Bankless: 4 angles to tell you why PoS is better than PoW

Later this year, the proof-of-work (PoW) Ethereum blockchain will be “merged” with the existing proof-of-stake (PoS) beacon chain (Beacon). An upcoming network upgrade will remove PoW from Ethereum and replace it with the PoS consensus mechanism that currently secures the Beacon chain.

This transition to PoS will be the most significant blockchain network upgrade ever in the crypto space. As the merger nears, discussions around proof-of-work vs. proof-of-stake will become more meaningful, especially as crypto networks become more integrated into everyday life.

Consensus mechanisms are complex, and the process of understanding them is fraught with rabbit holes and psychological pitfalls. The crypto industry itself has yet to agree on the nature of consensus mechanisms, the lasting impact on their respective ecosystems, and the assets that power them.

This article will clarify some common misconceptions about Ethereum Proof of Stake, while illustrating some of the highly underrated advantages of the PoS consensus mechanism.

Summary

PoW is PoS with extra steps

People think PoW and PoS are very different. Although they have different properties, they all end up in the same way.

Which of the two has a higher return on capital?

Which mechanism has a higher ROI? Why is this important?

What type of assets do PoW and PoS generate?

Will the consensus mechanism affect the nature of the asset?

Differences in governance and power between PoW and PoS

How does the consensus mechanism affect the governance structure of the blockchain? Does Proof-of-Stake Give Stakeholders Governance?

Response to 51% attack

How PoW and PoS can recover from a 51% attack?

Conclusion: Which is a “legacy technology”

Hint: Not the one that takes years of research

Which of the two has a higher return on capital?

Which mechanism has a higher ROI? Why is this important?

PoS is often criticized for making “the rich get richer” due to the compounding of assets. For example, if you are very rich, capital can make money faster than you can spend it.

But this is a completely outdated and wrong notion. Proof of Stake protects the security of Ethereum through ETH pledge as a validator, and users can freely adjust the pledged assets and get a fixed rate of return according to the formula. The amount of ETH staked does not change the rate of return for staking.

In contrast, large funds will generate higher returns in PoW.

For example, if you build two Bitcoin mining farms, one with an investment of $100,000 and the other with an investment of $100 million, the computing power of a $100 million mining farm will be more than 100 times higher than that of a $100,000 mining farm. The key to breaking the proportional growth of computing power and investment lies in some additional activities, such as the cost of purchasing hardware, hardware maintenance and wear, electricity consumption cost, infrastructure construction, cooling equipment, etc. Every related activity is a growth point for big money to improve returns. The economies of scale of big capital give it an advantage over the average user or investor.

By eliminating additional activities that generate economies of scale, PoS can become the fairest public chain consensus mechanism in the world.

In fact, PoW is the system that makes the rich richer. PoS allows users to stake ETH at home at zero cost, but PoW forces everyone to join the competition for economies of scale. The concentration of computing power caused by economies of scale reduces security and centralizes funds to network control participants, further exacerbating oligopoly.

This is traditional technology.

A $1 million ETH staked investment will earn the same ROI as a $1,000 investment, even if it were $1 billion.

This is the technology of the future.

At the same time, PoS also has the characteristics of economies of scale. Validators with larger stakes can make frequent transactions to improve long-term returns. As staking increases, so does the cost of monitoring validators, and better hardware and networks come at a cost.

But compared to the difference in revenue between large and small PoW miners, the difference between large and small PoS stakers is obviously much smaller.

PoW creates a structural imbalance between the elite and the masses, which the blockchain industry wants to eliminate.

What type of assets do PoW and PoS generate?

Will the consensus mechanism affect the nature of the asset?

There is a saying that the formal link to energy consumption turns PoW currency into a “commodity currency”. Similarly, “using assets to get asset dividends” turns PoS currency into “equity currency”.

I think these are interesting conceptual models, but they are not definitions to refer to.

ETH has the characteristics of both commodity-like and equity.

