Bitcoin is backed by electricity: Why I believe PoW will outlive PoS, and I do not trust DPoS
There is much discussion on the differences of Proof of Work (PoW) versus Proof of Stake (PoS) and Delegated Proof of Stake (DPoS), with the current trend leaning towards the staking varieties. I believe this may be an wrong direction, and that Proof of Work may outlive PoS/DPoS coins in the long run.
Broadly speaking, Proof of Work means that in order for a block to be mined the miners need to perform a computational task that generally costs a lot of power (electricity) to complete. Proof of Stake takes the computational element out of the equation and replaces it with a mechanism where you lock your coins down and operate a node and receive some sort of reward/interest for doing so. Delegated Proof of Stake works similarly, except that Delegates (or Witnesses in the case of Steemit) are chosen who perform the staking and operating of nodes.
The benefits of PoS are clear: There is no excessive energy consumption, and with an incentive to hodl there is less fluctuation in the price as there will be less sellers. Especially the last part is why some coins have had massive successes: who doesn't want to hold a coin that pays them for holding it?
In Proof of Work coins, however, there is a clear cost involved for creating a new coin. Part of the price of a Bitcoin is because it costs X amount of dollars in electricity to create a new Bitcoin. This sets a base cost: Nobody will sell for less than the production cost. One might say that Bitcoin isn't backed by gold or oil or a bank, but it is backed by the electricity that was produced in creating it.
PoS/DPoS coins have no such base level production cost associated with them. They operate 100% on the assumption that 'it has value because people believe it has value' which is true to some extent, but it carries significant risks if the perception of the value of the coin changes. A better competitor could come by, for example, and if people left the old currency to flock to the new currency the whole house of cards could simply come tumbling down with nothing left to back it. PoS is backed by the coins that are locked in; one could say Dash is backed by the amount of Dash locked up in masternodes. However, if the value of Dash is backed by Dash then it is truly not really backed by anything except public perception of the worth of Dash. Whereas a PoW coin will always have a base cost associated with it - even if the popularity of Bitcoin should lower I cannot fathom a miner willing to sell a Bitcoin for less than the production cost.
Additionally, I feel that PoS/DPoS opens the door for centralization more so than PoW. Those with wealth will be able to accumulate more wealth and control. I see no reason why any PoS coin would not, eventually, turn into a centralized one-conglomerate-coin where one party or group owns and controls the majority of the network. The only thing necessary is to simply 'buy in'. Just like how one big corporation could swallow another, a corporation could simply buy up the entire supply of a crypto over time. The more they have, the more they control the network.
In DPoS this effect might be worse. People on Steemit love it, because Steemit uses DPoS, but I have serious doubts about DPoS. It may be more effective/powerful because the nodes are running better hardware, but I cannot see how centralization benefits when you lower the amount of people involved in running the network. Delegates are chosen, but the way they are chosen is very flawed: Who here really knows what the witnesses they voted on do? Isn't DPoS essentially the same as our current political system, where we choose 'delegates' to rule over us? How good is that going? It introduces a corruption level just as with any other chosen delegate system. Here on Steemit too, we have had Witnesses who turned out to be corrupt already.
PoW on the other hand, always costs energy. It is somewhat centralized as well, yes, but mostly because electricity is cheaper in one place in the world than another. I believe this is not a problem of PoW, but a problem of ours and perhaps the answer is not to seek a different method but instead fix the problem of divergence in electricity cost worldwide. After all, PoW is fair in the sense that it costs as much electricity here as it does elsewhere.
In the end, people often ask 'What is cryptocurrency backed by?' and even though us crypto veterans nowadays assume the value of crypto, I believe it is wise to look back at that question from time to time. Because it matters. When times get rough, and uncertainty takes root, a crypto exodus begins, I believe it may be the PoW coins that survive. Simply because they are backed by the cost of the electricity that went into creating them.
