Crypto pundits’ efforts to defend Proof of Work, despite the financial absurdity of paying millions of dollars per day to perform a few transactions, and the resulting environmental calamity, are second to none.
The reason why PoW is the hill where the crypto industry is ready to die on, is that PoW is the foundation of the legal loophole that makes the blockchain a no-man’s land from the point of view of financial regulation and liability.
Proof of Work is stupid
Proof of Work is extremely wasteful. Having miners compute useless hash to control the rate at which blocks are created has been purposefully designed to be as inefficient as possible. Because of this absurd feature, Bitcoin currently costs $40 million per day just to exist, 1/3rd being wasted on electronics, and 2/3rds on electricity. Ethereum is much more “efficient”, with only about $1 million per day in running costs.
Not only does this make crypto an environmental boogeyman, as Bitcoin alone is responsible for 40-50 million tons of CO2 emissions per year, but it also puts crypto under extreme financial pressure – investors need to constantly buy newly minted coins to pay for the miner’s electricity bills.
Alternatives exist, of course. Without even mentioning (distributed) databases:
We already store data. In a database. It works well.— Jimmy Wales (@jimmy_wales) February 10, 2020
… you can have other forms on consensus, like Proof of Stake, which cost close to nothing and don’t produce millions of tons of CO2 per year.
Why, then, does the crypto industry fight tooth and nail to spin the absurdity of PoW as a good thing?
The “no third parties” meme
The pervasive lie in crypto is that the PoW blockchain is some sort of autonomous creature that doesn’t rely on anything and is controlled by nobody:
First of all, Bitcoin and Visa are fundamentally different systems. Bitcoin is a complete, self-contained monetary settlement system; Visa transactions are non-final credit transactions that rely on external underlying settlement rails. Visa relies on ACH, Fedwire, SWIFT, the global correspondent banking system, the Federal Reserve and, of course, the military and diplomatic strength of the U.S. government to ensure all of the above are working smoothly.Nic Carter
Bitcoin obviously isn’t a self-sufficient payments system that doesn’t rely on any third party:
- without exchanges, Bitcoins would be worthless
- without miners, Bitcoin transactions wouldn’t be possible
- without developers, bugs in Bitcoin node software would be exploited and the network would collapse
Bitcoin, if used for payments, is just another layer on top of the existing financial infrastructure, and a very expensive and inefficient one at that. Yet insiders claim the opposite, comparing Bitcoin to the whole banking sector:
4/ Even so, Bitcoin’s energy consumption is trivial compared to legacy financial systems. As measured by electricity costs alone, Bitcoin is much more efficient than traditional banking and gold mining on a global scale.— Yassine Elmandjra (@yassineARK) February 12, 2021
This is absurd. Bitcoin is just a database. Banks aren’t databases. They have people helping you and protecting you and giving out loans and mortgages and… you get the idea.
So why this absurd stance? Well, here’s a clue:
Ethereum’s weird PoS move
Ethereum is moving to an almost-PoS consensus mechanism, where blocks are validated both by miners (with smaller rewards), and by staking validators. This hybrid PoS/PoW mechanism is said to be temporary, before moving fully to PoS.
Why all the confusion? Well, Ethereum has always been walking a tightrope:
If you tried to do an Ethereum style sale in the US today it would not end well.— Palley (@stephendpalley) March 28, 2021
They were early enough, apparently, to get away with it.
and moving to a fully PoS consensus mechanism might change the SEC’s stance toward Ethereum not being a security (here and here). In general, a PoS coin might run a much greater risk of being classified as security than a PoW coin.
Note the “might” – nobody really knows what regulators will decide. But why risk spoiling a good thing? Right now, actors in the crypto ecosystem enjoy a remarkable liability-free environment due to the fact regulators have struggled to catch up with the “innovations” whose purpose was to create that legally unbinding environment.
Miners aren’t liable for the transactions that they choose to include in blocks (cue kiddie porn forever stored on the Bitcoin blockchain), very much like social networks aren’t liable for the content users post on their platforms. Nodes aren’t responsible for the blocks they broadcast to the network. Dev teams aren’t responsible for the code they roll out, because in theory, node operators are free to choose whatever code they wish to run (even though in practice, over 98% of Bitcoin nodes run a version of the Bitcoin Core team).
The crypto ecosystem is a 21st century version of Agatha Christie’s Murder on the Orient Express, where nobody can be ruled as the definitive murderer, because everyone’s a little bit guilty, yet no one single suspect pulled the trigger.
This is the reason Ethereum wants to maintain this shroud of mystery and indecision, by keeping a little bit of mining in its consensus mechanism. If blocks were validated by PoS alone, with accredited block validators who have a stake in the Ethereum ecosystem, then the situation would be much clearer as to who’s responsible when something bad happens, like if Tether suddenly turns out to be a money laundering, market manipulating fraudster’s den (most of USDT transactions happen on the Ethereum infrastructure).
PoW is needed to the murky status quo
Despite many much more efficient alternatives, Proof of Work has the enormous advantage of splitting the liability between interested parties in such a way that it’s very, very hard for regulators and law enforcement to pinpoint a clear and definitive culprit for all the scams and frauds that happen in crypto. What happens on the blockchain, stays on the blockchain.
Crypto shills work very hard to create and preserve the meme that “nobody’s in control”, that everything happens ex nihilo. Take Bitclout, who decided to monetise people’s reputation without their consent:
Like Bitcoin, BitClout is a fully open-source project and there is no company behind it– it’s just coins and code.#bitclout— Bitclout (@Bitclout_) March 17, 2021
How convenient! With nearly all the usual suspect VCs invested in the project, there’s somehow no company and no one to take the blame for this theft in broad daylight. So innovative.
Now you should understand what crypto insiders mean when they say that they’re “developing infrastructure”. It’s not about groundbreaking technological improvements that will allow goat herders in Uganda access banking and finance. Instead, it’s about building around regulatory loopholes so that insiders can run scams and frauds without being held to account.
And if it costs tens of billions per year in electricity and electronics waste, and spews out hundreds of millions of tons of CO2 in the atmosphere, who cares? Suckers will buy coins to pay for it all, and shills will saturate media channels with lies and whataboutism to keep everyone looking elsewhere.