BTC is basically neither.

commodity

The “goods” produced by blockchains are their block space. Apple sells iPhones, Google sells ads. Blockchain sells blocks.

Purchasing transaction space on a blockchain costs money (gas), and you need to purchase block space in the corresponding currency of each blockchain.

There is an association between a blockchain’s block space and the corresponding currency in which it can be purchased. BTC is the only currency that can buy Bitcoin block space, and ETH is the only currency that can buy Ethereum block space. Buying block space on any chain creates a certain demand for the corresponding currency.

This makes the nature of the block space part of the nature of the asset. Since assets monopolize block space, the characteristics of block space are integrated into the essence of assets.

Here are the main differences between Bitcoin and Ethereum:

With Bitcoin, there is no formal relationship between block space and assets, except that Bitcoin block space must be purchased with BTC.

In contrast, Ethereum’s EIP-1559 directly links the value of Ethereum’s block space to the value of ETH. EIP-1559 translates demand for Ethereum block space into demand for ETH.

EIP-1559 changes the relationship between assets and blockchains by consuming rather than recycling the currency that pays for block space. Buying Bitcoin block space sends BTC to miners, who are then reintroduced into the secondary market (to cover mining costs). By contrast, buying Ethereum block space burns ETH (via EIP-1559), consuming it like a commodity and removing it from the supply.

Ethereum block space supply is inelastic. At the same time, due to the existence of EIP-1559, the increase in block space demand leads to an increase in ETH consumption rate.

This allows ETH to fully embody the commodity value of the Ethereum block space.

Since Bitcoin’s primary use is “holding,” the demand for Bitcoin’s block space is generally not large. The transfer needs to be possible, but the value of Bitcoin is not in the transfer of Bitcoin, but in its total supply of 21 million.

rights and interests

PoW proponents compare PoS to ETH with the staking feature. I do think ETH has staking-like properties, but those properties don’t come from a consensus mechanism. The price of ETH is formally linked to the value of the Ethereum network (establishing a “stake” relationship) through two mechanisms:

EIP-1559 Collateral Requirements in DeFi

collateral

collateral

ETH is DeFi’s most primitive collateral; ETH’s trustless properties demand DeFi more than any other asset, and the growth of DeFi has led to an increase in the value of ETH. “Decentralized finance” can also be called “trustless finance”, in order to trust these financial products in the early stage, over-collateralization is required.

As the number and utility of DeFi applications grow, more ETH is required as collateral. This induced reservation demand creates a relationship between the overall DeFi superstructure and the value of ETH.

DeFi applications translate into ETH demand, linking the value of the Ethereum network to the price of ETH on the secondary market. Ultimately, the price of ETH is a measure of the value of the goods and services provided by Ethereum, which sounds a lot like fairness.

Bitcoin does not have the ability to host DeFi applications, and thus there is no such link between the network and the asset.

EIP-1559

Similar to giving ETH commodity attributes (described above), EIP-1559 also gives ETH equity-like attributes.

All Ethereum applications generate economic activity in a broad sense. Every application on Ethereum generates some incentive to use it, creating a demand for Ethereum block space. By consuming ETH for each transaction, EIP-1559 links the value of economic activity to the demand for ETH.

The impact of EIP-1559 on the nature of ETH assets is similar to both commodities and equity, and discussions about “commodities” and “equity” are moot.

Have to ask if ETH is more like a commodity or equity? That’s all, and it’s not, ETH is ETH. The same goes for Bitcoin, BTC is not a commodity. It’s only 21 million, and BTC doesn’t benefit from the growth of the Bitcoin network, so it’s not equity either.

it is so

Differences in governance and power between PoW and PoS

How does the consensus mechanism affect the governance structure of the blockchain? Does Proof of Stake give stakers governance rights?

Ethereum’s proof-of-stake is often confused with explicit on-chain governance. There are indeed blockchains with on-chain Token governance such as Tezos and Decred. Tezos is PoS and Decred is a hybrid PoW/PoS. Consensus mechanisms have nothing to do with token governance, they are different aspects of blockchain design, but are often seen as the same thing.

