{"id":23649,"date":"2022-08-20T12:42:33","date_gmt":"2022-08-20T12:42:33","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=23649"},"modified":"2022-09-15T12:46:29","modified_gmt":"2022-09-15T12:46:29","slug":"proof-of-stake-is-better-than-proof-of-work-but-ethereums-merge-wont-fix-any-other-problem-with-cryptocurrency","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/08\/20\/proof-of-stake-is-better-than-proof-of-work-but-ethereums-merge-wont-fix-any-other-problem-with-cryptocurrency\/","title":{"rendered":"Proof-of-Stake is better than Proof-of-Work \u2014 but Ethereum\u2019s Merge won\u2019t fix any other problem with cryptocurrency"},"content":{"rendered":"

After eight years of promises that Ethereum would definitely get off the blithering idiocy of proof-of-work cryptocurrency mining<\/a> … the merge of the ETH blockchain into the new Beacon Chain system, formerly ETH2, is scheduled for some time between 15 and 20 September 2022.<\/p>\n

If it happens this time, then hooray! Proof-of-work mining is a crime against humanity. Using a country\u2019s worth of electricity, and thus pumping huge amounts of carbon dioxide into the air, is unconscionable.<\/p>\n

Update: <\/strong>First proof-of-stake block validated around 07:00 UTC on 15 September. Well done, lads. [Twitter<\/em><\/a>]<\/p>\n

But that won\u2019t suddenly make cryptocurrency good. Proof-of-stake still doesn\u2019t fix all the other<\/i> problems with Ethereum, or cryptocurrency more broadly.<\/p>\n

Decentralisation is always fake. Proof-of-stake pretends to change that \u2014 and it just doesn\u2019t.<\/p>\n

And that\u2019s before we get to the community angst over whether US-jurisdiction validators will follow OFAC sanctions because they have to.<\/a><\/p>\n

Proof-of-stake will still be a vast improvement over proof-of-work. And will cause much-needed political problems for bitcoin\u2019s proof-of-work.<\/p>\n

In all other senses, none of this matters.<\/p>\n

 <\/p>\n

\"\"<\/a><\/p>\n

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Proof-of-work<\/h3>\n

Proof-of-work (POW) cryptocurrency mining was invented for bitcoin. Satoshi Nakamoto needed a way to add transactions to a ledger, making sure nobody spent a coin twice \u2014 but without any<\/i> central authority. And he also wanted to distribute fresh bitcoins. So he paid the transaction processors with a bitcoin reward.<\/p>\n

If you just give coins to anyone who asks, you don\u2019t know if it\u2019s a thousand people asking … or one person with a thousand sockpuppets. So Satoshi required an unforgeable commitment for everyone who wanted the bitcoin reward: competitive waste of resources.<\/p>\n

You throw away computing power as fast as possible to show you deserve the bitcoins. Your chance of winning the bitcoin lottery is in direct proportion to how much you waste.<\/p>\n

Bitcoin mining now uses over 0.5% of all the electricity in the world<\/i> \u2014 for the same seven transactions per second it managed to do in 2009. Bitcoin is the most inefficient payment system in human history.<\/p>\n

Ethereum copied bitcoin\u2019s stupid system, because they didn\u2019t have anything better that they could claim was decentralised.<\/p>\n

Proof-of-stake<\/h3>\n

Proof-of-stake (POS) was first proposed by BitcoinTalk user QuantumMechanic on 11 July 2011. You show your commitment by holding coins. Your chance to validate the next block and get the coins is proportional to your current holding: [BitcoinTalk<\/i><\/a>]<\/p>\n

I\u2019m wondering if as bitcoins become more widely distributed, whether a transition from a proof of work based system to a proof of stake one might happen. What I mean by proof of stake is that instead of your \u201cvote\u201d on the accepted transaction history being weighted by the share of computing resources you bring to the network, it\u2019s weighted by the number of bitcoins you can prove you own, using your private keys.<\/p><\/blockquote>\n

POS is a bit too obviously \u201cthems what has, gets\u201d \u2014 so you have to convince the users to go along with it.<\/p>\n

There was zero chance that bitcoin would adopt POS. But many minor altcoins seized upon POS \u2014 just on the basis that they needed something to let them pretend to be decentralised that wasn\u2019t POW, and this was something. Most remained functionally centralised in practice.<\/p>\n

Merging to the Beacon Chain<\/h3>\n

There are many ways to do a proof-of-stake system. Ethereum\u2019s new mechanism is the Beacon Chain.<\/p>\n

A participant validates a block of transactions. Other validators then confirm and attest that the block is valid. Once there are enough attestations, the new block becomes part of the Ethereum blockchain, and participants get a block reward of some ether. If a validator goes offline or attests to invalid transactions, it can lose its stake (\u201cslashing\u201d). [Ethereum.org<\/i><\/a>]<\/p>\n

To run a validator, you have to stake 32 ETH. Staked ether cannot be withdrawn as yet \u2014 that\u2019s coming in a future version of Ethereum. For now, if you stake ether, it\u2019s unavailable to you, and you just get block rewards back from your stake.<\/p>\n

