Most of you whether you’re new to crypto or you’ve been around forever, all of you likely heard about various consensus mechanisms. You hear people say, oh PoS is great, it’s going to save energy and what not. But, are all these consensuses really great or not we have to take a deeper look with a better understanding. They are mechanisms how a blockchain comes to agreement that a block is valid with all transactions in it. All of them are a variant of Proof of Work with the same goal that all participating nodes come to agreement about blocks being created and recorded. You have heard of Proof of Work the foundation of Bitcoin, you have heard of Proof of Stake, Proof of Authority, and even Proof of Reputation. Or some crazy form of hybrid. Some of you might not heard of Poof of Reputation, but I’ll talk about that a bit later. I wanted to share a perspective of how I see these experiments in nature. As Satoshi once stated he did investigate other alternatives in the past. Sticking to the timelines, we’ll start with Proof of Work the beginning of it all.
The words themselves are self-explanatory but there are far more to PoW. Miners expend energy and computational power a cost and also work performed to unlock the hash puzzle of a block, then validate the transactions, and propagate that block to all other miners to arrive at consensus. Thus, work was performed, and resources was expended. This is but scratching the surface. The core design in PoW is in how it promotes honesty and competition as well as resistance to attack at scale.
When the network is at scale, to attack the system becomes costly because of competition and exponentially increased requirement to mine. Most you heard of mining difficulty and that it adjusts based on amount of hash power currently mining the chain to maintain the 10 minutes per block interval. To undermine the system, having majority of the hash power is required. As Proof of Work scale, it becomes ever more difficult to subvert the system. This is a critical aspect of a method to prevent central control. In Proof of Work, security scales too, not just capacity. It becomes ever more secure as the network grows. At Scale, it discourages miners to attack the system for the same reason is that massive resources and computational powers are required. So there is a huge cost that becomes not viable for attacking the chain. On top of that, if you break the law, you face consequences. So it is highly unlikely a miner would be able to harm the system the bigger it grows especially when Bitcoin is deeply rooted in our society. There is no benefit of being dishonest and it is very difficult to hide a large scale covert mining operation from law enforcement or the mining community since you have to connect to the network. On the other hand, if you play honest, there is actually a lot of reward to be earned. Thus, it promotes honesty among miners. As the chain scale, ever more capacity can be handled on chain, and that equates to massive fees not in terms of expensive cost per transaction but in terms of massive volume. Simple example, 1 million tx per block at 0.01$ per transaction, it is very lucrative business for miners. How does competition work in PoW?
Competition in PoW is twofold. First, when a miner finds a block they are in fact competing with other miners who is also trying to find that same block since there can be only one about every 10 minutes. So as soon as a miner solves the hash, it is in that miner’s best interest to propagate that found block so that the network can come to consensus and thus the miner can claim that block reward. So a miner not only solve the puzzle, they also compete to win the block by telling other miners about that block and having it being accepted as first by other miners as soon as possible. Even second apart could mean they lose a block to another competing miner. This aspect contributes to the speed of the network as it is in miner’s best interest to have the fastest connection so that they potentially win more blocks. Competition also comes in terms of configurable fee and block size a miner is able to set for what they are willing to accept. This is like a simple barter system between a miner the suppler of block space and a user the consumer that creates demand for block space.
For example, I am a miner, and I am willing to take 512 MB blocks at 0.05$ per transaction. Let just say I am a bit greedy charging 0.05$ per tx. For simplicity sake, let say that 512 MB block can fit 5 million transactions. On average the block might be full 20% of the time or about 1 million transactions per block and room for spikes say during holiday sales. So then my revenue on average is 0.05$ x 1 million=50000.00$ per block found and won. So let say I do 30 blocks a day out of total of about 144 ~ 150 or about 20% per day. That’s my slice of the Bitcoin pie ok because Bitcion blocks are once every 10 minutes and total of about 144 blocks possible per day. That equates to 30 blocks x 50k$ per block gets me 1.5 million dollars of revenue per day. Boy, I am rich right? I’d be bringing in about 45 million per month in pure revenue based on fees. Holy mother lode!!! I am not just rich; I am going to be filthy rich. But, that would have been too good a dream to come true. Unfortunately, the system is permission less.
A permission less system means more miners can join the network freely and compete with me. Due to my greedy nature, another guy came along and he started advertising that he’ll do it for 0.03$ per transaction. Son of a competitor! He just under cut me by 2 pennies!! And suddenly, he’s getting all the user transactions because I am rejecting anything lower than 0.05$. Now, I am forced to compete with him! And then, more miners started to compete and they might do it for even less for as long as they are making profit. This is the beauty of Proof of Work. It is pure competition that brings the lowest price that a user is willing pay and the miners are willing to take. It is based on free market competitions. This is the main reason why PoW is far superior to any other consensus systems. And, most importantly, it prevents miner collusion. Even if all miners decide they will collude and accept same higher fee, there is always another miner that could come in and compete in an open permission less system. I will stop here today and continue another time with part II where we will look at all other consensuses.