PoS: A Superior Alternative To PoW

Proof of Stake (PoS) is superior to Proof of Work (PoW) in every meaningful way. When we look at these two consensus algorithms objectively, from the standpoint of economics, security, decentralization and even according to broadly agreed upon subjective principles of fairness and equality, the conclusion remains obvious that PoS has all of the advantages over PoW. This is contrary to majority opinion, as the public still catches up to these developments. The purpose of this article is to prove this assertion without a shadow of a doubt, helping to create a more rational market, moving us all closer to the ultimate goals of the cryptocurrency movement.

Economics

Proof of Work carries with it a massive cost in arbitrary computation almost completely absent when compared to Proof of Stake. This cost has to be reflected in either fees or inflation to pay for its long term security.

PoW externalizes the cost of validation by requiring a massive amount of hardware and electricity to secure the network, all to solve arbitrary mathematical equations that do not directly benefit the network itself. PoS on the other hand, leverages the value of the token itself to secure the network, resulting in a far more efficient means to gain high blockchain security.

PoS is economically superior since without this massive arbitrary computation cost, its token economics can have far lower fees and or inflation in all variations of the design, due to this increase in efficiency.

Security

Cost expenditure is already much lower with PoS as pointed out above, so if all else is equal PoS is already more secure based on that alone. However, if we draw up an attack scenario and attempt to calculate the cost of attack of a PoS vs PoW system, the results are very dramatic:

Take for example a $100B PoW network, using historical BTC figures from 2020 while rounding down for the sake of example we can assume that there is about $2B paid out to miners each year to secure the network. Therefore a 51% attack on such a network would cost at least $1B per year.

Taking a $100B PoS network as our next example, assuming a 50% staking ratio, it would require at least $25B to attack the network, based on the cost to buy half of the tokens currently being staked. Therefore in this example, our PoS network is 25x more expensive to attack when compared to an equivalent PoW system.

There is more to these scenarios to consider, such as requiring more than 50% for an effective attack and the cost of buying tokens driving up the price among many more of such details. However, for the sake of simplicity and brevity I am leaving such details out of this model.

If we where to consider worst case scenarios, such as a full take over of the validators (51% attack) on both systems, using the previous figures, running through this example starting with PoW first:

An attacker would be able to sustain an attack for more than a year based on our previous example, therefore relying on the natural changing of the guard of PoW is unrealistic since having the blockchain not operational for such a long period of time is not something it can survive, at least not while maintaining any sort of market dominance. In such a scenario, a mining algorithm switch could mitigate the attack, causing a split. However, if the attacker was already expecting this move it could already have lined up sufficient CPU/GPU power for a second attack. At which stage there would be no more recourse, since a mining algorithm switch can only be effectively carried out once for this reason.

Running through the example with PoS:

If there were an attack on the PoS algorithm, an attacker would be able to sustain an attack indefinitely. This certainly can be seen as one of the advantages of PoW if it were not for the following mitigation strategies available in PoS. Primarily the ability to carry out slashing, causing a split. Since the attacking parties’ stake can be clearly identified and consequently slashed when the defending fork occurs. Thereby completely destroying all of the attacking capital, rendering any follow up attacks impossible with the exception of carrying out the full expenditure again, which would only bring about the same result. This defensive method is so effective that it would not even be worthwhile attacking such PoS networks at all, unlike small PoW networks such as ETC and BSV, which have been attacked multiple times due their security budget dropping too low.

Validation Participation

In PoW today it is not financially viable for an “average” person to participate in mining. It requires economies of scale and at minimum several hundred thousand dollars if not closer to a million for the initial investment. At the same time it also requires access to cheap electricity, which are often derived from connections and special high value deals with electricity providers in particular jurisdictions. Making participation in PoW extremely exclusive, with a relatively small number of distinct parties being able to carry out this activity.

PoS on the other hand allows “average” people to participate through staking pools, for as little as 0.01 ETH (($19) at the time of writing). This is not a false equivalence to PoW, since pools are an absolute necessity in PoW where no more than 50 pools can even exist in terms of financial viability (due to variance), unlike PoS where unique validators already exceed 38k over the ETH beacon chain today (based on IP and address aggregation estimates). In PoS, the financial return is equalized for all participants, unlike PoW where participants with the greatest economies of scale and lowest electricity rates gain a disproportionate profit over the protocol. This all means that PoS consensus algorithms can support a much larger number of distinct parties carrying out validation when compared to PoW.

Decentralization

This greater distribution of power/validation is the very definition of decentralization in blockchain design. Therefore, based on the comparison in the previous section and assuming an equal block reward, PoS is far more decentralized than PoW based on this fundamental design.

Lowering the barrier for participation and allowing for a much larger amount of unique validators is what allows for this greater distribution of power. As the real power in blockchain lies with the ability to create blocks, simply running non-staking or non-mining nodes does not carry with it much influence in comparison, as these are not Sybil proof mechanisms.

The equality of opportunity is also significant in terms of decentralization as this avoids further concentrations of power given a more competitive miner under PoW can earn significantly more, allowing it to scale its operations faster than competitors. This is only compounded with centralization in chip manufacturing, as there are only several chip foundries operational in the entire world at one time.

Governance

The implications for governance should be obvious at this point. Greater decentralization means we have a superior form of governance in PoS within the context of cryptocurrency.

It is not just that there is greater decentralization but also a superior alignment of incentives with the stakeholders. This is because PoW creates a separate “ruling class” from the stakeholders themselves, whereas PoS combines these actors into a single party. Naturally leading to a better alignment of incentives between parties.

One of the mismatches of incentives I explored in my “Theory on Bitcoin Governance; Three Stage Model” is that miner incentives are too short-term, having time horizons between 2–5 years based on hardware shelf-lives and electricity contracts. I argued that this is what has led to miners historically prioritizing short to mid-term decision making over long-term decision making.

PoS on the other hand does not suffer from this problem as consistently, comparing the time horizons of investors against industrial operations such as mining, investors are obviously much better positioned for long-term decision making. Potentially solving this particular problem in blockchain governance.

Conclusion

PoS presents us with a clearly superior alternative to PoW, in every meaningful way. PoS is truly a more economically efficient, secure, fair, inclusive and decentralized alternative to PoW. There are a lot of vested interests to overcome in the transition to PoS. However, this is an obvious case of a far superior technology competing directly with a far inferior technology. Historically this means that it is just a matter of time for the popular narrative to shift towards this inevitable truth.

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