To those who feel Proof of Work is bad for the environment and wasteful, I would like to finish this off with this video of Andreas Antonopolous, explaining eloquenty as ever why this fact is very much misrepresented:
Come battle me through @STEEMPUNKNET!
The security of these blockchains comes from the transparency not from consensus mechanism imo
I agree, transparancy is a great tool for trust. But when it comes to issues such as double spending, I believe it's quite important to stay decentralized so nobody has the power to do an attack like that. And when it comes to money, somebody is going to try at some point.
Double spending is not really an issue because the community could always fork bad actors off the network ( basically what happens to ETH with DAO) Listen starting from 0:40 sec
What makes a blockchain secure imo is the ability of its participants to come to consensus, this is why coins around communities are more secure. Take for example Segwit2x , it was called off because of community consensus or lack thereof.
Satoshi's idea that someone who owns 51% of the hash power controls the network is a noble one but the reality is very different.
The journalists love to complain about the electricity consumption of bitcoin miners, but they fail to take into account the amount of power required to run the entire banking and financial system across the globe, which is grossly inefficient, slow and exclusionary to vasts swaths of global population (unbanked).
Let's see the journalists do those calculations and then make a comparison to bitcoin's energy demands.
I agree, the current system is also very expensive. I do think it may be a good thing to change the PoW from a 'worthless puzzle' into something that's usable, like many coins do. That sounds a lot less wasteful, to begin with.
That would also mean all the existing mining hardware will become obsolete. Not gonna happen!
You're right.
Sigh, I love crypto. Such revolutionary and strange :)
They also even forget to compare it to the power consumed by real mining like gold, silver, etc...
I would have to disagree. Pow is more centralized. It naturally gravitates to where power is cheapest. As is the case with btc and bch. Dpos is used in bts for a years. When a witness or even a group of witnesses do anything bad only 1 witness can vote to have them immediately replaced with a backup. Sorry but I disagree. Also it wouldn’t make sense for a witness to go rogue as they would be voted out plus they are heavily invested in the coin itself. DPOS is used in bts for many years. Used on steem. And will be used in EOS. If it was that simple that a wealthy individual can take over why hasn’t it happened to bts ?
Your logic is flawed. If anything btc is blockchain 1.0 tech. Bts and steem is blockchain 2.0 tech. I no longer hold any old tech coins DPOS is the future.
I agree BTC is definitely 1st generation tech, and I do think PoS and DPoS are going to be the future for the foreseeable time.
But let's take Bitshares for example. What would happen if a party decided it wanted control of Bitshares. They would start by buying up all the Bitshares. The more you buy, the more power you wield. When you hold the majority, create some agents to become delegates. Slowly take over, eventually replace previous delegates through various tricks and means. Eventually it isn't impossible to create a majority and control the network. I am not saying this is going to happen anytime soon, but the bigger the honey pot and the longer time goes by, eventually somebody is going to do it.
Power costs make PoW very centralized for sure for this moment in time, but what happens in the future when new technological breakthroughs decrease the cost of power in industrialized countries? While a lot of mining happens in China, there are increasing efforts all over the world to increase mining in the west but also in Russia. I'm not sure the Chinese miner dominance will continue for much longer
From what i understand 1 witness can vote to remove all other witnesses if they go rogue...
the chances of a group of people to spend the amount money and time and stay under the radar to replace all witnesses would be massive and take a very long time without being detected...
but you do have a point but i think the chance is very small...
