since Proof of Stake incentivizes a reversion to a Barter Economy as well as rule by banks, we can basically guarantee that we won't be changing the status quo, and instead we'd only be giving it new shiny bells and whistles that benefit it, such as the traceability that comes with blockchain (which requires privacy measures like coin-mixing to offset).

Reason 4: Proof of Stake lacks Objectivity (and has potential security problems)

Since this is technically a very rich topic, I only wish to cover the absolute basics. In Bitcoin's Proof of Work, it is globally and objectively agreeable that any node has performed work in a cryptographically provable way. But in Proof of Stake, how do you know if others actually hold their coin stakings? You can only know that by trusting that the entire network is correct in it's current assessment of who owns what coins.

For example, if tomorrow there is a 51% attack on the network, under Proof of Stake, all coin holdings could change instantly. Under some implementations of Proof of Stake, past history might even get wiped out too. Since nodes only talk to nodes on the basis that they have a staking to ensure their legitimacy, their legitimacy can be just as easily undermined by a 51% via staking. Or one might even argue, perhaps not all legitimate nodes need staking (depending on the network). But since Proof of Stake incentivizes staking, you can be assured that most node operators are going to want to stake coins with their node anyways. And if all nodes are programmed to follow the nodes with the highest stakings, then they'd likely by default follow a successful 51% attacker. If not, then this is not so much of a problem, but in the end, it still is puzzling to think that everyone only owns the coins they do because everyone else with coin holdings agree that they own the coins, as opposed to cryptographic proof of work that determines who owns what coins, and everyone just agrees to follow that as an objective metric.

This is unlike in POW, where the integrity of the network under a 51% attack is guaranteed to be a lot safer and more stable then some other weakly modelled Proof of Stake networks. Because nodes only follow Proof of Work and the longest chain as the legitimate ordering of events, and because Proof of Work is fundamentally objective, a 51% attack on the POW still can't override what the nodes are programmed to protect against, spending coins without private keys or printing coins. A 51% attacker under current consensus rules can't simply print or steal coins, as they need certain cryptographic elements to convince all the nodes in the network to proof the validity of their transactions. The second a 51% attacker tries to do something that's forbidden on the network like print coins or steal coins or change history, he would get forked off into his own separate network, due to all the nodes being run by hundreds of businesses and individuals not following those differing rulesets, and this attacker would have to choose between dropping his forked version of the network and attacking again or staying on the forked version. However on Proof of Stake, a 51% attacker is able to make infinite attempts at stealing or printing coins, and potentially split the network everything he tries to do so, since he would own both halves of every coin 1:1.

Fundamentally, the truth value in Proof of Stake is subjective and the power is intrinsic and logically circular, but in Proof of Work it is objective, with extrinsic power that is logically straightforward.

Reason 5: Proof of Stake distribution centralizes, Proof of Work distribution decentralizes

The last and final problem I shall cite for Proof of Stake, is monetary and power distribution. In Proof of Stake, node operators do not have to reinvest continually in order to continue to gain benefit from the network. Under Proof of Stake, you only have to invest once, and early comers get most of the power and influence. One of the consequences of this is that all network proceeds goes to stakings, and therefore people with coin holdings just end up holding more coins. The rich lists only get worse with time under Proof of Stake. And in order to get money under Proof of Stake, you must first buy the money itself, thereby barring potential participants with no other way to access the system. Under Proof of Work, all you need is a computer and electricity, which many people today have, and you can then get some Bitcoins, even if it's at a market loss, at least you have the opportunity to potentially get something.

Because Proof of Stake incentivizes centralization of wealth, this only empowers already existing financial institutions at our continual expense. Proof of Work requires capitalist merit, Proof of Stake just requires having money in general.

Conclusion

Proof of Stake incentivizes the existence of multiple currencies and therefore a barter system, it also disincentivizes loyal participation to a network and incentivizes political indifference, it therefore empowers banks and centralized third party institutions, and it also leads to a centralization of wealth and power. In addition to this, Proof of Stake lacks objectivity, and can easily be split and fragmented into countless pieces.

Proof of Work is the necessary consensus mechanism for a decentralized and secure cryptocurrency in the long term for reasons described above.

2
$ 1.27
$ 1.00 from @Read.Cash
$ 0.27 from @majamalu
Avatar for cryptacritic
4 years ago

Comments

POS coins seems to be fine security-wisely. All the 51% drama in the past few years was affected POW coins (for example, the reorg of vertcoin).

If the developers decide to switch to a POW+POS solution with BCH, then support it - one vote for POS.

$ 0.00
4 years ago