How Proof-of-Work Incentives Are Fairer Than Proof-Of-Stake

This is an editorial opinion piece by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transferring to the Finance Corps.

As Ethereum completed its transition to proof-of-stake consensus, I couldn’t help but notice a lot of articles citing a 99% reduction in energy usage. The claims, however true, are false and counterproductive.

Incentive Proof-Of-Stake

Proof-of-stake validators need to lock up a bunch of coins to earn the privilege of validating transactions. While this removes the need for mining and thus reduces power consumption, the driving force is that the Ethereum network will become more and more centralized.

Investors will receive a cut of transaction fees, as well as a new ether issuance that essentially renders part of their stack illiquid. The counterparty’s risk-free return encourages staking. The more you bet, the more money you make.

However, the more you win, the more you can bet. It’s a positive feedback loop that ensures those with the biggest pockets can always lead in accruals. Given the way proof of stake works, it will also ensure that the biggest stake holders can always exert more influence on the network. Setting ETH as a full validator node requires 32 ETH. The counterparty risk-free return ensures that the holders of the largest pocket can and will have the most nodes to generate the most income. In doing so, they can slowly but surely accumulate more and more control.

Combined with their fee-burning deflation claims, the price is most likely going up in fiat terms, however, the more expensive ETH is, the more out of reach the average will be to trigger a staking button. .

In addition, the complexity and risk involved in staking will also ensure a steady stream of outsourced demand for staking. According to EthHub, “Beacon nodes aim to be a high-performance, high-availability platform… Therefore, their hardware requirement is anticipated to be a server-grade CPU/SSD/network connection.”

Furthermore, the risk of cutouts coupled with the risk of inactivity means there are fines for your deposited ETH just for losing your internet connection.

This essentially ensures that the majority of staking will be sent to solutions like Coinbase and other major exchanges. I don’t have a server-grade device with guaranteed 24/7 Internet. You have?

The more concentrated the supply is on staking, the easier it is for governments to cooperate and censor. Just because it doesn’t happen now doesn’t mean it won’t happen in the future. Such censorship alone is enough to give pause.

Incentivize Proof-Of-Work

Proof of work requires real-world input. The cost of electricity creates innovation as mining service providers find new ways to harness electricity.

There is much to be said along these lines, but the proof is in the pudding. The companies have worked with landfills and gas companies to extract and limit methane and waste gas sources, thereby reducing greenhouse gas emissions. Miners are also being harnessed to harness thermal energy trapped in the ocean, a technique that has so far remained theoretical because of its economic feasibility. There are too many stories like this to be written about in one article, but the incentives are clear. The economics of Bitcoin mining is driving innovation towards a cleaner and more sustainable energy future.

Variable costs are also a blessing, not a curse. Where proof-of-stake holders may only have to pay taxes on income, proof-of-employment companies are often forced to sell to cover many of their input and capital costs. This ensures a more consistent distribution of coins.

Read more: The Merge is Official: Ethereum’s Transition to Proof of Stake Now Complete

The truth is that Bitcoin’s protocol is simply fairer. Anyone can run a node for around $250 and validate their own transactions. The 32 ETH needed to create a node costs around $50,000 at the time of writing, which is beyond the reach of anyone outside of the 1% West.

Proof-of-work is innovation that drives energy innovation and new ways to exploit wasted resources. Proof-of-stake ensures the richest among us will continue to control others who will never be able to catch up. To me, that sounds like a more complicated version of what we already have.

This is a post by Mickey Koss. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.

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