DPOS and the internal built in voting system and committees in BTS and Steem show much more stability and cohesiveness compared to POW coins like BTC...it is easier to hijack and control BTC than BTS.. look at all this forking with BTC and ETH? each fork takes away value from BTC whether ppl want to admit it or not....also with every fork a subset group of developers who hold opposing views leave to create there own blockchain...leaving more and more of the same group of developers who can be coerced or threatened..... DPOS everyone with even a partial amount of coin has a vote...it would a massive undertaking involving many different groups spread out over all continents....also EOS has its own constitution for arbritration and governance....BTC and ETH does not...BTC ETH is old tech...BTS EOS and STEEM is the future....hoping for a miracle power breakthru in power generation so BTC can be less centralized ?
dont hold your breath....what i see for BTC is it will be digital gold used for large purchases like cars and houses...EOS will be working with all the silicon valley tech companies since it can scale...ETH cannot scale it cant even run 1 cat game...lets be real...Steem will be altrnative to facebook, medium, reddit, and youtube... and BTS will be to NASDAQ or FOREX market for crypto...but what do i know im a high school dropout...
Don't you worry that DPoS will lead to similar situations as we have in the current political system? Currently we vote based on what the media feeds us and tells us who to vote on. But in a future-DPoS system we may very well see a similar situation? I mainly know about STEEM's witness system and don't know too much about BTS delegates, but the way we choose out witnesses here on Steemit is absolutely terrible and simply will not work in an economy a hundred times the scale it is now. At some point so much money will be involved that we'll be voting for delegates like we're voting for politicians now - with all the same lies, corruption and everything that goes with it.
I feel like it is introducing a human element into a system, and wherever humans enter the equation things go wrong.
I admit wishing for a technological breakthrough is silly, but my point was mainly that the fact that energy is expensive for some of us is not the fault of PoW. We're just unlucky and if we're unhappy with it, maybe find a solution so we can compete with those who do have access to cheap power.
so is ETH and btc have no human element? this is going nowhere ...really dissappointed hoping i followed you for crypto info was obviously a bad assumption on my part...
good luck
Oh, sorry you're taking it this way! I thought we were just having a discussion, not an argument!
A very interesting and thought provoking post! Thanks for sharing!
I'm not sure about the points made here unfortunately though.
Andreas gives a good craic at trying to get people onboard the PoW train, but I'm not buying it. I know he wants (and needs) more adoption of Bitcoin, but hey, don't we all. We do have a moral obligation to stop and think however, if our actions to attain great riches might potentially be harmful to the future of others.
The argument Andreas makes seems to be basically "Electricity is there so lets use it and everyone is more profitable through the process".
Protection of the environment begins by reducing consumption and PoW doesn't reduce at all. It constantly increases in consumption and wastage based on the value of the coin being mined.
Saying that it is OK to keep consuming more power because we need to build power plants 15 years ahead of time doesn't make it any less wasteful. The industries that build power plants and deliver energy need to become more efficient and agile and we need to stop helping them manage their way through wasteful processes by not building more industries such as PoW mining around them.
DPoS and PoS still use a lot of electricity, but much less than PoW. They have a much better chance of reducing wastage, although it would be wrong to say that they are not wasteful.
The fact that the (D)PoS staking mechanisms generate income or value is a great thing I think though. Their value is not backed only by the fact they generate more coins. They must still show or explain a tangible use in the world (e.g. Reddcoin Vs Ark).
DPoS, PoS or PoW will all ultimately have a small number of wealthy individuals or groups that control them.
The question should be which has the highest long-term chance of resistance to centralisation. I honestly couldn't say. A few Bitcoin mining pools are massive but Lisk is fairly dominated by a few groups too. It seems like any cryptocurrency you look at, you'll find that those with a good chunk of money are constantly trying to own more and more of them.
Perhaps EOS and it's year long ICO might actually be more ahead of the game than people take it for!
The issues of centralisation will remain forever as long as there is money to be made. I don't mean to give a "2%" diatribe here, but the more you have the more opportunity you have to gain and conserving the environment will never get in the way of progress (or the rich getting richer).
Great reply!
I agree Andreas goes a little bit overboard in his defense, but I do think his comparison to the current cost of operating the financial system is spot on. While PoW is definitely more wasteful than PoS/DPoS, it's still probably cheaper than the way we currently do it.
