Proof of Work vs Proof of Stake: a Mirror of History
By: Daniel Kronovet
Tags: Proof Of Stake, Blockchain, Philosophy, Proof Of Work, Bitcoin

I. PoW vs. PoS

I went to an amazing debate recently at Grand Central Tech.

Hosted by Crypto NYC, the event pit two prominent Proof of Work advocates against Proof of State advocate Nate Rush in an engaging debate over arguably the most important question facing the blockchain community.

For those unfamiliar, “Proof of Work” and “Proof of Stake” are types of what is known as a “consensus algorithm”: a set of rules for how a blockchain decides what transactions become “canonical” and which do not. A blockchain’s consensus algorithm is a little bit like its constitution: the fundamental rules which define it and determine its behavior.

Of the two, Proof of Work (PoW) is currently the de-facto standard, powering both Bitcoin and Ethereum, the world’s two largest cryptocurrencies. In essence, PoW requires participants to demonstrate that they have done a certain amount of computational work in order to place a transaction into the canon. By imposing this work requirement, Bitcoin and Ethereum make it economically inefficient to attempt to place fraudulent transactions into the canon. As long as the “good guys” have at least half of the computers, the “bad guys” will not be able to commit fraud, and the transactions in the blockchain can be trusted as being accurate.

Proof of Work was pioneered in 2008 in the original Bitcoin paper, written by the pseudonymous Satoshi Nakamoto. It was the first algorithm to solve the “double spend problem”, the achilles heel of prior cryptocurrencies. It is lauded for being effective, simple to understand, and simple to implement. Its essential drawback is its profound energy requirement: since the “work” of Proof of Work involves arbitrary (and unproductive) computation, participants in the network are essentially competing to waste the most electricity.

Proof of Stake (PoS) is a more recent, experimental consensus algorithm often touted as a potential replacement for Proof of Work, and seeks to avoid PoW’s substantial energy cost. It does so by making the determination of which transactions enter the canon a function not of computing power, but rather of possessing and committing tokens. A participant commits some tokens (such as Bitcoin or Ether) in order to have a say in which transactions become canon. The more tokens they commit, the more likely they will get to decide. If you commit coins to try to include fraudulent transactions, there is a high chance those coins will be lost. Therefore, PoS creates an incentive to try and include honest transactions over fraudulent (assuming most of the token holders will prefer honest transactions). The challenge with PoS is that it is more vulnerable to certain types of attack, such as those coming from manipulations of the price of the token. There is much interest in the Ethereum community about moving to a Proof of Stake algorithm in the future, and it is an area of active research.

II. Realpolitik vs. International Institutions

Listening to the debate (and reflecting on reading I had done in the past on these protocols), I could not help but be reminded of a similar debate occurring in courses of international affairs. In international affairs, there is the notion of realpolitik, developed in Germany in the 19th century, is a political philosophy which holds that, in the absence of a hypothetical strong global government, practical realities like military strength determine the relationships among nations. They view nations as co-existing in a “state of nature”, in which ideologies, values, and norms are irrelevant or minimally impactful. As a philosophy, it is known to be effective, simple to understand, and simple to implement.

In absence of trusted diplomacy, states are incentivized to engage in arms’ race, competing to build stronger armies with more advanced weaponry. Resources are diverted from social goods like schools and hospitals, as the prosperous nation with a weaker military will inevitably be overrun. Periods of stability exist either when one nation is so powerful that there can be no challengers (a hegemony), or when multiple nations are similarly matched, and so the settle into a peaceful, if tense, stalemate (a multipolar world). Wars litter history like so many punctuation marks.

Mount Washington Hotel, site of the Bretton Woods Conference (src: Booking.com)

Towards the end of World War II, the allied nations of the world came together in Bretton Woods, New Hampshire and set to work developing an alternative. This war of all against all had gone on for too long, they said. We will develop an international system of organizations and connect the nations together via a network of finance and trade, with mechanisms to debate, regulate, and resolve disputes. We will beat our swords into ploughshares, and learn war no more.

This system has proven to be very effective. While it has facilitated the intense concentration of global wealth into the hands of a few, it has also succeeded in preventing total war among the great powers, and in general is understood to have promoted science, technology, culture, and an improved quality of life for billions.

III. Dialectics Rule Everything Around Me

It is interesting to contrast these two systems of international affairs with the two consensus algorithms being presented, and to reflect on the essential similarity in the problems they solve. In both cases, we seek to achieve order among competing, possibly antagonistic parties. The first approach is to hinge the result on a show of force. This approach works in as much as force is a proxy for other desirable attributes: control over resources, organizational ability, conviction, and it is simple to understand and to implement. This approach is limited in that it necessitates hard-won energy being put towards no productive work. Inasmuch as the essential process of life is the acquisition and allocation of energy, this is necessarily suboptimal.

The second approach is to attempt to create a more nuanced system of mental relationships, and to hope that this framework is robust to the inevitable attempts at exploitation and capture by those seeking influence over the outcomes. Unlike the first approach, this approach is more vulnerable to being undermined, and in ways which can be difficult predict, detect, and respond. If we as a community — a cryptocurrency community, or a world community — have the skill and commitment to execute on the vision, then this system would allow participants to contend in a way that is fair and in which outcomes hinge on a display of desirable attributes, but also highly efficient, in as much as it consumes as little energy as possible to preserve energy for other tasks. Higher risk, but higher reward.

Looking at these two debates, which is essentially one debate, it is hard not to take a moment to look ever further back and draw a second connection, between these debates and our own development as animals, in which we began as simple bodies but over time developed sophisticated minds. And the same way, the tensions between these schools of thought is the same as the tension between our bodies and our minds: the mind carries risk, and often we wonder if the body was all we needed. On the other hand, the body is limited, and the mind holds such great promise. Do we have the skill, vision, and fortitude to make the leap, without losing touch with where we came?