The “workload” in PoW does not reduce human governance any more than in PoS.

It is cryptography, not workload, that reduces human governance from cryptoeconomic systems. Cryptography uses cryptography instead of consensus mechanisms to reduce human governance.

Lyn Alden posted on social media:

Bankless: 4 angles to tell you why PoS is better than PoW

“Consensus mechanisms don’t involve workload, they involve governance. Only workload can reduce or eliminate governance. A PoW system can become a commodity, and PoS is essentially a stock. I like stocks, but stocks are not commodities.”

Signing a private sale memo to invest in a 150MW mining rig to mine BTC cheaply over the next ten years, and then investing those profits into more ASICs and other mining rigs, is not “work.” PoS does require work, and validators actually have to do real computation to move the network forward. As in PoW, the CPU of the PoS verification computer heats up and consumes energy while processing block transactions. The difference is that all computations of PoS verification are useful, not just competing for who is using more electricity by generating meaningless hashes.

PoW does not require governance due to its resource-intensive nature. What I’m trying to say is that it’s the exact opposite.

The resource-intensive nature of PoW has caused dissatisfaction among local forces. The reliance on supply chains, physical buildings, energy consumption, and other physical things also puts PoW at the mercy of current real-world managers.

Encryption is here to build the digital world of the future; reliance on physical things is a burden.

Response to 51% attack

How PoW and PoS can recover from a 51% attack?

PoW

In PoW, once someone has accumulated 51% of their hash power, there is no mechanism to stop them from continuing to attack indefinitely. This is called a “nesting attack”; the attacker can hit the chain with 51% attack over and over again, making it useless.

In the 51% attack scenario, if honest miners cannot obtain additional computing power, the attacker has full control over the transaction content.

The computing power that secures Bitcoin is generated outside the network.

Post

ETH is a virtual ASIC that has these major advantages:

ETH will not decline, but will be stronger.

PoW proponents claim that this creates structural centralization. Because the validator on day 1 is basically guaranteed to remain validator on day 10,000, however, miners will be replaced due to hardware equipment investment and operating costs.

Proponents of PoS claim that this will better empower individuals. Because only those with special knowledge, political connections, and substantial capital can meet the challenge of maintaining market share in computing power. PoS takes all of these challenges and includes them in the value of ETH, allocating the upside of these benefits to those who can hold and stake ETH.

ETH is easily transferable, extremely decentralized, and unaffected by the real world

The staked ETH doesn’t actually exist anywhere in the real world. This greatly enhances the PoS network’s ability to resist attacks. PoW mining rigs are subject to physical forces (armies, officials, tanks) and cannot be easily transferred. The bulkiness of the PoW facility makes it vulnerable to looting, just as gold ends up being looted by nation-states.

Most importantly, Ethereum is familiar with ETH

Unlike ASICs, the Ethereum network can identify malicious and honest stakers.

In a PoS attack, the attack comes from a specific address that holds a specific ETH used to attack the network. Where the supply of staking ETH that would attack Ethereum comes from, everyone can see objectively.

“15M pledged ETH at 0xabc123attackeraddress789xyz proposes an invalid block in an attempt to fork the network”

There are two possible situations here:

a.  A staker produces an invalid block. The protocol can look at it objectively and weed out the stakers who came up with this invalid block. The whole process does not require human intervention.
b.  The attacker has more than 66% stake and is able to prevent situation  a  from happening. This allows the maker to delete all transactions.

In dire situation  b  , PoS allows the system to fork into a new chain while removing the attacker’s stake. The community will identify validators controlled by the attacker and will reach a consensus on whether and how to remove these validators from the active set. Either forcibly remove them from staking, or even remove these validators from the system entirely, effectively destroying the stake.

Once such a fork occurs, a significant amount of ETH is removed from the network, and the stake of ETH owned by honest actors whose interests match the chain grows substantially. The supply of ETH is also significantly lower, and everyone without the attack chain can have a larger share of the ETH supply. It appropriately rewards those who stand with the network, while also increasing the cost of subsequent attacks, as the threshold for attack is now a larger percentage of the total supply. It’s very elegant.

