Proof-of-Stake Vs. Proof-of-Work

Beginning a deep dive into the hot debate between proof-of-work and proof-of-stake has folks wondering which approach really plays fair. This journey heads into a close inspection of the good parts and challenges of each, trying to reveal their strong and weak sides.

Inaugurating a series of discourses, we embark upon the first segment aimed at unraveling the age-old contention between the proof-of-stake and proof-of-work consensus paradigms. This narrative endeavors to illuminate foundational principles while concurrently addressing the contentious themes of wealth aggregation and disparity, pivotal in any communal discourse.

The advent of Bitcoin and a multitude of foundational digital currencies heralded the era of the pure proof-of-work schema.

In the year 2013, Peercoin emerged as the vanguard of the proof-of-stake mechanism, a project that persists in its existence to the present day. Despite Peercoin’s pioneering efforts, the widespread acclaim of PoS was significantly amplified by Ethereum‘s ambitious transition from PoW—a transition that has proven to be protracted.

Contrastingly, projects such as Cardano took a deliberate stride towards PoS, eschewing PoW after meticulous evaluation of consensus frameworks.

Communities orbiting Bitcoin and Monero remain fervent advocates for the mining-centric proof-of-work mechanism, underscoring a steadfast allegiance to this foundational consensus approach.

What is a consensus algorithm?

Within the vast expanse of any blockchain ecosystem, the consensus algorithm stands as the cornerstone, designed to address the quintessential dilemma of trust among network participants. This algorithm is crucial for validating transactions, serving as the cryptographic keystone that sustains the functionality of cryptocurrencies.

Verifying basic transaction attributes, such as ownership and the transaction amount, is facilitated through the marvels of public-key cryptography, leveraging its foundational mathematical principles.

Consensus algorithms are devised to counteract the peril of the “double-spend” attack, wherein a nefarious entity might endeavor to expend the same digital currency multiple times. Addressing this challenge necessitates a judicious decision to ascertain the legitimacy of concurrent transactions.

The resolution to this predicament transcends pure mathematical formulations, relying instead on a synthesis of cryptographic rigor and economic incentives to uphold a cohesive network.

Bitcoin’s consensus mechanism adheres to a straightforward principle: the veracity of the longest chain of blocks. This method, commemorated as Nakamoto Consensus in homage to Bitcoin’s enigmatic creator, predicates that augmenting the blockchain necessitates considerable effort.

Proof-of-work and the mining process are pivotal, securing each block through cryptographic means that demand substantial computational exertion.

The security underpinning Bitcoin is fundamentally tied to a tangible physical metric — energy, reflecting a direct correlation between computational power and electricity consumption.

Conversely, proof-of-stake fortifies network integrity through the allocation of stakes, or significant holdings of the network’s tokens. Its security paradigm is intrinsically linked to the network’s economic valuation — the fiscal heft required to dominate the majority stake.

However, proof-of-work networks also manifest a tangible relationship between their economic valuation and security. Miners are remunerated with cryptocurrency, incentivizing the augmentation of computational resources and energy expenditure to heighten security. This dynamic fosters a security apparatus that evolves towards an economic balance, influenced by the cost of electricity.

Over time, the investment in mining infrastructure is influenced by the cryptocurrency’s emission schedule and market valuation, rather than the network’s operational performance or user engagement. This aspect is frequently cited by advocates of proof-of-stake as a fundamental flaw of the proof-of-work paradigm.

The energy problem and Trusting PoS history

In an enlightening dialogue with Cointelegraph, Aggelos Kiayias, the eminent chief scientist at IOHK, one of the pillars behind Cardano, shed light on their strategic choice for proof-of-stake (PoS). She articulated:

“The considerations of environmental sustainability and energy expenditure inherent in Proof of Work blockchains were pivotal. It sparked the question: ‘Could we architect a protocol mirroring the efficiency of Bitcoin’s blockchain without the excessive energy consumption?’”

Bitcoin mining’s electric demand is substantial, with a July 2019 assessment pegging its annual consumption at 70 terawatt-hours, roughly equivalent to the total power usage of a smaller European nation like Austria. Yet, this figure represents merely 0.28% of the worldwide electricity consumption.

The ecological ramifications of this consumption are a subject of debate. A report from the same period estimated that 74% of Bitcoin mining utilizes renewable energy sources. Proponents within the Bitcoin and Monero communities contend that the energy devoted to mining is essential, underpinning the system’s robustness and decentralized nature.

Jake Yocom-Piatt, the project lead at Decred, echoes the environmental concerns but remains skeptical of PoS as the ultimate solution. In conversation with Cointelegraph, he remarked:

“Proof of Work’s environmental toll is undeniable. Nonetheless, it’s vital to recognize it as the inaugural and most straightforward consensus mechanism. Future enhancements to PoW are conceivable.”

Although proof-of-stake also entails energy use, particularly in the delegation process, it is widely acknowledged as being significantly less energy-intensive than proof-of-work systems. Critics argue, however, that this efficiency comes at the expense of several other critical factors.

