Proof of Stake is Useless. Bitcoin Tech Talk #274

Proof-of-stake is being used by those that really know very little about Bitcoin as a way to accuse it of being wasteful. It’s not only newbies that make this accusation, nor creators of altcoins who have a clear interest in adding FUD to Bitcoin, but also people in the political sphere. This is a complete misunderstanding which is not only annoying, but starting to influence people that really ought to know better.

Proof-of-stakers really have no idea what they’re talking about. Proof-of-stake doesn’t solve the problem it purports to solve and it’s therefore useless. In today’s column, I hope to show exactly why.

Proof-of-stake is positioned as an alternative to proof-of-work and seen by the proponents as a more ethical alternative. Instead of spending energy on proof-of-work, you can instead use signers to validate blocks. Usually, there’s some incentive for signers in the form of block rewards, meaning that for the low cost of signing a block, they can dilute other holders of the coin.

The result is a rich-get-richer system. There’s generally some minimum to stake, so only those with enough coin can stake and stakers get newly printed tokens, so it’s a nice advantage for the rich, not unlike the fiat system. The bigger problem, though, is that proof-of-stake doesn’t solve anything. It’s really a mechanism of reward that works well enough in a centralized system, but doesn’t work in a decentralized system.

This has to do with the problem that proof-of-work is solving. The problem is that decentralized things tend to get out of sync and as there’s no central authority, figuring out what is true, what the state of the ledger is, becomes impossible. This is known in the industry as the Byzantine General’s Problem, and it was an open question whether decentralized consensus was possible. Proof-of-work is what solved the problem of coordination.

Without proof-of-work, you can’t tell which is the “real” ledger. One ledger says A paid B, another says A paid C instead. Which is correct? Proof-of-work gives each actor in the system an easy way to figure out who is correct. A neutral observer can see if a block has proof-of-work or not and follow that. If they both submit proof-of-work, ask for the next one and go with that one. This is the key innovation to Bitcoin. Proof-of-work lets observers know which is correct without reverting to a centralized authority. Proof-of-work is expensive, so can’t be faked and ties are broken pretty definitively.

Proof-of-stake does not solve this problem. Signatures don’t cost anything so two ledgers can have signatures from a majority of the signers and both be valid according to their rules. This means that an observer can’t figure out which is the correct one without resorting to some central authority. In a sense there is no correct one, they’re both equally valid according to the rules. In other words, there’s no decentralized consensus here.

Proof-of-stake then, does not provide decentralized consensus and is therefore useless for the purposes of replacing proof-of-work. And indeed, every proof-of-stake system essentially reverts to some centralized authority telling them what to sign because there’s no other way to achieve consensus. It is a centralized consensus system, which is really no different than fiat money, just dressed up in its DINO (decentralized-in-name-only) clothing.

Proof-of-stake doesn’t solve anything technical, but it does give its proponents the appearance of something unique and interesting. Sadly, this is all too familiar in this space with “blockchain-not-bitcoin” still making the rounds after 7 years of futility. The reality is that much like the blockchain-not-bitcoin hype, proof-of-stake is just as useless.

Proof-of-work is an essential part of decentralized consensus and anyone selling you on proof-of-stake as an alternative is not only wrong, but likely clueless, ignorant or scamming.

Bitcoin

Jameson Lopp published his 2021 year-end review of stats pertaining to Bitcoin. As you would expect from Jameson, he’s thorough and puts the numbers in historical context. Bitcoin has been growing this past year and the big stories the number tells is about the mining movement from China and the fees dropping very low. There’s also been a lot more trading and generally, the industry is more profitable than ever.

CoinKite has published a NFC standard for communicating Bitcoin data with off-line devices. NFC is an interesting new way of communicating and does have less security concerns, than, say, wifi. More options are good and I’m glad that they’re implementing standard, which, by the way, is off by default. I once worked on using an audio cable to communicate Bitcoin transactions between online and offline computers. This is much more elegant.

zensored explains the benefits of OP_CTV which would be enabled by BIP119. This is a good summary of all the different things enabled by OP_CTV in a nice compact way. While Jeremy has been a tireless advocate of OP_CTV, his claims about what it’ll enable tend to be a bit scattered, so it’s nice to have the benefits spelled out this way. The main things are all covenant related. They enable different ways to use Bitcoin. I will say the main concern for me are the fuzzy property boundaries that this creates, which philosophically is one of the reasons why fiat money works so badly in my opinion.

HRF has announced 4.25 BTC in grants to various organizations and developers. The grants vary in what they’re achieving, which makes sense, given their mission. Congrats to all the different recipients and I look forward to seeing what they do with it.

