Proof Of Work vs Proof of Stake — Proof-Of-Bashing is rising
By: Phil Champagne
Tags: Bitcoin, Tezos, Proof Of Stake, Proof Of Work

“tigers fighting on swamp” by Frida Bredesen on Unsplash

I have to admit, when I picked the title “The Book Of Satoshi” with an obvious nod to the creation of a religion, I wasn’t expecting it to actually be the case. First of all, remember that prior to Bitcoin, it was assumed there was no solution to the double spending problem, and yet, now we have a solution. Now that Bitcoin has demonstrated its tenacity — of course we still have paperbug, pro-central banksters teaming up with hard-core gold bugs bashing Bitcoin — we suddenly have another layer to this story developing where Bitcoin is viewed by some as the only way, it’s like a religion for nerds. In some way, I actually can see the parallel in the sense that deep down, the Bitcoin Maximalist, or any others, view other coins as competition diluting the market cap of Bitcoin. It is true that if for some reason, we could only have one cryptocurrency at any time, say the original Bitcoin, its market cap would be bigger by at least a factor of 2.

One typical debate that is rising is about proof-of-work versus proof-of-stake and the article below is one that is making the absolute claim that all forms of POS are flawed. Before we head into this, I want you to keep the pro-gold and anti-bitcoin Austrian-School of Economy folks in the back of your mind.

The article claims there are multiple ways to uncover the weakness of POS and I’ll go point by point.

Unforgeable costliness.

He references an article by Nick Szabo in regards to the origin of money. Note that Nick’s article has no mention of POS and the “unforgeable costliness” refers to weight and measure:

The unforgeable costliness of standard weights of precious metals could now be “assayed” in a marketplace, by wage earners, or by tax collectors via trademark, i.e. trust in the mint’s brand, instead of chopping coiled wire at a randomly selected spot.

Now, if the point is really about what is money, then let’s tackle this issue directly. Money has all the properties of a currency (medium of exchange, unit of account, divisible, fungible, …) but with the addition that it holds its value over the long term. If you talk about Bitcoin to a anti-bitcoin gold bug, he will gladly tell you Bitcoin is not money as just gold can claim this attribute historically. Personally, I believe Bitcoin has the definite potential to hold its value over the long term as long as there are no major issues discovered that cannot be resolved by any software update. That being said, I feel confident about Bitcoin, and on that basis, the same can be said of Tezos, although not as confidently since it is much newer. In regards specifically to holding value over long term, you could in fact, include any certified signed autograph from Babe Ruth, although it would not classify as money as it does not have any attribute of a currency (divisible, fungible, …). But this attests that for something to hold value requires some finite amount of it and for it to retain its property over time and to always find people interested in it. To claim that “work must be involved” for something to have value is ridiculous in itself since I can find plenty of cases where it does not apply, as long as rarity was still involved.

2. Economics

The next point, about economics — might as well get Paul Krugman’ input on that — brings up this article as a frame of reference:

Overall, the whole set of arguments revolve on economic theories which would go no where if these same people were arguing with the gold bugs I told you earlier. Let me remind you that no one could see how it would be possible to have a decentralized currency capable of avoiding the double spend issue prior to Bitcoin’s arrival. And they did have many theories to justify how impossible that would be. To bring up that some cost must be associated somewhere to justify value is in my opinion, intentionally narrowing a perspective in order to obtain a given conclusion. However, a cost there is with Tezos. As a baker ourselves, our tez in the bond pool must be kept constantly in deposit, when they are released, they are used again for another cycle. We will only get them back if we decided to close shop, but what is the purpose of building a brand, a reputation, only to get rid of it. These are concepts they have not accounted for in any form, although they haven’t specifically analyzed Tezos.

At its core, to demonstrate that Proof-Of-Stake method such as the one Tezos uses is flawed would require answering the following points:

Is it limited in supply and does it have the properties of a currency? (Yes) Does it have interesting properties that can lead to an interest to own it? (Yes: in addition to the same properties of Bitcoin for ease of making payments, Tezos can support smart contracts, and integrate new features seamlessly, although that is yet to be demonstrated to an actual case) Is there any attack strategy that could prevent the proper functioning as intended of the blockchain and the cryptocurrency in general? If so, what are they?

Considering #1 and #2 are without any controversies, the only relevant question to answer is #3, which they do not address. If there is one that exist, they would actually do a good service to expose it as soon as possible before POS coins such as Tezos gets in the billions in market cap. They touch upon the subject with a mention of delegates concentrating their power to perform an attack but I’ve heard that same argument by anti-Bitcoin (pro-gold) against Bitcoin in regards to hash power. What if, say China decides to seize all of the Bitcoin’s mining power and attack the network as an example. The concentration of power exists too for Bitcoin and is about where is the hash power distributed? There is a mention of a conspiracy of wealthy delegates performing a double spend, but what advantage would it bring them considering this would destroy the value of the coin once revealed, not to mention frozen bonds for over 15 days. Clearly, a quick run to an exchange to dump the coin would not be possible for all their holding before they crash the market. Just like I said earlier, this “game theory” has a narrow perspective.

Because Bitcoin has brought a brand new currency rivaling gold while being only 10 year old, we are still in uncharted territories leading to a vast array of unproven theories from all side.

