Proof of Work vs Proof of Stake

Michael Saylor on Proof of Stake

Proof of Stake “…places all security & control of the network in the hands of a small group of software developers, who must create virtual machines doing virtual work with virtual energy in a virtual world to create virtual security.” [1]

“All attempts to date have resulted in a digital asset that meets the definition of an investment contract (i.e. digital security, not digital commodity). They all pass the Howie test and therefore look more like equities than commodities.” [1]

“Regulators & legal experts have noted on many occasions that Proof of Stake networks are likely securities, not commodities, and we can expect them to be treated as such over time. PoS Crypto Securities may be appropriate for certain applications, but they are not suitable to serve as global, open, fair money or a global open settlement network. Therefore, it makes no sense to compare Proof of Stake networks to Bitcoin.” [1]

Vitalik Buterin on the Enthereum Merge (PoW -> PoS)

“So, I think to summarize… One of the ways that I think about this in a more philosophical way Proof of Work is based on the laws of physics, so you have to work with the world as it is. You know, right, electricity as it is, hardware as it is, what computers are as it is. Whereas because Proof of Stake is virtualized in this way, its basically letting us create a simulated universe that has its own laws of physics. And, that just gives us as protocol developers a lot more freedom to optimize the system around actually having all of the security properties that we want, right. If we want the system to have a particular security guarantee […] often, there is a way to modify the […] mechanism to achieve it. So, its just, you know, much more flexible…” [2]

Bitcoin Mining Council on Proof of Stake

“…In contemporary Proof of Stake systems, it is the largest holders of the tokens that ultimately determine the governance of the ledger, even if ‘tokenholder’ governance is not explicitly encoded into the protocol. Digital asset users have a revealed preference for holding their coins with intermediaries like exchanges and custodians, and in practice these intermediaries tend to accumulate the bulk of supply. More aggressive regulatory dynamics in major digital asset jurisdictions mean that barriers to entry for these custodial entities will increase, intensifying an already ongoing trend of consolidation. Thus, the risk of corporate capture is extreme in Proof of Stake systems… Put simply, Proof of Stake transforms these novel financial systems into pure plutocracies – an outcome that is incompatible for tools that are meant to be decentralized, global, and completely void of political barriers to entry.” [3]

“Since Bitcoin was founded specifically to disempower intermediaries, it’s imperative that it remain on Proof of Work. Given how contrary Proof of Stake would be to the objectives of Bitcoin, the prospects for transitioning Bitcoin to Proof of Stake are completely impracticable.” [3]

“Non-crypto financial consortia are not considered “energy efficient” by virtue of their contrast to monetary commodities like Bitcoin and gold. Proof of Stake digital assets might share a common ancestor with Proof of Work systems like Bitcoin, but they should be understood as wholly taxonomically different, with different objectives and capabilities. Thus it’s highly misleading to compare the energy demands. Systems like Paypal or Venmo also use very limited amounts of energy, but these are not more “efficient” than Bitcoin, because they provide users with completely different assurances. Proof of Stake systems should be understood in the same way.” [3]

Michael Saylor on Connection between PoS and Bitcoin Environmental Concerns

[24:23] Saylor: …other crypto promoters are giving money to these environmental lobbyists. They’re just giving them huge amounts of money to lobby against bitcoin. Its not really bonafide environmental interest. If you’re an environmentalist, you would be focused on saving the trees, or saving the seals, or doing something in order to cultivate parks, and the like. But, 99.92% of all the carbon comes from something other than energy that fuels proof of work. So I actually think that its the other crypto promoters that are generating all the attack points. They’re generating all the propaganda. They’re feeding it. They’re funneling it through academics, they’re funneling it through politicians, they’re funneling it through 501(c)(3)s and through environmental activists. So you have to just follow the money. And they’re funneling it through their lobbyists. And I think their agenda is, they’re all promoting unregistered securities. [4]

[25:20] Saylor: So all of these other cryptos are, for the most part, unregistered securities. And, so, you have to have a justification for promoting a crypto token that doesn’t use energy. If you understood securities law, and you’ve thought about physics, you would realize that when you slurp the energy out of the commodity, it becomes a security. And when you convert the security to be programmatic, when you create a virtual world, of virtual energy, and use virtual machines, to create virtual security, to create a virtual token, you have got a software company, and that’s equity in the software company. And you’ve created a security, which you’re then selling to the general public. And if you’re going to sell equity to the general public, you need to do it pursuant to fair and full disclosure that’s ongoing. Every quarter, every year, continuous. Because the general public deserves to know who’s going to actually change the definition of the token, who’s running the company. [4]

[26:36] Saylor: And so I think that you have an entire crypto industry and a lot of crypto promoters, that they’ve got this kind of existential problem, and there’s no way to defend it. There really is no defense to creating a token, giving it to yourself, selling it to the general public, and not disclosing it. And so, the best way to deal with it is to change the subject. So we change the subject to energy usage is bad. [4]

[27:01] Saylor: And the reason you should let us exist, and the reason you should buy our token, is that bitcoin is bad for the environment. Right? Well, its bad for the environment in the same way that oranges, and meat, and buildings, and cars, are bad for the environment. They all use energy. [4]

[27:17] Saylor: In fact, hospitals use energy. Right? So, if I went to you and I said, I’m going to eliminate your hospital. And I’m going to replace it with a virtual, imaginary hospital that’s going to lower the cost of healthcare. And I’m going to fix your avatar up every time whenever your avatar has an imaginary heart attack, I’ll give you imaginary surgery, and I’ll make you imaginary healthy, and you can pay me in imaginary coins, and then you’ll go home imaginary happy. Right? I mean, sure, you can do it. But its ridiculous. Its like meta-money for the meta-verse with meta-energy. [4]