Lightning

aljazceru has aggregated the Lightning Node operation resources. This is everything from running your own lightning node at home to cloud services, to figuring out how to earn routing fees. The collection here is impressive and reminds me of the early days of the internet in its simplicity. Much like Jerry Yang’s links to various interesting websites eventually became Yahoo, this is likely the beginning of the many different things people will be using Lightning for.

Fanis Michalakis explains what anchor outputs are. The explanation is thorough and goes through all the DoS vectors of RBF and CPFP as to how they can be used for a pinning attack on Lightning. As he explains, anchor outputs prevent this pinning attack to allow fee bumping should a channel need an uncooperative close. The post is instructive for thinking about the game theory behind how an uncooperative close works.

Mark Andrew gives us an overview of all the interesting products being built on Lightning. I find threads like this great because it shows just how organic the Bitcoin ecosystem is versus all the altcoin chains where it’s so artificial. This is a great link to send to all the morons that say clearly untruthful things like “Bitcoin is not innovating.”

Lightning Escrow is a simple escrow service for transactions using Lightning. The interesting thing about this service is that they only make the routing decision if they do this right, and don’t get to actually possess the coins at all. This is ideal for escrow as you only have to trust their judgment on the sale and not security over funds.

Economics, Engineering, Etc.

Lyn Alden dispels the notion that Bitcoin is a Ponzi. Her defense of Bitcoin is accurate and truthful, even if the same argument has been around a while. The main thing to note is how she subtly shows how altcoins very well may be Ponzi schemes. Many of the things Lyn mentions as properties of Ponzis are easily applicable to altcoins, but not Bitcoin.

Cryptographer Moxie Marlinspike writes about his experience making an NFTs. The story is an indictment on the industry. It’s decentralization in name only as the NFT he created was taken off of OpenSea and then subsequently wouldn’t show up in any of his wallets. As he discovered, once OpenSea banned his NFT, it was nowhere to be found. If that’s not the definition of centralization, I don’t know what is. Honestly, Ethereum should be prosecuted for deceitful marketing for claiming decentralization on something so obviously centralized.

Ark Invest has a framework to evaluate Bitcoin using on-chain statistics. Many of the concepts should be familiar to readers of this newsletter, such as Bitcoin Days Destroyed and HODL Waves. The argument they make here is that these are part of the fundamentals that can be analyzed for how people are using Bitcoin and thus be a part of the valuation model. Personally, these all seem like lagging indicators of demand than anything else, but it’s good to see that they’re expending research effort in this direction.

Margot Paez makes the case that Bitcoin and progressivism are compatible. The piece is interesting in getting the progressive perspective, specifically the economic arguments. The two most interesting parts were about the fixed supply of Bitcoin and the entire degrowth movement popular in progressive circles. Suffice it to say that this article is encouraging for me to see that progressive talking points against Bitcoin have some natural arguments against it.

Level39 reviews all of Alex Gladstein’s contributions this past year on Bitcoin being a moral imperative. Alex has published many important pieces this year about Bitcoin and the US dollar. If you missed any of what he’s written this year, this article has a great summary and it’s well worth reading it all. I think what Alex has done this year is incredible and I’m honored to call him a friend.

Quick Hits

Mozilla gets more woke in the cringiest way possible.

Remington Reibow shows how community makes a difference in his journey to Bitcoin.

Who knew Kazakhstan had so much mining hash rate?

The federal government continues to stifle Wyomings attempts at banking innovation.

Another week, another stupid altcoin scam shows how it’s completely centralized.

Events

Bitcoin and the American Dream book launch is happening in Washington DC on February 10th. Come join me and meet the authors as well as some influential DC people for the event!

I am planning to be in London for Advancing Bitcoin March 3-4, but there is some possibility I won’t be able to get into the UK. I am also going to be at Bitcoin 2022 in Miami April 6-8.

I’ll also be doing the Programming Blockchain seminars in London March 1-2 (subject to being able to get into the UK) and Miami April 4-5.

Podcasts, Etc.

I took a break this week for Bitcoin Fixes This, as I prepare for season 4. It will commence next week with an interview with Peter McCormick. Reason TV did a feature on my seminars and Thank God for Bitcoin:

I read through last week’s newsletter which you can find here.

Part 6 of my interview series with Robert Breedlove is here. We talked about public property, propaganda and other drawbacks of democracy, which frankly, most people don’t think about.

My talk from TABConf is up. This one is about Schnorr Signatures and the main advantages we get out of them. I was on Tone’s show for Bitcoin’s Bar Mitzvah.

Here is the latest book which is out now!

My other books are here and here.

Unchained Capital is a sponsor of this newsletter. I am an advisor and proud to be a part of a company that’s enhancing security for Bitcoin holders. If you need multisig, collaborative custody or bitcoin native financial services, learn more here.

Fiat delenda est.