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

Bankless

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Proof of Stake is the only way to maintain decentralization for the longest time frame.

Original title: "4 Misconceptions about PoS vs PoW"

Original author: David Hoffman, co-founder of Bankless

Original compilation: czgsws, 0x22, 0x9F, Rhythm BlockBeats

Later this year, the proof-of-work (PoW) Ethereum blockchain will integrate with existing Proof-of-Stake (PoS) beacon chain (Beacon) "merging". An upcoming network upgrade will remove PoW from Ethereum and replace it with the current PoS consensus mechanism securing the Beacon chain.

This transition to PoS will be the most significant blockchain network upgrade ever seen in the crypto space. As the merger nears, discussions around Proof of Work vs. Proof of Stake will become more relevant, especially as crypto networks become more and 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, their lasting impact on their respective ecosystems, and the assets that power them.

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

Summary

PoW is PoS with an extra step

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

1. Which of the two has a higher return on capital?

· Which mechanism has a higher return on investment? Why is this important?

2. What types of assets are generated by PoW and PoS?

· Will the consensus mechanism affect the nature of the asset?

3. Governance and power differences between PoW and PoS

How does the consensus mechanism affect the governance structure of the blockchain? Does proof of stake give stakeholders governance rights?

4. Responding to 51% Attacks

How do PoW and PoS recover from 51% attacks?

Conclusion: Which one is "legacy technology"

Hint: Not the one that needs years of research

1. Which of the two has a higher rate of return on capital?

Which mechanism has a higher return on investment? Why is this important?

PoS is often criticized for making "the rich get richer" due to asset compounding. For example, if you are very rich, capital can earn money faster than you can spend it.

But this is completely outdated and wrong. Proof of equity protects the security of Ethereum through ETH pledge as a validator. Users can freely adjust the pledged assets and obtain a fixed rate of return according to the formula. Staking the amount of ETH does not change the rate of return for staking.

In contrast, big money will generate a higher rate of return in PoW.

For example, to build two Bitcoin mines, one with an investment of 100,000 US dollars and the other with an investment of 100 million US dollars, then the computing power of the 100 million US dollars mine will be higher than The computing power of a $100,000 mine is more than 100 times higher. The key to breaking the proportional growth of computing power and investment lies in some additional activities, such as hardware purchase costs, hardware maintenance and loss, power consumption costs, infrastructure construction, cooling equipment, etc. Every related activity is a growth point for big money to increase the rate of return. The economies of scale of big capital give it an advantage over ordinary users or investors.

By eliminating the extra activities that create 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 pledge ETH at zero cost at home, but PoW forces everyone to participate in the competition of economies of scale. The concentration of computing power caused by economies of scale will reduce security and concentrate funds among network control participants, further intensifying oligopoly.

This is traditional technology.

A $1M staked investment in ETH will get the same ROI as a $1K investment, even $1B .

This is the technology of the future.

At the same time, PoS also has the characteristics of economies of scale. Validators with large pledges can conduct frequent transactions to increase long-term yields. As the stake increases, so does the cost of monitoring validators, and better hardware and networks come at a cost.

However, compared to the difference in earnings 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.

2. What types of assets are generated by PoW and PoS?

Will the consensus mechanism affect the nature of the asset?

There is an argument that the formal association with energy consumption turns PoW money into "commodity money". Similarly, "use assets to get dividends on assets" turns PoS currency into "equity currency".

I think these are interesting conceptual models, but none of them are definitions to refer to.

ETH has the characteristics of both commodities and equity.

BTC is basically neither.

Commodity

The "commodity" generated by the blockchain is their block space. Apple sells iPhones, Google sells ads. The blockchain sells blocks.

Buying transaction space on the blockchain costs money (gas), and you need to use the corresponding currency of each blockchain to buy block space.

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. Purchasing 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 the assets monopolize the block space, the characteristics of the block space are integrated into the essence of the asset.

Here is the main difference between Bitcoin and Ethereum:

Using Bitcoin , there is no formal relationship between blockspace and assets, except that Bitcoin blockspace must be purchased using BTC.

In contrast, Ethereum's EIP-1559 directly links the value of Ethereum 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 the blockchain by consuming rather than reclaiming the currency that pays for block space. Buying Bitcoin block space sends BTC to miners, which are then reintroduced into the secondary market (to pay for mining costs). In contrast, buying Ethereum blockspace 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 requirements has led to an increase in the ETH consumption rate.

This makes ETH fully reflect the commodity value of Ethereum block space.

Since the primary use of Bitcoin is to "hold", there is usually not much demand for Bitcoin block space. Transfers need to be possible, but the value of Bitcoin is not in the transfer of Bitcoins, but in its total supply of 21 million.

Stake

PoW proponents compare PoS to ETH with the equity feature. I do think ETH has equity-like properties, but those properties do not come from the consensus mechanism. The price of ETH is formally pegged to the value of the Ethereum network (establishing an "equity" relationship) through two mechanisms:

· EIP-1559 Collateral Requirements in DeFi

· Collateral

Collateral

ETH is the most Raw collateral; the trustless nature of ETH has created more demand for DeFi than any other asset, and the growth of DeFi has led to growth in the value of ETH. "Decentralized finance" can also be called "trustless finance". In order to trust in the early stages of these financial products, over-collateralization is required.

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

DeFi applications translate into demand for ETH, 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 goods and services provided by Ethereum, which sounds a lot like fairness.

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

EIP-1559

Similar to assigning ETH commodity attributes (as above), EIP -1559 also gives ETH equity-like properties.

All Ethereum applications generate economic activity in a broad sense. Every application on Ethereum creates 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.

EIP-1559’s impact on the nature of ETH assets is similar to both commodities and equity. Discussions about “commodity” and “equity” are meaningless.

