The PoW vs. PoS Debate | Lyn Alden & Justin Drake

it's almost black and white the proof of stake is clearly superior than proof of work so there's a bunch of points they respond to so i'll try to go linearly i guess welcome to bankless where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless guys you are in for a treat today we've got two experts on proof of stake and proof

of work and they are debating the subject over which is better for creating a global money system a crypto money system proof of work or proof of stake lynn alden and justin drake on the episode today we're going to talk about a few things number one which provides the most economic security proof of work or proof of stake number two which provides the best deterrence and recoverability in the face of the dreaded 51 percent attack number three which minimizes governance power for the elites which is more power

to the people number four which is economically the fairest system to participate in and number five this is personally my favorite this conversation around proof of work being more commodity money and proof of stake being more equity money is that correct that's what one of our debaters believes and we dive into that as well david why don't you tell us a little bit about the format of this episode because uh it was a fantastic uh i think format in that the participants like i feel like for times during this episode

you and i could just sit back and watch the uh participants go over their points and articulate them well back and forth it was like watching a you know tennis match of like a serve and then a volley and then like back and forth back and forth yeah the first the first half of the episode i'd say just wrote itself seriously debated going back and like making a bag of popcorn because the first half at first half of the show as as host we didn't have to do a damn thing uh yeah lynn and justin just took it and of themselves and took this conversation in in their own direction uh and then uh we started you

and i as hosts again started in the second half of the show really to actually direct the conversation and uh summarize things that were said and digest things that were said uh and so the this is kind of how this this episode is bisected down the middle but then i would also say i really enjoyed the closing statements as well just allowing both justin and and lin to really just summarize holistically their entire scope for why lynn believes that proof of work is a better money system and why justin believes proof of stake is a money system uh so there is so much

knowledge baked into this episode this is going to be ones one of the ones that we're going to have to re-listen to to really fully extract all of just the the fantastic knowledge that is here and overall i'm just very happy that in this very tribal world of crypto that we have people like lynn alden and justin drake who can come to a podcast and just talk about things without the yelling that you would find on twitter spaces and without the jabs that you would find just a very respectful respectful conversation which i know is important for the listeners

because it's just very it's a pleasant debate to listen to so i'm so happy that we were able to produce this podcast here ryan imagine having an adult conversation about crypto it's impossible to do on on crypto twitter and other locations but that's what was had today it's fantastic points by both sides of this argument well articulated one thing david and i are going to do is have a conversation about the conversation that was just had we have that on an episode we call the bankless debrief you get that if you are subscribed as a bankless premium member

dave and i are going to talk about the merits of both sides maybe maybe your mind was changed david in this in this debate maybe there are some points that uh justin brought up maybe some lynn points that we'll have to talk about so i'm looking forward to that conversation if you're a bankless premium member you can look forward to that conversation too should be available to you now just upgrade to premium membership we're going to get right into the conversation with lynn alden and justin drake but before we do we want to hear about the fantastic sponsors that made this

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of work versus proof of state depending on what uh side of the of the conversation you're on i want to introduce you to repeat bank list podcast guest founder of lynn alden investment strategy lynn alden she's a leading expert in macro markets lynne alden has been a leading expert commentator on macro she's been a proponent of bitcoin for a long time she generally believes that proof of work is more suited to producing a new global money system than proof of stake she also wrote an article on this topic that

was widely read uh very well circulated and well argued so we've got lynn on the one side who is pro proof of work and critical of proof of stake lynn welcome to bankless how you doing uh happy to be here fantastic uh on the other side of things we have justin drake justin drake is also a repeat bankless uh guest he is a researcher at the ethereum foundation he's the pioneer of eth as ultrasound money you may have heard that meme a few times before he's also been hard at work at helping ethereum transition to proof of stake so of course he is a believer

in it and he believes that proof of stake produces an asset with the properties that the 2020s will need with the monetary properties that is so he's on the side of pro proof of stake and he's more critical of proof-of-work uh justin how are you doing welcome to bankless doing great thanks again for having me guys okay uh we're super excited to host this this debate this conversation if you will i know you you both have some fantastic uh points to go through i want to start with kind of the big question i think we're settling and see if we have