This process will not become an official part of the Ethereum network (and may never even happen in practice, given the deterrent of the soft fork threat). This requires human intervention and off-chain coordination to achieve; this is often against the spirit of cryptocurrencies. Our goal is to not have to fork. But by contrast, Bitcoin doesn’t even have that option. In a PoW 51% attack, human intervention is also required to get the network back up and running. Unlike PoS, however, there is no clear path to get honest hashrate back above 51%.

Both PoW and PoS lead to actions outside the network to restore network consensus.

Post:

1. Identify the attacker’s address (easy, just look on-chain).
2. Coordinate a block height and fork off the attacker’s stake (not easy, but fork coordination has happened many times in Ethereum’s history and is known to be controllable. We’ve done it before).

PoW :

1. Coordinate with ASIC manufacturers and supply chain to increase ASIC production as soon as possible. 

2. Once the ASIC is produced, ship the ASIC to a mining farm with energy. 

3. Make sure these new ASICs are not shipped to miners launching the attack (but you have no idea who they are!).

Fixed PoW’s 51% nesting attack over a long time span. Without knowing the nature of the attack and the attacker’s resources, it’s impossible to say for how long, but I think it’s clear that coordinating a fork of a PoS network at block height is more important than coordinating a global supply chain to put ASICs in the hands of honest miners easy.

For 51% attacks, PoW solutions are not only lengthy, but not guaranteed to work. “Just make more ASICs” is not the answer to the PoW 51% attack.

More critically, however, Case 1 does not actually gain any meaningful incentives for the network. Are miners really going to risk deploying capital to buy ASICs when the network is 51% attacked? What if the price of BTC plummeted due to a loss of confidence in the network? Are miners really getting the most ROI from the ASICs they need to buy? Why take the risk? No one can guarantee that the network will come back online, and the legitimacy of BTC as an asset will be seriously threatened. If this causes the price of BTC to drop, honest miners will be more reluctant to risk more capital to produce honest computing power.

Most importantly, this shows that whoever controls the ASIC production and supply chain controls the PoW chain. Due to its relationship to power consumption, PoW chains are limited by how the physical world is organized. Whoever controls the physical world controls the PoW chain.

That’s what PoW does; because of the reliance on physical things, it puts control in the hands of those who control the physical world.

Yes, Bitcoin mining equipment is distributed around the world, but PoS validators leave no physical footprint. The ETH pledged to the Ethereum network does not actually exist on any one particular computer. Validation computers that stake ETH can be destroyed, but staked ETH can be recovered and redeployed from private keys anywhere in the world.

This is one of the many reasons why PoS is more decentralized than PoW; there is no centralization of supply chains, no centralization of economies of scale, and no centralization of large mining facilities.

Conclusion: which one is “traditional technology”

A common saying in the Bitcoin camp is that “Proof of Stake is traditional old technology”.

The claim is that it is a reincarnation of the same power structures that the world already abides by, and in fact, Bitcoin and PoW are the real innovations.

I think anyone making this claim seriously confuses key elements of blockchain design. Neither conceptual models and metaphors about returns on capital nor their connection to traditional governance structures are proof, especially when they ignore the highly relevant details of Ethereum’s implementation of PoS.

One of my favorite criticisms of Bitcoin culture is that when the base chain does not allow L1 innovation, it moves to the social layer. In my opinion, any claim that PoS is a “legacy technology” is just making up stories to fill in their knowledge gaps with what they want to see, and proof of stake is rigorously researched by people at the forefront of cryptoeconomics.

Proof of Stake will go down in history as one of the most democratized forces of power ever created.

This is the legacy Ethereum is building for itself. Proof-of-stake best achieves the fair distribution of money and power on the fringes, and the system is designed to achieve those goals.

This is the only way to remain decentralized for the longest time frame.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/bankless-4-angles-to-tell-you-why-pos-is-better-than-pow/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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