^^^This, indeed, basically
I love staking coins, don't get me wrong. My main holding is NEO and I love that because you can 'stake' (sorta) with any amount. I feel that opens the door to a more decentralized system than one like Stratis where you need 250.000 STRAT to run a Masternode, or 1000 Dash for a Dash Masternode.
The problem remains though, what the core value of the coin is. If it is a utility coin, like you say, then it may be clear what the value is. But we have quite some coins whose utility simply is 'money' and nothing else. It's mainly these coins that I worry about losing value, with no base cost associated with producing them and no real use for which to spend them on, except as 'money'. When the current 'bubble' bursts.. and when even Chaincoin is going up again we can definitely call this a bubble.. but when it bursts, I think people are going to wonder what the price of a tulip truly is. And when it comes down to it, one of these tulip costs x amount of electricity to create, while another does not. It seems like the second would be more at risk of losing it's value entirely.
I definitely agree that there are coins out there that have no utility, but regarding the value of something just because it had a cost to produce, I would have to give the example below.
Hair straighteners: extremely popular and valuable to men and women that want to straighten their hair, but totally worthless to men and women with short hair. Their value can be deduced by popularity then the cost should be considered.
If however, they are no longer popular or valued by consumers, the business that produces them will continue to reduce the cost right down to giving them away for free to try and gain whatever value they can salvage from them and prevent the business from going under.
I would still turn the offer of a set for free down as I don't like or need them and it would be wasteful for me to take them. If a new more energy efficient or more popular product replaces them, even the target market will reject them.
It's almost a philosophical dilemma. I thought of this before when thinking of the value of a Bitcoin.
Let's say we're trying to obtain the value of a Lamborghini. What if you have a thousand Lambo's, but nobody wants to buy one from you? What is then the value? Is it still hundreds of thousands of dollars, or is it zero? I would argue that the value of a lambo is not zero, even if there is nobody willing to pay the price.
Similarly, if there was a buyer who offered $10, the value is not $10 unless the seller actually agrees.
When you think about it, there's not 'one' price of value for an item. It's not whatever somebody is willing to pay, but there is also the price at which point no seller will sell below.
I experienced this myself when I hodled Litecoin for 3-4 years. I wasn't going to sell at the 'value', simply because I didn't agree with the price. I would rather choke on it, so to speak.
The same applies with digging for gold too, of course. There is not just the perceived value, but also the cost of digging through a mountain to get an ounce of gold. Now there may come a point where some gold becomes too expensive to dig up compared to the current market price, but still... If you can't find any elsewhere and you want that gold, it's going to cost you x amount to get it. Wether you want to value it at that price or not?
I think it applies to hair straighteners too. The difference being that they are worthless to you. But you may very well say 'I don't care for gold, so it is worthless to me', but that doesn't say much for the price of gold at all?
I'm glad ubernerds are thinking hard on these issues ;)
I think this blog post and discussion is the most interesting I've found since joining Steemit a few months back! Thank you!
I hope you still have that Litecoin?! Totally agree that the seller must be willing to agree to the offer to buy. The offer or opportunity to sell only happens however when there is a buyer. Take any object or material in the world and ask if it is irreplaceable or could be improved on significantly or not. That is how I judge the value of things.
Lambos are Lambos! The old ones (same with Ferraris) are absolutely irreplaceable. They have been improved upon, but people love to capture the spirit of the times when they were built. They were truely works of art then. The new ones devalue by almost half when you drive them off the forecourt as they are less classy and nothing really special (fast and cool looking, but not classy at all).
Facebook is not irreplaceable, but you would have to spend so much more than you could ever make to knock it out of dominance that it wouldn't be worth it. You also probably couldn't improve on it enough to make your new product stand out enough to convince users to change ( as it stands today)
In Bitcoins case, it has that same first mover adoption advantage as Facebook, but when you ask if it is irreplaceable or could be improved significantly, the answer has to unfortunately be.....
