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PoS cheaper

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Is money a resource? Does "green capital" matter?

Title: "PoS is cheaper"
Source: ethereum fans

I tweeted this picture three months ago with the following:

I heard someone say, "proof of entitlement is less wasteful of energy."

- EV charging piles driven by diesel engines -

The tweet was meant to be clever, but it inadvertently led to one of the most insightful discussions I've ever had on twitter. After this discussion, my mindset on this issue has completely changed.

The purpose of this article is to share the insights that have emerged from the discussion, as well as my current thinking process for analyzing problems. Due to the limitation of space, please understand that this paper only focuses on the economic comparison of workload proof and equity proof, and does not involve other contents.

A prelude to

At first, the tweet was a reiteration of Paul Sztorc's assertion that "nothing is cheaper than proof of work," which is probably the most influential public argument for proof of work versus proof of equity.

In Paul's article, he argues that the labor we do to win block rewards (and the cost we bear in the process) will eventually be equivalent to the value of the block rewards we pay, regardless of whether we calculate the hash or pledge assets. Article simply, if a chain, on average, the block reward worth $1000, the work proves that men will pay up to $999 of costs (but not more) to get the biggest piece of possibility, and interest in miners will bear the cost as much as $999 of lock up higher (won't), prove the pledge for rights and interests.

Paul also argues that not only can personal costs be compared in this way, but so can social costs! In the workload proof world, we burn a lot of energy to keep the chain safe; And in the proof of equity, we lock in a significant amount of capital for a long period of time to secure a significant amount of security. Paul also argues that isolating large amounts of capital from macroeconomic activity hurts markets, hinders technological progress and even suppresses economic growth. This is the sharp point of Paul, which answers the reason why bitcoin should keep its original design from the perspective of economics, and expands the original solidified thinking mode based only on system security from the basic principle.

I've been active in cryptocurrencies for many years, and Paul's point of view is basically the position I take when I think about it in a macro way. In 2016, I quoted Paul in my master's thesis. Since then, I have had in-depth discussions with many bitcoin supporters, and I found that this is basically the mainstream view.

Let's take a look at some of the thinking on the opposite side of that argument in that heated debate, and some of my own.

David Schwartz: a better PoS deal

David Schwartz makes the following point in this discussion: yes, miners and pledges will end up paying up to $999 to compete for the $1,000 block award. But when you look at the economics of security in both systems, it's a very different story. Let's think about it. What would it cost to launch a double attack on these two different systems?

In the equity proof system, the reward is $1,000 per 10-minute block, which is about $50 million per year. If the pledger thinks that 5% annualized return is profitable, then about $1 billion worth of capital is pledged. At this point, a double-dip attack on the equity proof system requires at least enough capital to control more than two-thirds of the nodes (about $670 million), and the value of the pledged assets will also drop significantly after the attack.

While it is impossible to quantify the cost of a double-attack in a system of effort verification, it is certain that in some cases it is much less than in an equity verification system. For example, let's say a miner has accumulated more than 51% of the hash force, and has already partially or even fully recovered through mining. In this case, the cost of launching a block reorganisation attack (based on the last seven blocks) is well below $670 million. The direct cost of the attack is only $7,000 (7 x $1000) to generate the most recent 7 blocks. And if the block reconfiguration is successfully completed, the attacker can even get all seven block rewards (regardless of how much money is left after the attack).

This is not to say that double-flower attacks in PoW systems are easier to implement, just a simple thought experiment. Although there are certainly many unconsidered details of the attack practice in the analysis, it is one way to explore the problem from an economic perspective.

Another way to think about it: it is obviously better to pledge $5 and get it back after a period of time than to destroy $5 directly, so the alternative to destroying $5 would be to pledge $100 for a whole year, which would have the same opportunity cost as destroying $5 directly. At this point, although the cost of individual participation in both systems is comparable (about $5 vs. $5), the penalty for default is extremely unequal ($100 vs. $5)! Although today's proprietary mining equipment can cause some hardware investments to go straight to zero after an attack, the risk is far less than the huge amount of money lost in vests, even if the latter does not require energy consumption to compete for the block.