On the topic of PoS’s reliability, Yocom-Piatt points out that pure PoS systems are inherently reversible, implying a mutable history. This echoes a 2015 critique by mathematician Andrew Poelstra of Blockstream, who posited that the dependency of PoS on previous stakes—which themselves are baseless—renders it impossible for users to definitively validate a block’s legitimacy.

In contrast, PoW’s historical accuracy is mathematically ascertainable and can only be falsified through the monumental task of replicating its entire mining history. Poelstra highlighted that while PoS advocates believe securing short-term history suffices, alterations in older blocks would undermine the collective memory of the system’s participants.

This shifts the trust model from Bitcoin’s immutable ledger to one reliant on perpetually connected peers, susceptible to legal, network, and targeted attacks on trusted entities, thereby diminishing its resistance to censorship and decentralization.

Despite these criticisms, proponents of PoS argue that, much like PoW systems, it ultimately depends on a form of social consensus for its security.

The debate persists, rooted more in philosophical beliefs regarding the acceptability of relying on social consensus to mitigate energy consumption than in definitive technical superiority. This ongoing discourse continues to evolve, branching into various complex discussions.

Acquiring stake vs. acquiring work

The pursuit of economic equity remains a contentious issue in the realm of consensus algorithms, with proponents of both systems advocating for measures that curb unequal access and the exacerbation of wealth disparities, in line with decentralization ideals.

Proof-of-stake is often critiqued for perpetuating a cycle where the affluent amass greater wealth, a concept encapsulated by the adage “the rich get richer.” However, representatives from the Ethereum Foundation contended in a Reddit AMA that the reality is more nuanced:

“Owning an asset inherently provides the opportunity to derive further gain from it. The distinction lies in the mechanism of gain: PoS offers a more direct, equitable path (acquire token, lock token, fulfill responsibilities, earn X), whereas PoW’s correlation between capital and profit is swayed significantly by factors external to the protocol.”

Aggelos Kiayias from the Cardano network posited that PoS does not discriminate between the investments of the affluent and the financially modest, stating:

“Proof of Work cannot deliver a truly egalitarian consensus mechanism […] In contrast, Proof of Stake envisages a scenario where the investment of a less wealthy individual holds identical potency to that of a wealthier counterpart.”

The CEO of Equilibrium, working on an algorithmic stablecoin on EOS, echoed the sentiment of the Ethereum Foundation, endorsing the view that token staking is devoid of barriers to entry and does not foster wealth inequality, provided the tokens remain openly traded.

This perspective contrasts with the argument that mining inherently favours wealth accumulation through “extra-protocol” advantages such as bulk purchasing discounts or exclusive access to cutting-edge hardware, as highlighted by PoS advocates.

Conversely, Alejandro De La Torre, Vice President at Poolin, the leading Bitcoin mining pool, champions proof-of-work’s fairness, attributing it to the potential for innovation and efficiency gains through technological advancements. He conveyed to Cointelegraph:

“In my view, the capacity to innovate — be it through developing a new chip, optimizing a mining rig’s operating system, or any other breakthrough — epitomizes why PoW stands as the more equitable ‘cryptoeconomic’ model. […] PoS’s reliance on possession of the principal asset, where increased holdings equate to higher earnings, offers no alternative for enhancing one’s position, aside from acquiring more of the staked asset.”

This debate underscores the divergent philosophies underpinning the proof-of-work and proof-of-stake mechanisms, each with its own interpretation of fairness in the cryptoeconomic landscape.

Equality of opportunity is what matters

In an insightful exchange with Cointelegraph, Duke University’s international business professor, Campbell R. Harvey, delved into the dynamics of economic inequality as it pertains to blockchain consensus mechanisms. He highlighted a common critique of proof-of-stake (PoS) — the propensity for wealth concentration, stating, “Yes, the concern that wealth begets wealth in PoS is valid. Conversely, proof-of-work (PoW) operates more akin to a conventional business where miners aren’t required to possess the underlying cryptocurrencies like BTC, ETH.”

Harvey elaborated on the distinct economic principles underpinning the two systems, emphasizing the operational risks and competitiveness inherent in PoW mining, including the potential for negative profits and business failures. He noted, “I don’t perceive modern mining to significantly influence wealth distribution. Often, mining equipment is rendered obsolete not by wear but by the volatile nature of cryptocurrency valuations.”

Addressing the issue of bulk purchasing discounts and its impact on wealth disparity, Harvey regarded this as a manifestation of scale efficiency, a common aspect across industries, thereby normalizing the practice within mining operations.

He further articulated that wealth disparity is an intrinsic element of free market systems, driven by variances in innate skills and fortune. Harvey argued, “The focus should ideally be on equality of opportunity rather than wealth itself. The free market should enable anyone with a viable idea to ascend to the top echelons of economic success.”

In terms of access and fairness, Harvey views PoS systems, particularly those employing delegated proof-of-stake models, as inherently equitable, allowing even minimal stakeholders to partake in mining rewards through delegation.

Such delegation mechanisms and staking pools are ubiquitous across PoS frameworks, potentially extendable through analogous external measures akin to PoW mining collectives.

