Proof of Work vs Proof of Something else

Zoom out of time for a while and imagine how the antlers of a magnificent moose buck evolved into being. The main purpose of big antlers is to impress potential mates by the way. They’re somewhat akin to the feathers of a peacock or the shroud of any male bird for that matter. The animal is trying to signal that it can thrive in its environment despite its enormous appendage. These are all evolutionary metaphors of course, the animal itself is probably unaware that it’s signalling anything. For such antlers to come into being, a whole lot of moose specimen will have to die early, or at least not get a chance to reproduce, over thousands of generations. A lot of resources wasted in other words. All of this for the animal to prove its value to potential spouses. Therefore, from the moose’s point of view, those resources were not wasted.

The Proof of Work algorithm in Bitcoin does a similar thing. It “wastes” a lot of electricity, a real world resource, to find a certain number and thereby proving that it had to commit a lot of time and effort to do this. Time, by the way, is the scarcest of all resources. Because of all this, a Bitcoin miner is very reluctant to sell Bitcoin at a net loss. The electricity has already been used when the Bitcoin pops into existence and the miner has no other means of getting his money back than selling the Bitcoin for more than the cost of the electricity it took to produce it. This is assuming that the mining rig itself has already been paid for. Proof of Work is a way of converting computing power into money in a sense. Yes, it consumes a lot of energy but the energy consumed correlates directly to the value of the created token. Any decrease in this would also lead to a decrease in the value of the token which is why mining algorithms can’t be less resource consuming or more energy efficient. “Wasting” energy is the whole point. No “waste”, no proof of commitment.

Because of all this you should probably be very suspicious of alternative mining algorithms. Proof of Stake for instance. In theory, a miner in a Proof of Stake system stakes a portion of his tokens for mining in order to prove his commitment to the network. The problem with this is that it doesn’t connect to a real resource, like electricity or even time, in any significant way. There’s no proof of anything except a proof that you’re part of a pyramid scheme. Proof of Stake has nothing to do with decentralization or sound money. Some altcoins have proposed a gradual shift from Proof of Work to Proof of Stake. This is the crypto-equivalent of quantitative easing which in turn is the central banking equivalent of counterfeiting. Don’t fall for it!

Bitcoin is a rare species of moose with great, big golden antlers which will survive for who knows how many generations. Proof of Stake coin are dead moose head trophies that will deteriorate and wither away with time.