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Proof-of-Work vs. Proof-of-Stake

Proof of Work, at its heart, is the removal of trust from the system of money, and replacing it with something that can’t be faked: real work.

Tomer Strolight
Tomer Strolight
Oct 31, 2022October 31, 202219 min read19 minutes read
Audio narration

The claim that proof of stake is in any way at all an improvement over “Proof-of-Work” misses the entire point of what Bitcoin was created to do.

Bitcoin pioneered an entirely new way of governing a system of money. It is called “Proof-of-Work.” Lately, the press and ‘crypto’ communities have made claims that they have a better alternative called “Proof-of-Stake.” We’ll be exploring what proof-of-work actually does in as easy a manner as we possibly can. But let’s begin by getting an explanation of proof-of-stake out of the way, because it is actually very easy to explain, and has in fact been around, in one way or another, for thousands of years.

Swan Private Insight Update #16

Swan Private Insight Update #16

This report was originally sent to Swan Private clients on October 14th, 2022. Swan Private guides corporations and high net worth individuals globally toward building generational wealth with Bitcoin.

What Exactly is Proof of Stake?

“Hey there, I’d like to propose a system for governing all of finance all over the world, ” says the young, nerdy, and wealthy crypto-influencer. “It’s called ‘proof-of-stake. Here’s how it works:

“First, the rich get richer. To get richer they don’t have to do anything more than demonstrate that they’re already rich. This is because all transactions in this system must be approved by the wealthy, and they get to charge fees to anyone who wants to use the system.

“Also, the rich get to make all the rules. If enough of them get together, they can outright burn or confiscate the wealth of the less rich. But they won’t bother to do this because they can change the rules to enrich themselves at anytime anyways.

“In matters of voting, only the rich get to vote, and the richer they are, the more votes they get.”

“Also, the technology to do this is far too complicated to explain to you. You simply wouldn’t understand it. So if you are rich and want to participate, but are not technically saavy, then send your riches to specialists who will attest that you’re rich on your behalf. You have to trust them, but why shouldn’t you?

“Now, this may not sound completely perfect to you, but I think it will use less energy than a system where anyone who does good, honest, reliable, and verifiable work gets paid. So whether you’re rich or poor, whether you stand to make money or not, it doesn’t matter, because using less energy trumps any deficiencies you might complain about.

“By the way, in this system, if you start off very rich, like me — then you get to stay rich.”

When you strip away all the technobabble, the jargon, and the low-energy nonsense of the advocates of “Proof-of-Stake, ” the above is what you’re left with. Stake is just an indirect way of saying how much money someone has while trying to conceal that being wealthy is all there is to the system so as to avoid calling the protocol “Proof-of-being-very-rich-already.”

When distilled to an honest summary, the critiques of Bitcoin by Proof-of-Stake advocates simply boil down to the following:

“Bitcoin was invented to stop the already rich and powerful from exercising complete control over a financial system in which everyone has to trust elites who repeatedly betray that trust. By using Proof-of-Work, Bitcoin actually achieved that! We, the Proof-of-Stake advocates, propose abandoning Bitcoin and instead making ourselves the elites with complete control, where you will now have to trust us.”

Bitcoin’s Proof-of-Work has actually been so effective at preventing would-be elites from taking it over, that despite all their wealth and power, none have been able to take it over or even change anything about it at all. So instead, they’re trying to get the world to abandon Proof-of-Work. And, with the exception of Bitcoin, they’ve succeeded.

Let’s now delve into what Proof-of-Work actually is, and why it’s an essential part of Bitcoin that cannot be replaced with anything else. We’ll do it here by directly taking on the criticisms that the doubters and skeptics frequently offer.

Claim: “Proof of Work wastes energy.”

Truth: Proof of Work is an incredibly efficient use of energy — it only uses the most efficient technologies available and uses energy as efficiently as possible.

Why Waste Energy When You Can Use It Efficiently?

If you think for a minute about the claim that Bitcoin wastes energy, and even give it the benefit of the doubt as being true, you might then be inclined to ask “Maybe there’s a huge business opportunity in doing ‘proof-of-work’, whatever it may be, efficiently rather than wastefully?” You might ask, “Why are the people who are doing this proof-of-work thing doing it in a wasteful manner in the first place?” You might think, “That doesn’t actually make any sense. People would do it efficiently to make higher profit, putting the inefficient operators out of business.”

And, if you investigated both the history and the present state of proof-of-work mining of Bitcoin, you’d discover that this dynamic is in fact unfolding. Bitcoin mining is currently being done with the most efficiency that our current understanding of both computing technology and of energy-generating technology allows!

