Bitcoin’s consensus mechanism, the proof of work (PoW), tends to provoke divisive opinions in society. While some argue that it is a key aspect of Bitcoin’s success, others argue that the network would retain most of its properties while reaping new benefits if it switched to alternative consensus mechanisms such as proof of participation (PoS).
This discussion came to the fore this week as two diametrically opposed events took place almost simultaneously: the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, and the Oslo Freedom Forum (OFF) in Oslo, Norway.
Both Davos and Oslo hosted discussions on cryptocurrency, Bitcoin, and their designs. Led by growing environmental concerns around the world, the energy use of this expanding technology was inevitably part of the agenda.
Arguments for PoS Bitcoin
Based on the topic of power consumption, WEF tweeted earlier this year that, if Bitcoin went to PoS, it could “almost eliminate its environmental impact.”
The tweet included a video with arguments from the “Change The Code, Not The Climate” campaign, an initiative led by Greenpeace and billionaire co-founder of Ripple Chris Larsen to pressure 50 key miners, companies and developers in the Bitcoin industry to move . the remote PoW protocol in favor of PoS.
The claim that Bitcoin could use a different consensus protocol that is supposedly better for the environment and allows for a similar degree of security is not new. In January, a cohort of U.S. representatives made the same suggestion at a congressional hearing on bitcoin mining.
However, these assumptions are discussed.
The Bitcoin Policy Institute (BPI), an interdisciplinary cohort of economists, coders, lawyers, climate scientists, philosophers, and policy analysts who provide research, fact-finding, and commentary on Bitcoin, has released two fact-finding notes on myths and misunderstandings about Bitcoin. Bitcoin power consumption.
In addition to the energy debate – whether Bitcoin is really so harmful to the environment, which the BPI addressed in its notes – is also the security debate.
Bloomberg reported on the “Change The Code, Not The Climate” campaign in March, citing comments from Chris Bendiksen, a Bitcoin researcher at CoinShares and “one of the world’s leading experts in Bitcoin mining,” according to the report.
“It would put the possibility of Bitcoin moving to PoS at exactly 0%,” Bendiksen said. “There is no appetite among Bitcoiners to destroy the security of the protocol by making such a move.”
A panel in OFF 2022 raised similar concerns. The conversation featured Nic Carter, general partner at cryptocurrency venture capital firm Castle Island Ventures; Lyn Alden, founder of the venture capital and investment strategy firm Alden Investment Strategy; and Darin Feinstein, founder of bitcoin mining and computing infrastructure Core Scientific (Nasdaq: CORZ).
The three panelists addressed issues such as power consumption, the differences between PoW and PoS, and why PoW is needed for Bitcoin. But before we delve into the arguments, let’s review what a consensus mechanism really is.
What is a consensus mechanism?
The consensus mechanism of a cryptocurrency determines how network participants decide the state of the blockchain; in short, which transactions are valid and which can be added to the blocks and which blocks are valid and which can be added to the string.
Since cryptocurrencies are supposed to be decentralized, they are ideally composed of thousands of interconnected pairs, forming a network. These colleagues do not necessarily trust each other, which means that they do not have to believe in the veracity of the messages that each of them transmits through the network. And since there is no central authority to decide, there must be a standard set of directives for these “mistrustful” peers to agree.
There are many different consensus mechanisms that are being used in cryptocurrency projects today, but the two most popular are PoW and PoS.
PoW or PoS?
PoW is the consensus mechanism devised by Satoshi Nakamoto in the Bitcoin White Paper. At its core, the design of Bitcoin’s PoW system is based on Hashcash, which was invented in 1997 by Dr. Adam Back, a former cypherpunk and current CEO of the Bitcoin infrastructure company Blockstream.
Those looking to create new currencies on a PoW-based network, called miners, collectively do millions of computer calculations per second to find a valid number for the next block in the blockchain. This number, called a block hash, is the output of a hash function that is calculated by feeding it data such as transactions waiting for confirmation on the network, a random number called a “nonce,” a timestamp, and other information. Miners vary these variables to find a hash below a goal set by the network, a goal of what is known as difficulty; the lower the target, the harder it is to find a valid number.