We can say that the penalties for proof of entitlement and proof of work are asymmetrical: with the same block rewards, more money is at risk in the PoS system.

The above analysis points to a number of interesting conclusions. If the equity proof can achieve higher economic security at the same cost, this means that the security budget of the equity proof system can be less than the workload proof, but still achieve considerable results. Furthermore, this means that even if we reduce the block rewards, we can achieve the same level of security as the workload proof chain.

Paul: no one can control block rewards

The asymmetry mentioned above and the reduction of block rewards in the equity proof system do not hold true in the bitcoin world. The future of bitcoin is that at some point the reward stops. The only thing left to maintain system security is the transaction fee, which is clearly not determined by consensus algorithms but by market pricing of block space. It is also possible to assume that these transaction fees are sufficient to support the security of the chain. Therefore, if we agree that the workload proof chain can work without block rewards, the asymmetry mentioned above makes no sense -- it only makes the proof of interest chain "too safe" for the pledger.

The opposition to the opposition, Eric

Paul has a point, but his retort is not invulnerable. His argument rests on an inadequate assumption: that transaction costs alone can support the security of the workload proof chain. The transaction fees in the blockchain system fluctuate with time, and the issue of whether transaction fees alone can provide the required security has also caused many disagreements and debates within the bitcoin community. We will almost certainly see transaction fees fail to provide the necessary security budget. So from this standpoint, the more security that the vsa offers with the same incentives is attractive.

In the worst case, the proof of work chain becomes unstable when inflation stops, while the proof of equity chain is maintained on transaction fees alone (better than the PoW chain, the reasoning goes). What's more, this means that the native assets of the PoS system may have a higher Stock to flow ratio! Speculators will flock in, but in a treasure system with an asymmetric security budget, speculative fever is also a given.

Money is not a resource, says Dan Robinson

Let's use cows and volcanoes as analogies for the two kinds of consensus agreements. Dan believes that wealth in the real world cannot be measured by how much "money" there is in society. The truth is self-evident -- printing money like crazy won't make the world a richer place. Money can only be redistributed so that some people can buy goods, but society as a whole does not suddenly become more productive, making everyone richer.

However, in the currency world of equity proof, only pledged money, an asset, exits the economic cycle. So in the same way, can a product or service be reduced simply because someone has pledged assets? Won't! It simply means that some people give up their ability to buy goods and services and choose to pledge assets. For others, the options for purchase increase. A pledge does not destroy any assets in the real world, and therefore does not make the world poorer.

Dan goes on to retort that there is no such thing as "isolating large amounts of capital from macroeconomic activity". Just as governments make everyone poorer by printing money, pledgers make everyone else richer by locking up their own money (for a while). Because everyone is a little richer, the net capital in the system doesn't change.

Paul: money is really a resource

Paul's point of view is that money is not water, it doesn't just go everywhere. In fact, it is more critical that capital can be concentrated in certain areas, where it needs to go where it can. A timely and concentrated injection of capital into potential industries is a far greater social boost than adding five dollars to the pocket of every man on the street.

Dan's point is that the idea of money as a unit of measure does not hold true at all, but the process by which money is distributed releases significant value. Markets allocate money where value is generated, and society relies heavily on these "stacks of money" to be used in the production process. The pledge would significantly impede the flow of such capital through the market for a considerable period of time, meaning that some of the innovative projects that would have been funded would have been difficult to continue. This is the social cost of the pledge model.

So says Eric, the opponent of the opposition (#1)

I understand Paul's point through the concept of entropy. In thermodynamics, we think:

Low entropy = order = high energy

High entropy = chaos = low energy

I think this logic applies to economics.