Gold is slightly different from a purely practical perspective. Gold is a great conductor and is the best at many practical applications (mobile phones, satellites...and many other products). It's value is so high because in many cases it is the only thing that can do what it does and the only time gold is created is when a star explodes in a supernova. This means that there is a finite amount of gold that we will ever have the opportunity to poses, whilst all the time knowing that it is absolutely essential to many many different products and projects.
If we want more gold we're going to need a bigger....
You're welcome!
No, I sold my Litecoin. I kind of lost faith.. when the last time the bubble burst, everything lost value way more than Bitcoin did. Even Charlie Lee abandoned the project for years. He only moved back when the price suddenly spiked. I got it because of the 'Bitcoin's silver' but I don't believe that anymore. Especially with other competitors like Dash, Bitcoin Cash, etc. it is becoming less and less clear what Litecoin's purpose really is.
I sold my LTC for $30 each at the beginning of the year and got BTC for it. Then BTC went up big time, and now my value is a lot more than if I had just held LTC. So I'm happy. I've learned that in the end, Bitcoin is what matters most.
Also... we always need a bigger spaceship. How else will we moon, with this many people wanting to moon?!
That's got to be a great post header for a future debate!
"Best way to get to the moon? Millennium Falcon or Bitcoin?"
Good deal on your LTC! I bought at the top of the market a while back for more than it's current value, but offloaded at a loss for the exact same reasons as yourself. Strangely enough, I also bought into Dash so it's not such a sad story after all!
I think Vertcoin has to have it's day at some point. It just needs more belief from a wider audience and more articles written about it to highlight that it actually does what LTC and BTC do, but is GPU mined so less susceptible to centralised control.
I say that but halving just took place 2 days ago and it's getting quite tough to mine without a proper rig already. Is still possible on most gaming rigs though.
Vertcoin seems like a good project, but what bugs me is that people were excited about how asicproof it was years ago too. And that didn't lead to anything huge either. Maybe this time it will be different. I just don't know which digital currency to pick.. like the non utility ones, the real currency ones. Bitcoin seems the one that has the standing. All the others, there's just so many, I wonder if all of them can truly survive into the future. I wouldn't be surprised if we ended up with half a dozen 'currency'-coins that are huge, and all of the other ones being super tiny and failing. After all, people want to be able to talk about things in the same prices generally.
Vertcoin seems to have a good community though and is very popular and it did an amazing run, so what do I know :)
Crypto is madness..
I think if you want to mine profitably, you shouldn't mine the most profitable coin of the day. Instead look for a new project that is good, then mine that the first few days and hold on to them for a year. If the project is really good, maybe you got some of that really easy to mine crypto
Thinking back on our conversation, I just came across this video by Julian Hosp (TenX) who talks about the issue of wether the price of crypto is the same as the value of crypto.
Not trying to make any point here but as you said you thought it was interesting I thought you might appreciate his viewpoints too!
Thank you for explaining those differences. I am still fairly new to the crypto sphere. Do you think that various POS coins operate similar to banks in that they offer higher rates in order to keep customers and people holding their coins?
I think some coin developers are definitely competing in PoS reward rates, yes. The majority seem to have to have found a sweet spot of about 7-8% ROI a year, but some PoS coins give a lot more in return, whereas others reward with a lower amount. I do believe the higher amounts are simply higher to lure investors to pick them up. I'm not sure if it's a long term strategy that will continue to work for those coins.
That's really interesting. I never thought of it that way. Now that you've pointed it out, its almost obvious. Funny how that works.
What you said about POW and corruption was interesting as well.
Thanks! Yes, it really does come to that. And you might think then what happens if Bitcoin mining is too costly because the price went down... well, it self corrects because then the miners leave, the difficulty goes down and then the profitability goes up again. It's really an amazing mechanism.
interesting. Yeah it really is amazing
Damn, this is a great post! Didn't watch Andreas talk about this before :-)
What I also find fascinating is the energy-usage-of-Bitcoin vs energy-usage-of-a-country-comparison. This seems to be the newspapers favourite (aside from tulip mania). It sounds like a lot of energy when they do that and most people take it for the truth. While if you take a better look, the comparison is usually calculated using average household energy usage * inhabitants. How convenient to forget there are maybe also things like factories, companies, vehicles etc...
