Proof-of-stake would kill Bitcoin (and maybe that’s the idea)
Proof-of-Stake and Bitcoin: BTC Shouldn’t Abandon Its Proven Consensus Mechanism For One That Hasn’t Had 14 Years Of Battle-Testing, Says Rick Delaney, Senior Crypto Analyst @OKX.
It’s been a couple of months since Ripple and Greenpeace, and a handful of other environmental organizations, showed that they have no idea why Bitcoin is special. Announced in March 2022, the “Change the Code, Not the Climate” campaign seeks to push influential Bitcoiners to support a transition from the energy-intensive and proven proof-of-work consensus mechanism to the still-experimental proof-of-stake.
To justify its existence, the campaign leans heavily on Ethereum’s ongoing transition to PoS. And the day Ethereum’s miners shut down for good approaches, it’s a given that the anti-PoW crowd will increase pressure on Bitcoin.
Proof-of-Stake vs BTC’s Proof-of-Work
Boiled down, the rationale is “if Ethereum can do it, so can Bitcoin.” Yet this completely misses the point. Above all, Bitcoin’s supporters value its predictability and adherence to sound monetary principles. All of this becomes suspect if fundamental changes are made to the codebase.
Much has been written about PoS and PoW, and their trade-offs. While some claim PoW offers prohibitive security, others claim PoS achieves the same at a fraction of the energy consumption. The debate rages on, and I will not repeat the arguments here. Instead, I want to focus on something much more fundamental to why PoS is a bad fit for Bitcoin and its value proposition as the planet’s most sensible money – the lack of historical precedent.
Predictability creates trust
Money is a trust system. Without the widespread belief that this nugget of gold, £20 note or even a handful of seashells can be exchanged for someone’s time, products or ideas, these collections of molecules are just that. It is us as humans who give monetary value to something, and history has shown time and time again that a monetary system quickly falls apart without trust.
Would gold have been valued as the planet’s premier money, transcending space, time and cultural differences, for the past 5,000 years if its molecular structure periodically changed? Of course not. Gold does not change and remains reliable. In nations with the most unpredictable monetary policies battling unpredictable economic conditions, confidence in currencies collapses, and therefore the currencies themselves.
Trust doesn’t happen overnight either. BTC has been around for 14 years with more than 99% uptime and is still not universally trusted. Although many changes have been made to the protocol (after long debate and finding consensus at the network level), its key characteristics – namely its limited supply protected by the influence of the world’s most powerful computer network – remain the same.
Changes, especially those that lack historical precedent, often invite doubt about the future. Imagine a Fortune 500 company fired its successful CEO and brought in a complete unknown. It doesn’t take a genius to predict the effect on the share price. Now imagine that the entire value proposition of an asset is based on its predictability. That’s where BTC is.
“Ultrasound money” is a farce
It’s a popular meme circulating among Ethereum’s staunch supporters. It is a belief that anything designed to make the “number go up” – i.e. make the price rise – positions ETH as a healthier form of money than BTC, perhaps even an “ultrasound money.”
It’s easy to see why the meme is popular – if BTC is celebrated as sound money, surely our “ultra sound money” is better. Still, it makes absolutely no sense.
BTC is considered sound in part because of its limited supply. However, the hard 21 million limit means nothing if those using it (and yes, just holding it is using it) have no faith that it will stay that way. If BTC were to abandon its proven consensus mechanism for one that hasn’t had 14 years of battle testing, why would users think that the limited supply isn’t the next feature to go? BTC’s resistance to such changes is integral to its classification as sound money.
Proof-of-Stake and Ethereum
ETH, on the other hand, is not sound money. Its total circulating supply and issuance is difficult to quantify, and mechanisms such as EIP-1559’s charge burn only make it more unpredictable. If no one uses Ethereum, the issuance is inflationary. If many users transact, the issuance may be deflationary. The very fact that no one can definitively classify its monetary policy—which is apparently still subject to change—means that it is not sound money, let alone “ultrasound money.”
Whatever you think of them, it’s clear that El Salvador, MicroStrategy and others went big into BTC and not ETH, XRP, SOL or any other crypto. BTC is not trying to be a world computer. It does not try to serve as a platform for legally suspect applications. These goals, possibly admirable in themselves, require an entirely different network, and dramatic changes are to be expected.
BTC, on the other hand, is on its way to establishing itself as the healthiest form of money that has ever existed. Experimental consensus protocols are completely at odds with the mission.
Go slow, don’t break anything
Does the fact that PoS is currently a bad fit for Bitcoin mean that ETH is worthless, or that the “number goes up” mechanisms the Ethereums champion are bad or undesirable for Ethereum? Absolutely not. The argument provides no comments on what is suitable for a network with smart contract capabilities in the base layer.
Nor does it mean that PoS itself is necessarily wrong. There are strong arguments on both sides of the debate, but the fact that there is even a debate means that PoS is not suitable for Bitcoin today. It may well be appropriate tomorrow, but attempts to force code changes risk destroying everything that makes BTC special.
Currently, PoS in the form that Ethereum implements is unproven at scale. There are many variants of delegated proof-of-stake, but no blockchain worth tens of billions uses the same system that Ethereum is moving towards. It’s also hellishly risky to switch to PoS from PoW on a live network. That’s why Ethereum’s merger is taking so long. It has been an unstable transition period for ETH, while BTC’s appeal stems directly from its stability.
Proof-of-Stake and BTC: Misunderstanding or Misunderstanding?
Given the fact that the “Change the code, not the climate” campaign is so fundamentally at odds with what Bitcoin users feel is the network’s core value proposition, one must beg the question: Why rock the boat?
On the surface, you have environmental groups that share a tunnel-vision view of energy use – “if it uses electricity and we don’t like the application, it must be eradicated.” Given that Greenpeace and the Environmental Working Group see no value in Bitcoin anyway, killing what makes the network special to further their agenda is fine. For them, police energy based on what they subjectively consider to be useless or harmful is perfectly acceptable.
Now we come to Ripple. Ripple, of course, is the company behind the XRP cryptocurrency and presumably believes its own foray into digital money has a lot to gain from Bitcoin’s demise. A conspiracy theory? Maybe. But given Ripple’s own actions in the crypto industry, which have always been about cozying up to existing financial institutions and giving them the tools to protect the status quo, suspicions are warranted.
We can speculate on Ripple’s true intentions, but one thing is certain – similar attacks on Bitcoin will intensify as Ethereum’s “merger” approaches. And make no mistake, they are an attack on Bitcoin.
A video on the “Change the Code, Not the Climate” website says:
“The cost of Bitcoin is next to nothing.”
Yet hundreds of millions of Bitcoin users, including myself, disagree – the cost of Bitcoin is everything.
About the author
Rick Delaney is Senior Crypto Analyst @OKX. He is a former poker player turned author with an academic background in politics and linguistics. He first discovered Bitcoin in 2013 while searching for alternative ways to fund online casino accounts. After reading deeper, BTC’s promise to separate money from corrupt central bankers struck a chord with him. A few years later, he started in the crypto space working for media publications, including BeInCrypto, before joining OKX as the exchange’s senior content writer and crypto analyst. His field of interest spans all corners of the industry, but truly decentralized systems are what attracted him and this is where his real passions remain.
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