The Most Efficient Chip in the World

Bitcoin mining uses the most energy-efficient computing technology that exists for doing proof-of-work computing — microprocessors called ASICs. ASIC stands for application-specific-integrated-circuit. These are microchips that can only do one thing, but they do it with near-perfect efficiency, wasting no circuits or energy doing anything else at all. That’s the trade-off. They can’t do anything else, but they’re very efficient at what they do.

The alternative to ASICs are general-purpose computer chips like the ones in your computer, phone, or tablet (CPUs), or chips that sacrifice some general computing for somewhat more specialized improvements in speed and energy, like graphics processing chips (GPUs). GPUs are more limited in what they can do than CPUs are, but they can do a great deal more of what it is that they do much more quickly and energy-efficiently than CPUs.

But way out at the extreme end of this spectrum are Bitcoin Proof-of-Work ASICs: chips that can actually only do one thing. And that one thing is to run the one and only, very specific, proof-of-work algorithm that Bitcoin relies on. (It’s called double-SHA256, if you’re curious.)

In fact, ASICs are so efficient at doing this, and proof-of-work is such a competitive process (a little more on that later), that nobody can make any money running proof-of-work on the less efficient types of processors like GPUs or CPUs. Because of this, nearly nobody even tries. And that means that Proof-of-Work only runs on the most efficient computing technology that is known to us today. Hardly wasteful.

Accessing the Most Efficient Energy in the World

Once again, when faced with the claim that Bitcoin is wasteful, one must ask, “why use inefficient, wasteful sources of energy?” And once again, in investigating such a claim, one would discover that this is in fact not the case. Those involved in Bitcoin mining understand energy production and pursue the least costly, most efficient forms of energy.

One great example of this is that, until China’s ban on Bitcoin mining last year (and likely still so, but just covertly outside the watchful eye of China’s authorities), Bitcoin miners would physically move their equipment with the change of the seasons — locating where efficient, abundant sources of hydroelectric power operated during the rainy seasons, and moving to other more efficient locations in dry seasons when those locations became more efficient than those now-dry hydroelectric facilities.

Energy production, in particular electricity production, is a very complicated industry. Most electricity is generated in very large industrial facilities — called powerplants — that take many years to build and stay in operation for many decades. The overwhelming majority of the energy produced comes from plants that use some kind of fuel: either fossil fuels such as coal, gas, and oil, or the nuclear fission fuel, uranium.

Solar and wind, the two technologies which do not require fuel, provide only a small fraction of the world’s energy, and are dependent, respectively, on the sun shining and the wind blowing. Fuel, on the other hand, can generally be consumed as and when it is needed.

Below you can see how most of the electricity produced in the world today comes from fuels, not renewables.

Powerplants, however, come with a catch. Powerplants often need to operate at a certain range of output to be efficient. You can’t take a one-gigawatt plant and operate it at one megawatt (1/1000th of its capacity) efficiently — or even at all. That would be like operating your car’s engine, which peaks at about 6,000 RPM at 6 RPM — It can, at a minimum, operate at about 600RPM. And a powerplant is really just a very big engine that, instead of turning the wheels of your car, turns magnets wrapped in electric coils to generate electricity.

All things considered, typically, the bigger the plant, the more efficient it is at its optimal generating capacity, which is usually near its maximum output. But also, importantly, a powerplant cannot operate at all below its minimum capacity. Because of this, if there’s no demand for its electricity within the geographic area that its power can be transmitted (500 miles is the furthest wires can carry electricity), it must reduce its production or it will overload the local electric grid and cause outages.

Bitcoin miners that operate at an industrial scale are highly incentivized to find conditions where they can consume energy whose production increases the efficiency of the plants providing it. When plants are already at full capacity, the price they charge for energy is extremely high, because the demand exceeds their ability to supply it. No sane bitcoin miner would want to locate there. But where demand falls below optimal power generation, both miners and plant operators find incentive to work together — in fact, all consumers of electricity from a plant operating at suboptimal levels benefit from bitcoin miners moving in and raising the plant’s production to its most efficient levels, thereby lowering the average cost for everyone!

The special thing about Bitcoin Proof of Work mining that no other consumer of energy in the world can do as well is that it is a service that can take place anywhere in the world, at any time. The energy to power the lights in your home must be generated when you want the lights to be on and within 500 miles of it. But the energy to confirm and secure the next block of Bitcoin transactions can be generated in Antarctica and Bitcoin wouldn’t care. So Bitcoin mining can be added and removed from areas where efficiency is suboptimal, and even turned on and off as needed to keep plants operating at peak efficiency. Hardly a waste.