3. Computer Science

Another reference to a paper basing their case on the lack of true randomness that can be achieved except of course you have guess it, for Bitcoin with its Proof-of-work using SHA256 mining. What’s interesting is if the claim is that the hash output is a true randomness, what would they say if that was a method that a Proof-Of-Stake coin would use as a source of randomness. For example, the mining (baking) node could hash together a password combined with the latest block received and a nonce. It would increment the nonce until the SHA256 output start with say 1 or 2 leading zeros, a sort of mini proof-of-work internally done. This can then be used by the node as part of its contribution to create a general seed that will establish mining rights.

In addition, that first paper has this quote on page 9

with a sufficiently expressive ledger, currency holders are able to lock their currency for some amount of time, renting “stake” which is cryptographically verifiable. Then to extend the consensus history, rather than attaching a proof of work, each stakeholder digitally signs the extension. For reasons of practicality, typically a small random selection of stakeholders is chosen for each extension, and only a majority of the selection are required to give the extension validity. The chosen stakeholders are given a reward and after some time they are able to unlock their stake if they so desire. The idea is that rather than depending on the economic inviability of taking control of a history, stakeholders are incentivized to agree on each extension because (a) they are randomly chosen and therefore unlikely to be in collusion, and (b) even if they can collude, they do not want to undermine the system (e.g. by signing many conflicting histories) because they want to recover their stored value when their stake comes unlocked, and (c) they have limited capacity to cause havoc anyway, since for the above reasons the next random selection of stakeholders will probably choose only a single reasonable history to extend.

That’s actually a good recap. But then it is followed by the author’s own interpretation regarding it:

This exposition slightly overcomplicates things: real proof-of-stake systems use single signers rather than this majority system

Well, since Tezos actually uses this “overcomplicated thing” of multiple signers (remember endorsement), I guess we can forget his counter argument that only focus on “real” POS that uses a single signers. It seems only “real” POS are flawed?!

4. “Engineering”

Referencing another article the author wrote himself, he raise this valid question:

How PoW & PoS deal with network partition & unexpected outage

But this is where there is a dishonest conclusion being made. Under Scenario 1 where the entire network on the whole planet is down, the same impact will happen for Bitcoin as it will happen for Tezos. With Tezos, the chain with the blocks mined by the highest priority of miners is the chain that is established as the main one. So the impact is about identical as with Bitcoin. While we are at it, this outage is another argument the gold bugs justify the reason (rightly so in such case) to own physical precious metals. The “Mad max” scenario, because after all, if that outage last months, who cares about the blockchain, and POW or POS. (Yeah, you can visualize Tom Cruise on the phone yelling “show me the money”, except there wouldn’t be any phone in a Mad Max scenario)

Under scenario 2 — a portion of the network is down — well this is indeed similar situation to scenario 1, with the same flawed argument presented by the author.

Under scenario 3 is about, wait for it: stolen private keys. He comes back with the double spend attack, but what would be the purpose since it will be discovered before the bond deposit are released, therefore all the attacker could do is spend a portion of his tez. In addition, to imagine this attack would be successful is dubious considering Tezos has denunciations as well as endorsement done by other nodes. Here is the Occam Razor evaluation: considering the important amount of tez involved, it would be way simpler for the thief to simply get these tez on an exchange and cash them in before the owner reports the crime. I mean wayyyyyy simpler.

He mentions the attacker could also “rewrite” history but hey, I’d love for him to explain how that would be done with Tezos with 32 endorsers signing the blocks. That’s a lot of keys to steal isn’t it?!

He brings back the rewriting history in another article. Imagine the thief manages to get the keys of an old baker that closed up shop. Say he bakes 4 blocks (for simplicity) and that the thief happens to be involved in one of those transactions as a sender (lucky thief), and this happened say 20 cycles ago. If the thief changes that block by removing his transaction, he will change the block hash which means the next block won’t fit with it. Never mind for 2 seconds, that 600 existing baking nodes have a copy of the original block. In other words, he would need to steal the key of the baker who baked the block afterwards, and not to mention the keys of all the endorsers of the block The fact that the Tezos baking process involves multiple cycles and each cycle contains 4096 blocks is precisely for this security reason. Stealing a single unused private key has no benefit at all unless you steal the keys of all the other bakers involved in the last 7 cycles in addition to the cycle of the block in question.

In conclusion

I always look to be agnostic in my investment decision and I know the mind can play tricks on you if you are heavily invested. I will admit to you, I did realize this and my first step was to decide to read all these articles thinking I easily have one foot out of the Tezos door. Just sell everything if these guys are right. This mindset approach allows me to analyze the article with a more neutral perspective. But I cannot say the same about the author when many dishonest conclusions were placed without actually truly considering the impact. I have done this exercise many times and I still don’t claim to be perfect, but reading many articles by gold bugs on the subject forced me to consider their points, although I have witnessed their deceptive conclusions as well, or where they were simply omitting many points. I will however consider any new arguments that will come along either against Bitcoin or Tezos, but so far, I’m a holder of both.

I stand my ground on one thing: diversify your portfolio: consider owning Bitcoin as well as Tezos and as well as gold and silver. Just like I said to gold bugs, why would a guy in some remote ranch only own a handgun, they would be better owning a rifle as well to cover different possibilities. Gold and silver (and cash if it still has value) would save you when the grid is down (think hurricane Maria for Puerto Rico) but cryptocurrency will save you if your government turns into crazy socialists/fascists/communists (they all have one point in common: they don’t like their citizens to be free).

On a final note, let me ask you, how far are you willing to challenge dogma? Bitcoin was dismissed by a great majority in the beginning, only to be accepted slowly but gradually. An example of bad calls:

Happy investing!

Phil Champagne

V.P. Investor Relations

https://HayekLab.com