Low entropy = order = high economic potential

High entropy = chaos = low economic potential

"Stacked bags of money" are islands of order in a chaotic system. Accurate capital allocation increases the economic potential of the system as a whole.

Although the locking up of some entities makes everyone else in the system slightly richer, the wealth falls evenly on everyone. The economic potential of the system as a whole remains suboptimal. So Dan's point is really that "the pledge doesn't take the money out of the system," while Paul's is that "it doesn't take the money out, but the equity proof system takes the economic potential out of the system and creates chaos!" The redistribution of wealth brought by the pledge loses the energy of the original concentrated capital.

So says Eric, the opponent of the opposition (#2)

The last point is not a rebuttal, but I actually agree with Paul. Here's the real argument against Paul.

Although I think Paul is right in principle, if we go a step further and think about who would pledge, the whole picture changes immediately.

Green energy for mining

Let us begin by reiterating the fact that there is as much competition for deposits as there is for mines. In mining, if the miner has access to cheaper hardware and energy, he can beat the other miners because his involvement makes mining more difficult. Thus, from a macro perspective, mining is the most likely source of the cheapest electricity available on the planet. The fun part is that energy is the cheapest source in the "trapped" area, which cannot be used in other scenes.

Much of this so-called "trapped" energy comes from natural gas, solar and wind power, and a lot from hydropower. The fact that such energy is a growing part of the mining industry is a fact that bitcoin supporters often emphasize when discussing the environmental impact of PoW. The environmental protection mentioned here is limited to the type of energy used in mining and does not refer to the energy used in the production of mining equipment.

Pledged "green" capital

The same principle can be applied to a pledge. What is the cheapest "capital energy" you can never beat in a pledge? In ethereum's case, pledgers tend to be long-term investors in the currency. There is virtually zero economic sost to staking in the pledge if one is bullish on ether for a long time and has decided to be bullish on it for the next 5 to 10 years. Not only that, but the effect on the economy as a whole is the same whether they are held or pledged. What's more, these pledgers are willing to accept lower and lower returns, a trait that makes them invincible in the pledge race! The money that has no intention of doing anything else will beat the money that has a lot of things, which will flow into production creation, as in the mining example above.

- as the size of the pledge pool has grown and competition has intensified, the return on the pledge has declined (source)

When someone says, "proof of entitlement is less wasteful of energy."

Going back to the very beginning of this picture, the reason why I find it funny is because it pokes fun at the proof of equity and it just crutches the proof of workload.

But the reverse happened. Now, driving a charging pile with a diesel engine is not the same as burning diesel directly. A tesla fully charged with a diesel charging pile can go farther on the road than a diesel burning the same amount of fuel! Electric engines use energy more efficiently, so they really waste less!

Similarly, there is more capital involved in the proof of equity than mainstream bitcoin supporters think. The idea of "environmental capital" is an interesting perspective that I have found myself, and it is also the reason why I have changed my view that it is worth exploring the potential advantages of the equity proof system from the perspective of social impact.

What does this mean for the workload proof?

From a narrow economic perspective, the equity proof does have advantages that I hadn't considered before, but I still believe that the workload proof is the most robust consensus protocol for blockchain security and the most reliable support for building a digital currency.

This article omits many of the technical security issues in an equity proof system -- many of which are related to the impact on system security of equity assets being transferable (that is, assets that guarantee system security are produced by the system itself). I am still confident that the workload has proved to be the best consensus system for the moment, taking everything into account, although the position may change in the future. I will closely follow the development of the equity consensus.

This article was prepared for a podcast with Chorus One (see here), which validates multiple chains of interest.

I would like to thank Hasu, James Prestwich, Dan Robinson, Brian Crain and Torbj rn Bull Jensen for their contributions to this article, as well as Paul Sztorc, Alex Mizrahi, Emin Gun Sirer, Zaki Manian, David Schwartz, Georgios Konstantopoulos and many others for their enthusiastic participation in this discussion