Proof of Stake is an Old Solution

Proof of Stake monetary systems are not new. The fact is Proof of Stake has been tried many many times. It always fails…eventually. How long it takes to fail usually has a lot to do with the discipline of the participants.

The Proof of Stake system we are operating under right now is looking a bit shaky. The meltdown of the global financial systems in 2008–09 prompted “Satoshi Nakomoto” to create Bitcoin. The cry of a new era in money ruled the day back then. The central banks will be able to handle this just fine was the position of many in 2008-09.

Gold prices stayed fairly stable compared to any previous financial crisis, but there was the stench of gold price manipulation heavy in the air. JP Morgan has now paid a nearly billion-dollar fine for its role in such manipulation. Satoshi created Bitcoin in response to this environment. He/She/They may have looked at the lack of reaction in the gold price as a very bad sign and a powerful motivation to write some code to fix it.

A close look reveals a lot of money was created in the United States and then shipped overseas to make foreign banks whole back then. Since the dollar is the world’s reserve currency, the United States had a huge stake in maintaining faith in the system which had the dollar as the reserve currency. The United States paid up in 2008, but faith was shaken nonetheless.

The US dollar being the world’s reserve currency is not an accident of circumstances. It was orchestrated by American negotiators after World War II. The United States became the biggest stakeholder in the post-WWII Proof of Stake monetary scheme known as Bretton Woods. The United States had most of the world’s gold. This gave the United States power and it was able to steer things in a favorable direction. The Bretton Woods system set up a system of rules, institutions, and procedures to regulate the international monetary system, and established the IMF and the World Bank Group.

The United States insisted that the Bretton Woods system be based on BOTH gold and the US dollar. The dominant economic and financial position of the United States brought great benefits. Since everything was denominated in dollars, the United States had great latitude in its ability to print more currency. From the beginning of Bretton Woods, the dollar was a partial fiat currency.

There was a fiat loophole in Bretton Woods and everyone knew it, but the US had won WWII. Over time, the loophole was leveraged more and more by the United States. The United States currency was not truly backed by gold according to some of the other signatories. The French in particular disbelieved the United States currency was truly backed by gold bullion.

The French started protesting the partial fiat nature of the dollar. America denied this, but then Charles De Gaulle taught the United States a fiat currency lesson. In the sixties, he started converting all of the dollars in French hands into gold. This was the promise of Bretton Woods, dollars could be converted into gold bullion any time a holder wished. Because the United States had been leveraging the fiat loophole, it became far too expensive to support.

On 15 August 1971, the United States terminated the convertibility of the US dollar to gold. This effectively ended the Bretton Woods system rendering the dollar a fiat currency. Shortly after, many other nations followed suit and became free-floating. The Bretton Woods system was completely dead by 1973. Since 1973, currencies have been characterized by floating exchange rates.

From this point onward the US dollar has been a fiat currency with no real backing other than the full faith and credit of the United States. However, because the United States remained the most powerful and richest nation on the planet, the dollar remained the world’s reserve currency. As such, the world has been operating under a kind of Proof of Stake regime. The World Bank and IMF maintain a stakeholder account for something called Special Drawing Rights.

Allocation of Special Drawing Rights (SDRs)

The allocation of SDRs to each member country is based on the member's IMF quota shares. The stronger a country's economy, the higher quota shares it has. For example, the United States has 82,994 shares, while Afghanistan has 323 shares.

The more quota shares that a country has, the more it pays into the IMF, which comes with greater voting power. The SDR share of emerging market and developing economies is approximately 42.2%. Of this amount, 3.2% is for low-income countries.

The United States, as the biggest stakeholder, in this global monetary system has a natural inclination to operate the system responsibly. As long as the United States operates by the rule of law and is managing its currency in a responsible fashion, the rest of the world is inclined to play along. The world has in fact played along for quite a while even though the United States got the lion’s share of the benefits as the biggest stakeholder in the system.

When everything is denominated in dollars, printing extra dollar currency is easier. The United States was supplying currency TO THE WORLD not only to America. This had many “rewards” for the nation supplying the world with its reserve currency. Post-Bretton Woods is effectively a Proof of Stake regime. As long as the United States acted responsibly, all was well. America got most of the rewards, but the world benefitted as well from a stable reserve currency.

Unfortunately, greed and corruption have crippled the United States. The rule of law is in question as Congress debates a recent insurrection. The credit default swap debacle and resulting credit market freeze of 2008–09 was a direct result of poor regulation by the largest stakeholder in the post-Bretton Woods Proof of Stake monetary system.

All responsible and informed individuals understood the post-Bretton Woods system was in full decline. A return to gold seemed inevitable, but all knew there was a tremendous impracticability to this option. It was a path filled with pain so when the United States made all foreign investors whole, most were inclined to simply breathe a sigh of relief.

Proof of Stake ALWAYS fails. It just depends on how long the stakeholders can stave off the inevitable entropy of corruption and greed. When Proof of Stake systems fail, it is SOOO painful that many hang on until the bitter end.

Not Satoshi Nakamoto though. He/She/They did something about the obvious cracks showing in the system. He/She/They created a new version of gold in Bitcoin. Bitcoin became a Proof of Work asset in much the same way gold is. You have to work to get the gold and hang on to it.

It appears the post-Bretton Woods Proof of Stake system is about to succumb to inevitable entropy. It is very hard to enthusiastically embrace any other Proof of Stake system with this foreknowledge. In some ways, Proof of Stake is a kind of Ponzi scheme. As long as everyone plays along and the rules are not too badly gamed it can go on for quite a long time. It is a tempting road but requires a lot of trust and discipline which is not always immediately understood until the road has been far-traveled.

To call Proof of Stake a savior is a stretch. To call Proof a Stake a stopgap…perhaps. To call Proof of Stake something new is simply not true. In my opinion, Proof of Stake is a fiat scheme where the largest stakeholders always win and everyone else…well…they can just suck it.