In part I, we looked at Proof of Work was an economic system based on competition. It’s a system that not only becomes ever more secure the larger the scale, but it also becomes cheaper the larger the scale due to miner competitions for volume over cost per transition. The speed of the network derives from incentive to win blocks between miners and capacity derive from user demand and miner supply. Now, let us go into Proof of Stake the most looked forward to on Ethereum.
Proof of Stake revolves around the idea of having a stake in the game by replacing the energy intensive puzzle solving with monetary stake in terms of coins. In return the nodes with stakes are granted rights to validate transaction and record on the block chain as well as having the right to vote on governance. Such system has some advantages and disadvantages.
Most might agree that it saves energy because the energy intensive puzzle solving part was removed. But, beyond that, what are other advantages? Not much of advantage at all. On the contrary, PoS comes with a lot of disadvantages too. First of all, staking and removing puzzle solving doesn’t scale. It’s a form of optimization simply because we skipped a processes in the Bitcoin consensus mechanism. This is why Sharding is the next iteration of Etheruem scaling solution. So you can see, we are again making a simple system complex. And no, PoS is not faster than PoW. It’s optimization and not a true solution to more capacity.
Secondly, staking is similar to how our society is currently with the elite rich at the top. There is no competition in Proof of Stake that provides lowered cost. It’s a system that favor the top 1%. The idea is that the more money you have the more coins you can lock up in stake the more control you have over the network. To me that’s not a system that promotes usage or growth. It becomes a game of who has most money. Unfortunately, that is not any different than the vary problem we’re trying to solve in our society right now is that the rich gets richer, the poor are out of luck. It’s a system that’s opposite of free market competition, instead it promotes monopoly and control. One got to ask the question, do we really want such system in a global blockchain? That’s not innovation at all, it’s imposing the old system on blockchain tech. What about Proof of Authority?
Proof of Authority stem from private blockchain. I won’t go into much with PoA because Bitcoin innovation is in a global infrastructure for the entire earth like the internet. PoA has no point in all of this, nor does it contribute to the invention of a global commodity ledger. It’s not any different than a simple private distributed database system which many enterprises are already using with existing products. It is possible that private blckchain may integrate with the public blockchain but, there is no advantage since the public blockchain will always out compete the private chains in terms of cost. Because, in a private chain you have to run your own infrastructure and incur cost in terms of hardware, maintenance and human resources. Last but not least, Proof of Reputation.
Proof of Reputation is an interesting one. It’s a more recent idea from an Ethereum developer Travis Reeder. The idea of the design is that instead of placing trust in Proof of Work or Proof of Stake, the network place trust in reputable companies. Nodes are elected and not permission less. To be a signing node, you have to be a company with predetermined reputation. Thus, Proof of Reputation. The short fall here is that, it’s not permission less, therefore, there is no competition either. Here again, it’s a system with closed off access and control. One might argue it’s way too centralized since the system is placing power in the hands of elite group of inner circle rather than free market competition. Not any difference than Proof of Stake in terms of scaling. It’s not a scaling solution, it’s an optimization.
As you can see within all of these varying systems, none comes close to Proof of Work. Proof of Work can scale because the block size is unbound, it is determined by miners based on demand from users. The energy requirement is a cost that contribute to security that also scales as the network grows. The system becomes ever more secure as it grows. From the perspective of security, ability to scale, and a system that promotes free market competition as well as being permission less, Proof of Work is superior by far.