There are a fixed number of blocks to go on Ethereum, with the last being expected around 15 September. The Ethereum blockchain will then be continued by the Beacon Chain validators. [Twitter<\/a>; bordel.wtf<\/a><\/em>]<\/p>\n

But none of the technical details matter \u2014 because all of this is handwaving to pretend that a system full of central points of control is \u201cdecentralised.\u201d<\/p>\n

Decentralisation was always fake<\/h3>\n

The word \u201cdecentralised\u201d is an attempt to abrogate legal culpability for what happens on your network, by claiming that your network doesn\u2019t have any central points of control.<\/p>\n

Proof-of-work has efficiencies of scale \u2014 so it naturally recentralises. By 2014, one miner had 51% of all bitcoin mining \u2014 when 51% had previously been the apocalypse scenario for bitcoin. By 2015, 80% of bitcoin miners stood on the same stage together.<\/p>\n

Decentralisation has been fake ever since.<\/a> \u201cDecentralised\u201d is a legal claim of untouchability \u2014 and not in any way an operational reality.<\/p>\n

Ethereum copied bitcoin\u2019s stupid system, and right now it uses as much electricity as a slightly smaller country. Ethereum has even fewer mining pools than bitcoin.<\/p>\n

Proof-of-stake is a glaring case of “we need something, this is something, we’ll seize on this.” (Compare bitcoin seizing upon the Lightning Network.<\/a>) The key point is to keep pretending that the system is meaningfully decentralised.<\/p>\n

Staking is already as centralised as mining. The Lido staking pool plus the Coinbase exchange plus the Kraken exchange add up to over 54% of total stake. Thems what has, gets. [Etherscan<\/i><\/a>]<\/p>\n

The real central control point in Ethereum is Infura <\/a>\u2014 an interface to the Ethereum blockchain owned by ConsenSys. Almost 100% of useful Ethereum transactions go through Infura, because coding to Infura is vastly easier than coding directly to the blockchain. Infura has been Ethereum’s central point of control for many years. [CoinDesk<\/i><\/a>, 2018<\/i>] Ethereum\u2019s decentralisation is fake.<\/p>\n

The Beacon Chain developers are not addressing the Infura problem in any manner whatsoever. They don\u2019t seem to understand the question. They assume that if they<\/i> can do everything via telnet to port 30303 by hand, then everyone else must surely be just as able to.<\/a><\/p>\n

Beacon Chain developer Leonardo Bautista Gomez said: \u201cif Infura goes down today, the blockchain is still moving\u201d \u2014 as if that addresses in any manner the issue of miners\/validators, exchanges and all the sites and DeFi apps that people actually use<\/i> being on Infura. It\u2019s centralised in practice<\/i>, but it\u2019s hypothetically<\/i> decentralisable in the fabulous future! [Tech Monitor<\/i><\/a>]<\/p>\n

The final boss in Ethereum centralisation is, of course, the Ethereum Foundation. The behaviour of the blockchain is the behaviour of the code.<\/p>\n

What if the miners fork Ethereum?<\/h3>\n

Ethereum miners are being told to just bugger off. They could<\/i> decide to fork Ethereum!<\/p>\n

A fork of Ethereum was tried once before. In 2016, The DAO was hacked. The Ethereum Foundation and a majority of mining power decided to violate the immutability of the blockchain and wind back The DAO<\/a> \u2014 because immutability lasts precisely and only until the big boys lose enough money.<\/p>\n

One group started Ethereum Classic (ETC), which didn\u2019t wind back The DAO. Nobody ever used ETC for anything, and now it\u2019s just another minor altcoin.<\/p>\n

The winner for the title of official Ethereum will be the one the money backs. So far, the money is backing the Beacon Chain merge. Coinbase, the largest actual-dollar exchange, is assuming the merge is happening \u2014 in fact, Coinbase Prime is offering staking as a service. Circle, which issues the USDC stablecoin, has come out in ardent support for the merge. So has stablecoin issuer Tether. So the official Ethereum Foundation Beacon Chain is going to win. [Coinbase<\/i><\/a>; <\/i>Circle<\/i><\/a>; <\/i>Tether<\/i><\/a>]<\/p>\n

A lot of people in crypto expect the spurned miners to try to fork Ethereum. I expect nobody to care any more than they did about Ethereum Classic. [Fortune<\/i><\/a>]<\/p>\n

Is Ethereum staking a security?<\/h3>\n

The staking model for Ethereum is probably an investment contract under the Howey test<\/a> of whether something is a security under US law \u2014 and many people realised this years ago. [Grant Gulovsen<\/i><\/a>, 2019<\/i>]<\/p>\n

Crypto people deal with this sort of glaringly obvious issue by putting their fingers in their ears and going \u201cLALALALA,\u201d so it\u2019s back in the news now that the merge looks imminent. [CoinDesk<\/i><\/a>]<\/p>\n

Ethereum staking involves:<\/p>\n