When a miner finds a valid hash, it proposes to block it from the network by propagating it to the nodes, which will verify the validity of that work, which is easily done. Therefore, Bitcoin miners must comply with the network rules, which are verified by the nodes, in order to receive their block reward. In other words, miners do not control Bitcoin as is often suggested.
“PoW allows everyone to decide on the correct status of the general ledger without supervision or human government,” Carter said during the OFF panel.
Since the proof of work and the energy that feeds it are trivially tested in a non-subjective and programmatic way, PoW networks are able to eliminate the human component in the decision-making process.
Depending on energy expenditure, PoW is also able to link a digital network and its digital money to the physical world. Because the consensus mechanism requires real-world computers to perform power-consuming calculations, the network is able to charge a real cost to those involved in creating new currencies. In that sense, the value of Bitcoin is, at the very least, always directly linked to the costs of the physical world in which we live.
Feinstein argued that Bitcoin’s PoW mining system is an evolution of the hundreds-year-old registration system that relies on a centralized, trusted authority to maintain records and balances, which is leveraged by banks and almost all other related companies. accounting for that. day.
“Bitcoin has created a triple entry [ledger] of the old double entrance [ledger] and the general ledger is self-audited and written in chains, “he said.” It is an immutable general ledger entry that can never be altered. “
“That’s the best accounting technology ever created by humans,” he added. “So anything that lives on top of this Bitcoin network, which is an accounting innovation, will be better than the legacy system it replaces.”
PoS takes a different approach to finding consensus in a larger distributed book. Instead of requiring an energy expense, the cost of participating in mining on this network is tied to the amount of digital money from that network that the participant owns.
A node that wants to participate in the consensus mechanism of a PoS-based blockchain – to become a validator – needs to “stack” a certain amount of coins in that blockchain. Staking means blocking a person’s coins as collateral in the blockchain so that the network can punish validators by destroying some or all of their coins if they behave dishonestly or lazily.
Implementations vary, but taking as an example the PoS design proposed by Ethereum, the PoS network randomly selects a validator to propose a block and also a committee of validators to check and vote on the validity of the proposed block.
Proponents of PoS argue that betting on coins is a sufficient cost to encourage honest participation, but there are some opposing arguments.
First, PoS networks determine a minimum amount of coins that must be wagered for a user to participate in their consensus mechanism. In Ethereum, that amount is 32 ETH. Smaller players, although they can participate in groups, are excluded from the process and favor those with larger amounts of money. (This is different from bitcoin mining pools because the nodes validate and any participant can be a node.) As a result, in PoS those that determine the state of the network are those with the largest shares of that network’s currency.
“Basically, PoS depends on circular logic, where the largest coin holders determine the status of the general ledger and the status of the general ledger determines who the largest coin holders are,” Alden said in the panel.
Consequently, although there is no single central authority to tell the truth, PoS networks delay these decisions to a select group of large coin holders. This is similar to the common systems before the invention of cryptocurrencies where those who have a greater share in the system, the older ones interested, gain more power in decision making.
“PoS is just an elegant way of referring to shareholder governance or a stakeholder-driven system where effectively ownership of the system determines its authority over the system,” Carter said. “That’s how SWIFT works, that’s how PayPal works. That’s how banks work. Those are all PoS systems.”
Those who call for Bitcoin to move to PoS lose the differences between that consensus mechanism and PoW and how each strives to achieve different things.
“PoS is doing completely different things than Bitcoin does,” Alden said. “Bitcoin without energy, without work, is like planes with flights eliminated, it’s taking the key innovation out of what makes it so useful.”
Bitcoin, by harnessing the energy to test the work and the nodes to prove the validity of the work, can generate apolitical money that allows for equal participation and treats all users equally.
“Look, these PoS systems work well. They’re just not depoliticized. They don’t allow anyone to transact,” Carter said, adding that he believes money should allow anyone to transact, regardless of whether or not they live up to their political beliefs. system. “They took that away as we digitized the finances.”