Proof-of-Work is important to Bitcoin – Bitcoin Magazine
This is an opinion editorial by Pierre Gildenhuys, co-founder of a Hong Kong-based social environment technology startup.
Proof-of-work is the consensus mechanism that the Bitcoin protocol uses. At a basic level, this means that work must be done to prove that the transactions that have occurred on the network are valid.
Proof-of-work functions with specialized “computers” known as application-specific integrated circuits (ASICs), which input transaction data, information from the previous block listener, and a nonce (random number) to guess the result of hash functions. Hash functions are one-way mathematical equations, so it is impossible to figure out a resulting output from a publicly visible input other than through quick guesses like these ASICs do. “Miners” are the people who run these machines and they want to increase the number of hashes (or guesses) per second that their devices can produce and they want to find the cheapest and most reliable source of energy so that this mining becomes profitable for them to pay reduce the cost of their machines and make money to cover other expenses. Despite this, it is an incredibly competitive industry due to Bitcoin’s difficulty adjustment: depending on how many hashes per second are mined on the network, the complexity and difficulty of the hash function will increase or decrease accordingly so that it takes an average of 10 minutes for each new block to be found over the global network.
Blocks are a collection of transaction data that must be transferred and added to a chain of all the previous blocks on the network and will only be transferred and added to this “blockchain” when the answer to the hash function is found. Miners are rewarded for doing this by receiving transaction fees paid by users, as well as earning a block grant that began as 50 bitcoin but is halved every 210,000 blocks – roughly every four years. (The current block grant is 6.25 bitcoins per block.) The Bitcoin protocol has a maximum issuance of 21 million bitcoins, which means that the block grant will expire around the year 2140, and all mining rewards will be paid for by transaction fees.
The basic meaning of proof of work:
- There is a real cost to producing bitcoin.
- There is a real cost to defending the integrity and accuracy of Bitcoin.
- Bitcoin has “unforgivable costliness”, meaning that it would only be possible to make fake bitcoins or fake bitcoin transactions by redoing all the expensive proof of work that came before it at a rate that surpasses any ongoing proof of – work on the network.
It has already become too expensive and impossible to get the 51% needed for individuals, nation-states or organizations to take control of the network for their benefit and maliciously change the transaction history.
This contrasts with proof-of-stake which serves as the consensus mechanism for many altcoins, digital penny stocks and the other Ponzi schemes marketed as alternatives to bitcoin.
Proof-of-stake works through “staking” or, more simply, locking the tokens of that protocol so that they cannot be used. The number of tokens staked represents your chance to validate a block of transactions. The more tokens that are staked, the greater the chances of validating a transaction and thus the more often you will be rewarded.
With this in mind, most altcoins were issued to insiders and the development teams before they became publicly available – so large amounts of these tokens were already owned before outsiders could even start acquiring or staking them.
According to a study by Sam Callahan, Ethereum had an officially admitted premium of around 20% – which is among the lowest of all altcoins – meaning that these insiders would only have to raise an additional 31% since public launch to change the protocol in any way it was to their advantage. While Bitcoin has a demonstrable 0% premium, the number of bitcoins owned by an individual or group cannot change the protocol in any way, again unlike altcoins. The only way to change the Bitcoin protocol is through true consensus of 51% of the work done for the network, which historically has proven incredibly difficult to achieve and thus leaves the benefits of Bitcoin untouched, unless changes prove to be beneficial to everyone in the network. Researching the “Blocksize War” is a good way to understand this.
The implications of proof-of-stake:
- Proof-of-stake has no real production costs.
- A majority stake of 51% is easily obtained by wealthy individuals, nations and organizations, allowing them to change the rules of the protocol to their advantage.
- The defense of proof-of-stake tokens relies solely on the trust of anyone with enough capital or enough tokens not to change the protocol.
Proof-of-work is a good use of energy as it secures a global monetary network in a way where no one can change the rules or produce more tokens to inflate the supply, meaning it becomes an economically viable money to hold for a long time period. Proof-of-stake is not an adequate substitute for proof-of-work because it does not solve the problem of intervention by malicious parties anywhere in the world at any time.
Blockchain is not a new development, and financial payment rails can be developed that are much faster than any platform using a blockchain. Blockchains distribute total information about transactions to thousands of computers globally, thus making it slower than simply distributing balances from a centralized system. The only reason Bitcoin uses a blockchain is because it really needs to be decentralized. And with proof-of-work, however, it is provably decentralized, since the decentralization of proof-of-stake chains cannot be secured, using proof-of-stake altcoins essentially puts your trust in a centralized platform that could have malicious purposes and thus make it irrelevant to use a proof-of-stake system when more efficient centralized systems such as PayPal, Cash App or other digital payment platforms exist.
If you are comfortable with the risk that your funds could be stopped, censored or confiscated from you at any time for any reason – or more relevantly, that the platform could be revealed to be fraudulent or insolvent – then use centralized systems like e.g. the legacy financial system or digital payment applications. But using proof-of-stake cryptocurrencies, which are most often centralized Ponzi schemes that enrich the founders, is a waste as they are pointless and simply take up storage space that could be used for more important data storage for the future.
I will stick with Bitcoin which is secure, immutable, unspendable and decentralized without a single point of failure. Bitcoin is money with a limited supply, so the value of a bitcoin cannot be stolen through unnecessary supply inflation – which has happened to every fiat currency and most altcoins.
This is a guest post by Pierre Gildenhuys. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