Do you have to ask if ETH is more like a commodity or an equity? That’s all, and neither, ETH is ETH. The same is true for Bitcoin, BTC is not a commodity. There are only 21 million of them, and BTC does not benefit from the growth of the Bitcoin network, so it is not an equity.

It is what it is.

3. Governance and power differences 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 blockchains such as Tezos and Decred that are governed by tokens on the chain. 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 they are often regarded as the same thing.

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

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

Lyn Alden posted on social media:

"The consensus mechanism is not about workload, it is about governance. Only workload can be reduced Or eliminate governance. PoW system can become a commodity, PoS is essentially a stock. I like stocks, but stocks are not commodities."

Sign private placement memo, invest A 150MW mining equipment to mine BTC cheaply in the next ten years, and then invest these profits in more ASICs and other mining equipment, this is not "workload". PoS does require work, and validators actually have to do real computation to drive the network. As in PoW, the CPU of the PoS validator computer heats up and consumes power while processing block transactions. The difference is that all calculations of PoS verification are useful, not just to compete who uses more electricity by generating meaningless hash values.

PoW does not require governance due to its resource-intensive nature. What I'm trying to say is, quite the 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 makes PoW subject to current real-world managers.

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

4. Response to 51% attack

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

PoW

In PoW, once someone accumulates 51% Without power, there is no mechanism to stop them from continuing to attack endlessly. This is known as a "overwhelming attack"; an attacker can 51% attack the chain over and over again, rendering it useless.

In the 51% attack scenario, if honest miners cannot obtain additional computing power, then the attacker can completely control the transaction content.

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

PoS

ETH is a virtual ASIC, which has the following major advantages:

1. ETH will not decline, but will be stronger.

Proponents of PoW claim that this creates structural centralization. Because the verifiers on day 1 can basically guarantee that they will still be verifiers on day 10,000, but 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 rise to the challenge of maintaining market share in computing power. PoS takes all of these challenges and includes them in the value of ETH, distributing the upside of these benefits to those who can afford to hold and stake ETH.

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

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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 unwieldyness of PoW infrastructure makes it easy to loot, just like gold is eventually looted by nation-states.

3. Most importantly, Ethereum is familiar with ETH

and ASIC Instead, the Ethereum network can identify malicious versus honest stakers.

In a PoS attack, the attack comes from a specific address holding a specific ETH that is used to attack the network. Where the staked ETH supply that will attack Ethereum comes from, everyone can objectively see.

"15 million pledged ETH at address 0xabc123attackeraddress789xyz proposed an invalid block, trying 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 staker who proposed this invalid block. The whole process requires no human intervention.

b. The attacker has more than 66% staked shares and is able to prevent the situation a occur. This allows the maker to censor all transactions.

In dire circumstances b PoS allows the system to fork into a new chain while simultaneously Delete the attacker's staked share. The community identifies validators controlled by the attacker and reaches a consensus on whether and how to remove these validators from the active set. Either force them out of staking, or even remove these validators from the system entirely, effectively destroying stake.

Once such a fork occurs, a large amount of ETH will be deleted from the network, and the staked share of ETH owned by actors who are honest and whose interests match the chain will increase significantly . The supply of ETH is also significantly lower, with everyone without the attack chain owning a larger share of the ETH supply. It appropriately rewards those who stand with the network, while also increasing the cost of subsequent attacks, since 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 deterrence of the soft fork threat). This requires human intervention and off-chain coordination to achieve; often against the spirit of cryptocurrencies. Our goal is not to have to fork. But in comparison, Bitcoin doesn't even have that option. In a 51% attack on PoW, human intervention is also required to restore the network to normal operation. Unlike PoS, though, there is no clear path to get the honest hashrate back above 51%.

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

PoS:

1. Identify the attacker's address (very easy, just look it up on the chain).

2. Coordinate a block height and fork off the attacker’s rights (not easy, but fork coordination has happened many times in the history of Ethereum, and it is known that control. 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 mine with energy.

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

The time span to fix PoW's 51% nesting attack is long. 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 forked PoS network at block height is more efficient than coordinating a global supply chain to get ASICs into the hands of honest miners easy.

For 51% attacks, the PoW solution is not only very long, but also not guaranteed to work. "Just produce more ASICs" is not the solution to PoW 51% attacks.

More critically, however, Case 1 does not actually gain any meaningful incentive from the network. Will miners really risk deploying capital to buy ASICs when the network is 51% attacked? What if the price of BTC plummets due to a loss of confidence in the network? Are miners really getting the most ROI out of the ASICs they need to buy? Why take this 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 BTC price to drop, honest miners will be less willing to risk more capital to produce honest hashrate.

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

That's the deal PoW does; due to its reliance on physical things, it gives control to whoever controls the physical world.

Yes, Bitcoin mining rigs are distributed all over the world, but PoS validators do not leave a physical footprint. The ETH pledged to the Ethereum network does not actually exist on any one particular computer. The validating computer that staked ETH can be destroyed, but staked ETH can be recovered and redeployed from a private key anywhere in the world.

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

Conclusion: Which one is "traditional technology"

A common saying in the Bitcoin camp Yes, "Proof of Stake is legacy old technology".

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

I think anyone who makes this claim is seriously confusing key elements of blockchain design. Conceptual models and metaphors about return on capital or associations with traditional governance structures are not evidence, 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 doesn't allow L1 innovation, it moves to the social layer. In my opinion, anyone claiming that PoS is a "legacy technology" is just making up stories and filling gaps in their knowledge with what they want to see, whereas Proof of Stake has been rigorously studied by people at the forefront of cryptoeconomics.

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

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

This is the only way to maintain decentralization in the longest time frame.