some agreement uh on that big question um which is i think we're trying to answer the meta question of whether proof of work or proof of stake is most amenable to the accrual of monetary premium basically which of those two consensus protocols are most amenable to making a cryptocurrency a money have monetary premium do you guys agree before we get into kind of the the subtopics here that this is the correct framing of the whole

conversation uh we're trying to answer which consensus protocol has a better monetary premium potential justin why don't we start with you yeah i think that is that is the big question and it kind of boils down to what the consensus mechanism is all about it's about security and so we kind of we can kind of look at a consensus mechanism and through the lens of economic security for example we could look at it through the lens of

governance security to what extent does the community have control over the consensus participants which are meant to just be doing their job of maintaining the the blockchain we can look at physical security which one is more liable to attack uh you know from violence uh in the context of of nation states for example we can look at quantum security and we can even maybe look at meme security you know monetary premium to a large extent is about having the best

memes and i believe that proof of stake has the potential to have much better memes than proof-of-work when it comes to looking at cash flows um but that's i guess something we'll discuss later glenn i want to get your way in on this so um do you think that this is the question we're trying to answer is which sort of consensus mechanism is most amenable to the accrual of monetary premium proof of work or proof of stake or would you re reframe this in a different way i think that's a good way to phrase it and you know in the current system we have you know not on the blockchain but we have

proof of work and proof of stake assets essentially right so equities because you you know you own a stake in that company you have a proof of stake right and so your stake allows you to exercise some degree of control over that company whereas of course we have normal commodities that are proof of work assets more or less and what we've seen over history is that either asset can acquire some degree of a monetary premium right so for example in this era of bad money um stocks have required in some cases a monetary premium so you can have assets of either

case that have monetary premium and so the question becomes what is most suited to a monetary premium and what is able to acquire and then hold for the very long run and accrue a structural monetary premium i really want to kind of interject almost at the very beginning here and kind of try and and and kind of argue why this this analogy with equity and proof of stake is maybe a bad analogy and the reason is that in the context of of of equity um

you have the right to vote on anything you can completely change the rules of of the company um but in the context of uh proof of stake um actually there is a bit of an ambiguity you could have proof-of-stake governance and you can have proof-of-stake consensus so some chains like tezos like polka dot like dfinity they empower their token holders to make arbitrary changes to the rules of consensus and that can happen even without a fork

if there's a sufficient quorum the rules kind of automatically change on chain but um in in the context of proof-of-stake as a consensus mechanism for security um the consensus participants can't just arbitrarily change the rules so for example and i think there's something we can both agree on the consensus participants can't say we're just gonna give ourselves you know a thousand if each um because that would be kind of an invalid transaction an

invalid block and so ultimately the consensus participants are beholden to the community and that is a huge difference relative to to equity and if we really want to go down this equity metaphor then we kind of need to think of us think of how proof of work would be equity like and it is equity like in the sense that the consensus participants those who have hash rates have this very constrained voting power only

in the context of governance so and on the context of consensus not in the wider context of governance guys i think everyone here is really eager to uh get into the details and we jumped ahead a little bit with that justin so i'm going to zoom out and kind of give a road map for the listeners before i give it right back to lynn there in order to answer the question which produces the best monetary premium there's a bunch of sub questions one of those is like the commodity versus equity debate with which we just kind of hopped into and so we'll start with that first but the other things that we're going to talk to talk about on this show are

things like 51 attacks which one which system can recover deter and recover from 51 attacks economic security which provides the most economic security fairness and decentralization which one is economically fairest for participants and kind of what we were just talking about commodity money versus equity money lynn generally thinks that proof of work produces commodity money or money with commodity properties and proof of stake produces money with equity properties as we just alluded to and that is i guess where we're going to start this debate as we've uh hopped

