Craig Wright may or may not be Satoshi, but without a doubt, he thinks about bitcoin from a level deeper than almost everyone in the space.
After the split between BCH and BTC, he has become one of the most prominent supporters of bitcoin cash. You can easily find people question his character and calling him a scammer, but it is very hard to find anyone who can or does question his ideas.
In this paper, he tackles a number of different issues:
– Economic incentives of miners in proof of work-based systems
– Issues with proof of stake
– The relevancy of non-mining nodes
You can find the full paper at: https://nchain.com/en/blog/proof-work-relates-theory-firm/
Below are select highlights and notes:
On hashing being wasteful and Proposals to Make Proof of Work “Useful”
“When the utility is divided between securing the network and alternative uses, the result that must naturally flow is that the investment in securing the network in a mixed-use environment needs to be lower than which will occur in a pure single use environment.”
“These alternative use scenarios are higly valued by the individuals proposing their incorporation into a proof of work solution, but they are less valued by most people using the system.”
“What we see from Condorcet’s paradox is that the incorporation of multiple options reduces efficiency. In attempting to solve several problems outside the value of money, we create a scenario where no ideal valuation has been subjectively returned.”
“Simply put, the value of mining is not simply wasted, it is incorporated into the value that we gain in a new transactional medium. The value of mining is the security of the bitcoin network.”
On Unequal Distribution of Hashing Power and Why It’s Not an Issue in PoW
“Ronald Coase demonstrated that transactional costs lead to firms optimizing size. In his argument, he demonstrated that where all things are equal a firm will tend to be larger until a point of management inefficiency is reached. Where the cost of organization increases at a lower rate than the increase in transactions organized a firm will tend to grow.”
“..there is no methodology available that can solve byzantine consensus on an individual basis. The solution developed within bitcoin solves this economical using investment.”
“In all proof of work systems, there are requirements to inject a costly signal into the network that is designed as the security control. To many people, they believe that the cryptographic element, namely the hashing process is the security feature of bitcoin. This is a fallacy, it is the economic cost that is relevant to the overall system and not the individual element.”
It is not the hashing power that secures the network it is the economic incentives that keep bitcoin secure. The reward you get from being and honest actor and the costs you would suffer from attacking the network in lost energy and equipment costs. When you understand this you can see that ASIC’s increase the cost of attacking the network and make it more secure, not less, because any miner that would attack the network would also render his equipment useless.
On the Oligopoly Problem with Proof of Stake
“The distinction from proof of stake solution as has been proposed comes in the requirement to constantly reinvest. A proof of stake system requires a single investment. Once this investment is created, the system is incentivized towards the protection of the earlier investment. This leads to a scenario known as a strategic oligopoly game.”
“The solution using a proof of work algorithm is the introduction of an ongoing investment.” This is different to an oligopoly game in that sunk cost cannot make up for continued investment. In a proof of stake system, prior investment is crystallized allowing continued control with little further investment. Proof of work differs in that in requires continuous investment. More than this, it requires innovation. As with all capitalist systems, they are subject to Schumpeterian dynamical change. The system of creative destruction allows for cycles of innovation. Each innovation leads to waves of creation over the destruction of the old order.”
“Proof of work-based systems continue to grow and continue to update and change. Any incumbent corporation or other entity needs to continue to invest knowing that their continued dominance is not assured.”
A company like Bitmain can exist and be powerful because of continued reinvestment and continued innovation. But unlike PoS—Where a stakeholder the size of Bitmain would be secure in this position of power over the long-term, Bitmain is very insecure and under the constant threat of better firms, with better innovations, that could take over its position.
“In a proof of work system, oligopoly strategies, or the formation of cartels fail due to the impact of the most profitable firm seeking to defect. In all cartels, the least profitable firm needs to be propped up by the other members. The scenario always leads to dissent and the eventual failure of the oligopoly.”
“Proof of stake allows players to form protective cartels. In competitive environments cartels breakdown naturally. Proof stake can be created in a non-competitive manner. Even if the system starts off competitively, it is the nature of an oligopoly to seek abnormal profits and this can be achieved through the manipulation of the rules over time. Such manipulation can result in increasing levels of control as the incumbent firms ensure that innovation does not change or disrupt the status quo.”
“The proof of stake system is a form of oligarchy that represents societal control by a small number of wealthy individuals.”
“The introduction of control by wealth holdings (also known as proof of stake) ….”
Proof of Stake is a great and benign-sounding euphemism for “Control by wealth holdings” which is an accurate description of the system.
“The biggest flaw with a proof of stake based system is the inability to account for present action. Past holdings lead to an ongoing scenario where the wealthy can hold their power without the need to innovate or continue to invest in the market. In a proof of work-based system, individuals need to reinvest consistently and constantly, research and develop and evolve. It is this reason that these two systems are so different. As with many aspects of bitcoin and other cryptocurrencies, the defining factors are economic and not the implementation of cryptographic tools.”
On mining pools
“To assert that the mining pool controls the network is to misunderstand the nature of the firm. In this, the firm members, those people associated with the mining pool can choose to defect and leave the pool and join another.”
On Merchants and Nodes
“This does not require [merchants] to maintain full copy of the Blockchain. It is not receiving your transaction that is important, it is the ability to check that the majority of the hash power have accepted your transaction and included it into a block. It does not matter how many wallet nodes have received a transaction, it only matters that the majority hash power has received it. If there are 10,000 wallet nodes and 1,000 miners (nodes in the true definition) and the majority of the miners reject the transaction, it does not matter at all if every single wallet says that the transaction is valid. If a transaction does not get into a block, it is not a transaction in bitcoin.
The consequence is that merchants will end up working with miners to ensure the successful integration of their transactions. It is not users who care for the accuracy of protocol, it is merchants. When an individual walks into a store and makes a purchase, it is the merchant who was taking risk. It is the merchant who can be double spent, not the person making the payment”
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