Usefully Using Energy That Would Otherwise Actually Be Wasted

Bitcoin mining doesn’t just improve the efficiency of existing plants with existing customers, it can (and does) also consume energy that would otherwise be produced and wasted on doing nothing at all. This is especially true for the intermittent sources of energy, wind and solar, but also for fuel-based technologies like nuclear that must operate at rather high minimum production levels.

You have probably already figured this out for yourself at this point. The demand for lighting is not as high when the sun is shining brightly, but solar cells produce more power when it’s light out than when it’s dark outside. How is this imbalance in production and demand managed?

Well, a lot of power is simply wasted. It’s gets produced regardless of demand. That’s unavoidable. However, it produces zero revenue for the plant operator because there is no buyer of that power. But with a Bitcoin mining firm in the neighborhood, there can now be a customer for that wasted energy. In fact, that may make the difference between it being economically viable to build more capacity or not.

Moreover, there’s a lot of energy that can be produced but isn’t because it’s source is too far away from any customer. This is where Bitcoin miners can be useful too. Bitcoin miners are mobile and can move to any location where the energy is being produced. They don’t care if there’s people nearby that need lighting in the dark or not. A great example of this was covered in last month’s article in Insight, “Green Money, ” by Dennis Porter. It spoke of how Bitcoin mining could actually pay for carbon-negative activities like burning leaking methane from abandoned oil wells all over North America which would reduce greenhouse effects of those leaks by orders of magnitude.

Claim: “Proof of Work Doesn’t Do Anything Useful.”

Truth: Proof of Work Provides Many Valuable Benefits that Nothing Before it, or Since, Can Provide.

Proof of Work uses energy for three intertwined purposes, none of which are useless.

First, it uses energy to ensure that everyone knows and agrees on what the true state of the system is, without any person, group, government, or institution having authority over this conclusion. Second, it uses energy to protect the system against anyone’s attempts to alter its records. Finally, it uses energy to keep the system operating at a stable and predictable rate (both the progress of its processing of records and of its monetary issuance). It does this while making sure NOBODY is in charge of the system so that nobody needs to be trusted not to change it.

With the rules of Proof of Work in place, participants in the free market decide for themselves if it is worth it for them to spend their money and energy on the rewards of doing the work required. Proof of work pays people to do real work, and to prove that they’ve done it. That’s why it’s called Proof of Work. If it’s profitable to do the work, because they’ve got sufficiently efficient equipment and inexpensive enough energy to put into it, then a miner will do it. If it’s unprofitable, they won’t.

If someone wants to try to take over a Proof of Work system, they have to be able and willing to do more work than the work of all the other people in the system combined — work that comes at a real cost. That’s called a 51% attack. And to pull it off isn’t easy — not in Bitcoin at least. The attacker has to do a tremendous amount of real-world work! Work. Not sitting around on their ass and intellectualizing on why doing work is a waste of energy — they gotta do more work than all the other workers combined. Even if they are tremendously rich, they will have to consume their riches by paying for the specialized equipment and the energy required to attack Bitcoin’s proof of work mechanism. They can’t just show that they’re richer than everybody else and take over the system and get paid for that (which they can do in proof of stake).

Not surprisingly then, the weak, lazy, misinformed, and/or corrupt architects of Proof of Stake systems don’t like Proof of Work. They’ve concluded they can’t take over Bitcoin because they’d have to work to do it instead of paying for it to get done. And since it’s so much easier to make up a lie about work being bad for the environment than it is to do actual work, that’s the route they’ve chosen. But it still is a lie.

It’s also not surprising that the world’s central banks — the institutions that Bitcoin was invented to disempower — are desperately trying to persuade anyone naive enough to fall for it that “Trust is the soul of money.” It isn’t. If anything, money is a measure of value, and value is created by a combination of physical work, intellectual work, and innovative work — not by trusting people who say “trust me.”

One final note about trying to actually attack Bitcoin using Proof of Work: even if you do more work than everyone else combined in Bitcoin, you still don’t get to change the rules. You get to roll back the ledger somewhat for some period of time. The rules themselves only change for each person who accepts proposed changes to those rules. We, the users, each have a veto over any changes to the rules. I do suppose that from the perspective of someone who wants to make up the rules as they go along, Proof-of-Work does waste energy, because no matter how much work they do, they cannot use it to change the rules to their benefit for exploiting or oppressing other participants in the network. But that’s the whole point — Proof of Work is a subset of the rules of Bitcoin; it’s not permission to change the rules.

