PoW vs. PoS

In 51% attack, we introduced the related ideas that:

1. Bitcoin is the first software program that is natively secured by real world energy, as opposed to just cryptography and logic.
2. Logic can be exploited, or have “bugs.” Energy cannot be exploited (faked), nor have “bugs.” It is grounded in physical reality.

These ideas are core to understanding why proof-of-work bitcoin is, and is likely to remain, decentralized, secure, and credibly neutral, while competing cryptocurrencies, including those secured by proof-of-stake, are not.

Proof-of-work (PoW) and proof-of-stake (PoS) are two different systems for achieving consensus over the state of a blockchain, or, said otherwise, for determining and agreeing upon who controls what.

We learned extensively about PoW in a previous post. PoW relies on real-world energy and computing power to update the state of a blockchain.

PoS, on the other hand, is “a system where holders of the cryptocurrency lock up or ‘stake’ their coins, and use them to vote on the valid blockchain, and get rewarded with more coins for successfully creating new blocks.”¹

Who controls what is conveyed by property rights. Property rights are how a population organizes and distributes internal resources. Resources are the outputs of applied energy.

There are two basic systems for securing property:²

1. Physical power (PoW)
2. Abstract power (PoS)

Each has its own systemic, immutable properties.

Physical power (PoW):

• Inclusive and fair: anyone can harness their own physical power on the same terms as anyone else.
• Unbounded and positive-sum: there’s no practical limit to the amount of power one can summon, and my ability to harness power doesn’t impact your ability to harness power.
• Cannot be systemically exploited, because it is decentralized and fair.
• Can be physically observed, and thus can be verified.

Abstract power (PoS):

• Exclusive: it is assigned by those who hold the abstract power.
• Bounded and zero-sum: my rank (e.g., in society) can only come at the expense of others’ rank.
• Can be systemically exploited, because it is centralized and unfair.
• Cannot be physically observed, and thus cannot be verified. Solely trust-based.

Both security protocols have their advantages and disadvantages. Chiefly, PoS trades off security for efficiency (in terms of energy expenditure), while PoW trades off efficiency for security.

To use an analogy, modern human society has adopted various abstract power hierarchies to organize and distribute internal resources because they don’t consume energy (making them more efficient) or physically injure (making them more safe). This has taken the form of a system of Kings and Queens, Feudal Lords, Dictatorships, and/or democratically elected governments, depending on time and place in history.

These various abstract power hierarchies are only possible with human abstract thought and represent a wonderful development in the evolution of life on Earth, leading to great technological development and prosperity. Now that we’re not using all our energy killing each other to settle every dispute, we are free to direct our energy to more noble pursuits.

But we observe that, over time, those with abstract power are prone to exploiting those without – Kings/Queens/dictators/governments have consistently throughout history exploited their populations at egregious scales. When the population is fed up with being exploited, they employ physical power to regain control. This is known as revolution or war.

The abstract power hierarchy breaks down, because it is inherently not secure.

Physical power, on the other hand, is both secure and a naturally decentralizing force.

One physical resource humans value is the surface of the Earth. Humans have decentralized control over the surface of the Earth in the form of 195 sovereign nations. We achieve this through physical power projection. There is no nation that has control over all the Earth’s land and resources – we deliberately prohibit it through the PoW security protocol by imposing physically prohibitive costs on any potential centralized control authority.

Unlike abstract power, which is upended and re-organized over time, physical power as a security protocol withstands the test of time because it is real, rooted in physics. It is secure because there is no practical limit to the amount of power good, honest people can harness to make it physically cost prohibitive to achieve control of all the resources.

The PoW security protocol is precisely what makes a 51% attack on bitcoin costly and impractical, thus ensuring bitcoin remains decentralized and secure.

In a PoS system, if an entity or cooperating consortium manages to gain 51% of the stake, they have lasting control over the network. Nobody else can capture 51% of the stake without the controlling entities’ permission, granted only by giving away some of their stake. This is what is meant by bounded and zero-sum: total stake in the network can only add up to 100%, and so my stake necessarily comes at the expense of your stake.

Contrast this to bitcoin: if an entity or consortium manages to gain 51% of the hashpower, they only maintain control of the network for as long as they maintain 51% of the hashpower. This is what is meant by unbounded and positive-sum: no entity can prevent any other entity from amassing more hashpower, and the total amount of hashpower securing the bitcoin network can grow unbounded.

In PoW bitcoin, you have to expend real-world energy in order to earn newly issued coins.

In PoS, the only way to earn newly issued coins is to stake the coins you already have. Those who have coins are the ones who are awarded new coins from staking. Since they don’t need to expend resources to stake, stakers can simply increase their staking amount as they are awarded more coins and increase their overall stake in the network exponentially.³ This is the mechanism by which PoS blockchains tend toward centralization over time.

In the fiat world, this basic concept is captured by the expression “It takes money to make money.” 

The more dollars you have, the more dollars in interest you can earn. This is the mechanism by which wealth concentrates over time.

Viewed through the lens of PoW and PoS, then, it starts to become clear that bitcoin represents a new, different monetary system and global property security protocol, while competing cryptocurrencies represent an evolution and extension of the old system.

Bitcoin is governed by rules, while PoS cryptocurrencies, and fiat, are governed by rulers.

This is part of what bitcoiners mean when they say bitcoin, not crypto.