into it already so lynn uh do you want to just keep on going with that conversation about proof of work as commodity and proof of sake as equity so i agree that there are different types of proof-of-stake systems right so they're ones that give you more control than others um and i you know if i were to focus on say defining proof-of-work as as you know commodity money i would also even go you know so far as to say that if you have a proof-of-work system that has difficulty bombs or that has say very large blocks or just you know very uh uh you know hard to run your own

node that starts to have equity-like systems as well and so for example you can have some of the hard forks away from bitcoin start to look more equity-like because it kind of consolidates the number of people that can make decisions for that protocol rather than being a fairly immutable protocol as you would generally see in a commodity right so producers have no influence over the properties of copper for example that's that's an example of a commodity money or a commodity in general and so going back to the you know proof of stake to equity analogy we can point out that for example shareholders in a

corporation can make changes but of course they can't make changes that violate the law of the country that they're that they have a jurisdiction or that you know places they operate in right so they're still bound by things that are outside of just their stake in that company and that that's that would be true for this as well and so in this context the proof of stake would refer to uh the fact that people that hold the capital are the ones that get decide which transactions are processed more or less that's kind of that's what their their stake is is rather limited to right so if we want to take kind of a

technical perspective i guess um the consensus participants can try and do two things one is they can try and do a hard fork which is basically to make transactions which are are not valid and somehow make them valid and as you say this is the context of the law there's this law which is set by by users which cannot be violated by the consensus participants and then there's this other thing that they can try and do is basically as you said restrict the set of transactions that

can be processed and so this is what's called a soft fork which is basically a form of censorship where transactions that used to be valid are no longer being processed and so they're effectively invalid and so i do agree that consensus participants have this ability to do censorship and then the question becomes if we want to compare proof of work to proof of stake which one is least liable to these census flip

attacks and and here what we need to do is we kind of need to zoom out all the way to the social layer because this is where the social layer needs to intervene and it turns out that one of the massive advantages in my opinion of proof-of-stake is that the social layer has the tools to go intervene whenever there is censorship by the consensus participants um whereas proof of work does not have that now in terms of um you know things that you mentioned like like the difficulty bomb small

blocks versus big blocks these are things that i believe are somewhat of a gonna to the discussion today and i think one way to really focus the discussion on the topic of specifically proof of work versus proof of stake which is a tiny part of consensus it's kind of interesting how this this professor proof of work with proof-of-stake is actually all about restricting the set of consensus participants that can come in it's an anti-sybil gadget and you know there's other things in the in the in as part of consensus there's

the folk choice rule there's localization there's dvm versus utxos there's big blocks versus small blocks there's all sorts of other things but i think in in order to have like the simplest discussion possible maybe we could compare a hypothetical bitcoin proof of stake and a versus a bitcoin proof of work or we could just look at ethereum proof of stake versus efferent proof of work but if we start um you know talking about things outside of canvases apples to apples

comparison then the discussion becomes quite quite convoluted i'd like to go um back into the kind of commodity money versus equity money type of discussion um so lynn i i i want to understand kind of your take here um is it is it the case that you believe that uh any kind of proof of stake produced monetary premium or money is more like equity and less like a commodity or um is there some like

granularity there uh in in in kind of your belief i i think you just expressed in what you were saying previously that some proof-of-work systems can actually become a bit more equity-like and less commodity-like is the same true of proof-of-stake systems can they become a bit more commodity-like and less equity-like in your mind so i think there is some degree of spectrum but i think for the most part it's a rather one-directional street in the sense that it's

there's there are multiple ways to become an equity but very few ways to become a commodity in that sense uh and so commodities by their nature are somewhat rare they're immutable and there are so many things that require governance in our world and so you know especially when we're talking about the topic of decentralization and immutability there are multiple ways to essentially become an equity and there are multiple ways to define what an equity is in that context and so i would say for the most part you know the the the ways to create a true kind

of commodity in the digital realm is extremely limited and that's why i bring up the block size i agree that we should we should focus almost entirely on the proof of work versus proof of stake concept but my point of bringing that up is that even among even in proof of work there are multiple traps to fall into to create a system that ends up being more equity-like in the sense that those with with capital and those you know with outsized influence can control the network uh compared to uh one you know having one that's that's truly decentralized and as close to immutable as you're going to get in the digital realm do you think part of the