Claim: “Bitcoin’s energy use is going to destroy the planet.”

Truth: Energy use does not destroy the planet, (neither Bitcoin’s nor any other industry’s).

Energy use itself does not destroy the planet. And it isn’t going to destroy life on Earth, or even just human life either. In fact, it’s going to help us thrive in harmony with nature.

There’s lots of ways in which humans have managed to extract energy from our environment. Humanity started by using fire. We also figured out how to catch the wind in sails. But since then, we’ve figured out much cleverer ways to capture energy, and lots more of it. Today, we can find very dense energy sources buried underground and we can even split uranium atoms to release more energy. And we can do this all quite safely.

But that’s all besides the point. Bitcoin’s Proof-of-Work energy use largely doesn’t require the generation of increased energy. It only uses energy that’s economically profitable to use. This goes back to the “wasting” energy point. It’s irrational to use energy on Bitcoin wastefully and doing so will lead to bankruptcy for anyone who tries it, because nobody’s getting free handouts from the taxpayers for mining bitcoin.

Bitcoiners, unlike elected politicians and appointed bureaucrats, aren’t pandering to popular misconceptions about energy (or spreading those misconceptions and then pandering to them). They are actually interested in the long-term sustainability of human civilization in harmony with nature. They don’t reject science, or pervert the concept of it; they embrace it, and want to use it to prevent harm to our planet, life, humanity, and civilization.

A realistic, non-alarmist, non-catastrophizing view of energy is humanity’s way forward: we can better understand what impacts and dangers are true with each form of energy production, and we can take measures to minimize them. But predicting that the world will end if we continue using energy is neither accurate nor mentally healthy.

Human beings are problem solvers. The reason we generate so much energy is that energy can be used to solve lots of problems. Want to get from New York to Los Angeles in under thirty years? Then instead of walking try flying on a jet. You’ll be there in under six hours, and you can watch a movie the whole time. But to accomplish this, you’ll need to use energy. Want to not freeze to death in the winter. Use a furnace. Want to not die of starvation? Use modern agricultural techniques, shipping methods, grocery stores, restaurants, and sound money. You can even enjoy a wide variety of otherwise unavailable foods if you do. For all of these solutions, you’ll need to use energy — lots of it.

Abandoning these solutions because some other potential problem arises from them is not the way of humanity. Solving the other problems is. We may even find that solving environmental problems is best done by generating more energy. We can use energy to do so much after all — we can even use it to clean up any messes we make in producing it! And, after all, dying from harsh climate conditions while traveling, from the cold of winter, or from a drought-induced famine are actually some of the ways people used to die from climate problems that energy production has now solved. So let’s not throw out energy use, whether it is Bitcoin’s or any other valuable and useful industry for that matter.

Final Claim

Finally, let’s address the claim that is attempted to be used as a trump card when all the other claims against proof of work are exhausted:

Claim: “Proof of Stake uses less energy than proof of work.”

Truth: Yes, but so what, since it doesn’t do the useful things proof of work does.

Okay. Sure. A dead body uses less energy than a living one. A wrecked car at the side of the road that can’t go anywhere uses less energy than one in working condition that is taking people places. And a system that can’t be trusted to enforce the property rights of average people, because it relies on trusting other self-interested human beings, uses less energy than one that is secure and does depend only on reliable math and physics.

So what?

Like a body without life, or a car that can’t drive, you can take the energy requirements out of a thing, but you can’t leave its function intact.

Proof-of-Work is no different. At its heart is the removal of trust from the system of money, and replacing it with something that can’t be faked: real work, which requires the use of real, costly, energy.

Tomer Strolight

Tomer Strolight

Tomer Strolight is Editor-in-Chief at Swan Bitcoin. He completed bachelors and masters degrees at Toronto’s Schulich School of Business. Tomer spent 25 years operating businesses in digital media and private equity before turning his attention full time to Bitcoin. Tomer wrote the book “Why Bitcoin?” a collection of 27 short articles each explaining a different facet of this revolutionary new monetary system. Tomer also wrote and narrated the short film “Bitcoin Is Generational Wealth”. He has appeared on many Bitcoin podcasts including What Bitcoin Did, The Stephan Livera Podcast, Bitcoin Rapid Fire, Twice Bitten, the Bitcoin Matrix and many more.

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