Contrastingly, Alejandro De La Torre posits that the principle of equal opportunity is equally applicable to ASIC mining, underscoring the lifecycle of mining equipment, which typically spans three to four years before obsolescence due to failure, increased mining difficulty, etc. He pointed out, “As we observe the phasing out of dominant models like the [Bitmain] S9, the mining industry undergoes renewal. This cyclical renewal fosters the introduction of new mining rigs, operating systems, and quests for cost-effective electricity, thereby inviting fresh entrants keen on exploiting PoW mining opportunities.”

This discourse illuminates the nuanced perspectives on economic fairness and opportunity within the blockchain consensus ecosystem, underscoring the complex interplay between technological innovation and market dynamics.

Mining is not always the same

Kristy Leigh-Minehan, a luminary in the realm of cryptocurrency mining and the former CTO of Genesis Mining, as well as a co-architect of ProgPow, posits that the discourse surrounding the fairness of proof-of-work (PoW) primarily critiques ASIC mining. She advocates for the utilization of consumer-grade hardware, like CPUs and GPUs, for mining, leveraging their ubiquitous distribution and availability to level the competitive field. Minehan elucidates:

“CPUs and GPUs are entrenched in global supply chains, reaching countless individuals worldwide every day. By designing a PoW algorithm that harnesses this readily available hardware, you’re essentially capitalizing on established supply and distribution networks, rather than forging new pathways.”

She underscores the importance of ensuring equitable opportunity in mining, aiming for a scenario where all participants, regardless of their stature, have an equal shot at earning cryptocurrency. Minehan acknowledges that miners will invariably seek to refine and specialize their operations, but emphasizes that the essence of fair competition should lie in the capital expenditure (CapEx) involved.

The acquisition cost for ASICs can be markedly lower for major players, benefiting from economies of scale. Conversely, GPUs and similar consumer-centric hardware offer a more accessible and financially viable option for the general populace, Minehan notes.

The fundamental contribution of PoW

Kristy Leigh-Minehan, with her profound understanding and experience in the field of cryptocurrency mining, espouses a deep faith in the integral role GPU miners play, particularly during the nascent stages of a network’s life. She articulates a compelling narrative: the average person is hesitant to convert their laboriously earned traditional currency into what is often whimsically termed “magical internet money.” The proposition of leveraging existing computing resources presents a far more palatable avenue for participation.

This skepticism towards the expenditure of fiat currency on digital assets isn’t unfounded. Indeed, the genesis of the initial coin offering (ICO) phenomenon is deeply intertwined with the pioneering efforts of Bitcoin and Ethereum. Bitcoin’s inception and subsequent evolution effectively sanctified the notion of digital currency. It wasn’t until over 17 months after Bitcoin’s inaugural block was mined that the landmark Bitcoin pizza transaction occurred on May 22, 2010, assigning Bitcoin a tangible fiat value for the very first time.

Ethereum further cemented this legacy by executing one of the earliest ICOs in 2013, thus validating the viability of this innovative fundraising mechanism.

Minehan posits that the distribution mechanism inherent to Bitcoin’s initial rollout would have been untenable within a purely staking-based framework. According to her, it’s the establishment and stabilization of the network that predicates any feasible shift towards staking models.

Jake Yocom-Piatt, concurring with Minehan’s insights, underscores proof-of-work (PoW) as a crucial mechanism for ensuring equitable token distribution. He suggests that PoW serves as a “high quality source of entropy,” a foundational principle that was also embraced by Peercoin in its initial distribution phase. This perspective sheds light on the multifaceted utility of PoW, not just as a security measure, but as a catalyst for fair and decentralized network growth.

The systems are different, not necessarily better or worse

Concluding the discourse on the economic equity between proof-of-stake (PoS) and proof-of-work (PoW) systems, as Campbell R. Harvey suggests, may lead us astray from the core issue. It’s challenging to definitively state that one system inherently centralizes wealth more aggressively than the other.

In PoW configurations, while miners can potentially secure undue advantages, they also face the risk of total investment loss — a predicament virtually non-existent in PoS frameworks.

Jake Yocom-Piatt, whose initiative Decred incorporates elements of both paradigms, elucidates that “pure PoS and pure PoW are fundamentally divergent.”

He advocates for a hybrid model, believing that it amalgamates the strengths of both systems. On one hand, PoW effectively gamifies the process of timestamping, thereby safeguarding immutability. On the other, PoS is indispensable for aligning governance incentives.

Yocom-Piatt posits that miner interests might not always converge with the broader objectives of the cryptocurrency, highlighting potential governance frailties.

Decred’s journey intimates that juxtaposing PoS against PoW might be an oversimplification. The synthesis of these mechanisms could mitigate their individual limitations, a notion distinct from other blockchain controversies, like Ethash versus ProgPow.

From a governance perspective, the recent takeover episode within the Steem community underscores a pivotal lesson: control over tokens does not equate to ownership.

The forthcoming article in this series promises a deeper dive into the governance dynamics within PoS and PoW ecosystems, aiming to further unravel these complex interrelations.