Exactly! The media likes to highlight certain viewpoints which sound sensational, because that's what sells.
Especially when it comes to crypto the media knows so little it's scary..
Thank you very much for giving away such valuable free knowledge.😀
You're welcome!
I disagree as well. I welcome the discussion though. Look what happened to BTC taken over, forked to death, all the manipulation. Its not just about electicity its about who controls it as well. Electricity is a huge part of it. I mined for 6 months, When I realized how much power I was using, when I broke even and sold all my parts. So no energy part is not misrepresented.
Yes, you're right, BTC has had troubles and got more centralized because of electricity being cheapest somewhere. But in my mind, the only way to transfer value from the real world into the digital world is by use of electricity. It's almost tangible, because electricity is the one thing that connects both the virtual world and the real world: it exists in both and has value in both.
I just don't think cryptocurrency would have gotten where it was if it was started as PoS, and while PoS sounds great now that we all accept cryptocurrency as a valid means of payment/value storage.. What happens when the usual doubts start coming in? When people wonder what the price of a tulip really is? PoS sounds great when there's more people coming in, but I just don't know if there is enough attraction to keep people in once an exodus starts happening and people leave that coin. The electricity cost in PoW will always be there though, to create a base value outside of people's perception... regardless of wether or not people think Bitcoin has value, it will always cost something to produce one.
But I agree not being able to mine profitably in the west sucks. I used to mine years ago too, but stopped due to lack of profitability. I wish there was a different system of transferring value from the real world to the digital one, but I don't see it yet
Hi Pandora - you really got people riled up with this one! Good discussions in the comments.
I think you should focus on the definition of waste. For me, the definition of waste is producing something that has no value to someone at some point. A hammer has no value to someone when it is not used but it has value whenever it is used. However, if something produced - anything - and will likely never have value to anyone, then that is wasteful.
Is it wasteful that production costs are cheaper in one place than another? I don't think so, if you think in terms of value. But assigning value is tricky because it can change over time and different circumstances. So what does that mean? It means that the definition of waste is different for everyone!
For simplicity, let's just say value is assigned by a combination of price it costs to produce, utility, and circumstances. Producing things that have high cost but low utility is not wasteful as long as it has value to someone somewhere.
Waste is basically assigned by the market (everyone). But it gets complicated. If BTC production uses 25% of the worlds energy but generates 26% of worlds economic production value - is that wasteful? Is it waste to think we could have put that 25% in something with more value - say medicine or homes? Who says what should be produced over something else? We do, by voting with our dollars and where our community needs are. BTC production, no matter what it costs to produce, is wasteful if we need to divert all our resources somewhere else.
It's very easy to get caught up in circles because the definition of waste and value is different for everyone.
Ugh - I wish I had more time to write more. I have to run.
Thanks for your reply!
Yeah, I didn't expect people to get so upset over it! But people do love the crypto that they hold. Crypto is like a new kind of religion/culture/beliefsystem, with all it's disagreeing branches.
My main point was to point out that even though crypto seems like it isn't backed by anything to most people, the PoW coins actually are backed by the cost of their production which seperates them from other models.
I agree wastefulness is a subjective matter. But the point Andreas makes I think is a good one, where the old financial system with it's thousands of offices running lights 24/7 and datacenters and whatnot consumes vastly more energy than the Bitcoin network. PoW may still be very wasteful in the sense of energy consumption, but when it's cheaper than the old system, then it's not really that wasteful... even if it isn't the cheapest system we can think of (if we're really focused on cheap and anti-wastefulness, maybe we should invest in SolarCoin instead anyway).