difference here lynn is that um like a difference of ossification right so some networks like maybe say a bitcoin for instance has far few fewer governance um decisions to actually make since it's kind of done it's like fully baked but something like ethereum whether it's whether it's proof of stake or or whether it's proof of work you know it's it's not a complete project maybe it's 50 complete i think vitalik said you know somewhere between 50 and 60 uh recently complete so there are still

future governance decisions to make and whether that is like hash power uh you know it kind of influencing some of those governance decisions or whether that's you know staked tokens influencing those governance decisions is the difference that ethereum and many of the other proof of stake chains are um not ossified they still have work to do versus versus something like bitcoin and proof of work do you think that's a useful distinction in your mind i think that is a useful distinction but i would say even in an ossified

proof-of-stake system it still wouldn't uh be basically a monitor premium in the same way that a proof-of-work system is one way i think one analogy you can use is that a proof-of-work system is like non-volatile memory right whereas proof-of-stake system is like volatile memory basically you have to be continually online to be as trustless as possible with that system and so that gives you different levels of hardness as it relates to attack surfaces in addition when you go down to the complexity of the code proof of stake is far more complex far more bloated

compared to proof of work and again i'm not saying that proof of stake has no use cases so so saying that something is a digital equity is not saying that it's worthless it's just saying it's not a digital commodity and so that's how i kind of would make that that kind of differentiation that even if you had a hypothetical ossified totally done proof-of-stake system or at least close as close to being done as possible or maybe you're changing with gradual soft forks and things like that uh that you still inherently require more governance because the failure modes in case that

there is a major system event is requires more intervention than if you have a proof of work system and if you had for example something crazy like the internet goes down for a month right so proof of something like a proof-of-work system where bitcoin can just restart again whereas a proof-of-stake system requires kind of more of a kind of a manual restart because you know it's not a system that's designed to make sense when it's not continually online and so i think that there are there are multiple angles you can approach it from a hardness perspective and it's more than just ossification

although ossification is a factor justin i'm kind of interested in you responding to that but i'm also interested in your concept of ether as an asset do you view ether as more commodity-like or more equity-like do you think that's a helpful distinction i like to think in technical terms and so like these these traditional labels i'm somewhat uncomfortable with um and i think the case could be made that both bitcoin and btc and eve have you know commodity properties and both have

equity properties um but you know i want to you know ask lynn kind of a simple question which is you know you you mentioned that the capital holders have this this outsized power in the context of a proof of stake um so if let's say bitcoin was a proof-of-stake system fully the same kind of ossification the same kind of culture and everything like that what exactly would be that outsized power because i'm

i'm not really seeing it well essentially go down to the idea that those that hold large stakes in the system have an influence a structural influence on who can transact in that system who can be censored and who cannot be and so for example in the current banking system as we've seen in some countries lately uh you know there's a rather small number of entities that can then determine what people can use that system to transact and which people cannot and so both types of systems have a risk where uh they can become you know centralized

to the point where they have temporary or permanent blockades on certain sites of transactions and so in a proof-of-stake system uh you have a situation where if you hold a quorum of the capital if you had if you hold a a majority of the capital you can then lock down the network uh uh to uh entities that are considered for whatever reason unworthy of uh transacting in that system and i think one one thing to keep in mind is when we talk about say attacks on a network we have to think of like you know some rogue actor coming in to

attack the network whereas i think a more realistic thing to uh approach is from a like a you know from a regulatory standpoint so for example if a country declares that all of the proof-of-work miners have to you know avoid processing certain certain types of transactions right so that that's an example of regulatory capture that becomes a problem if you have a lot of say publicly traded uh bitcoin miners for example located in one country

and that they have you know a majority of the the processing power now that could eventually be rectified by bringing more hash to the network and other places whereas when you look at the proof of stake system then the question becomes looking at custodians and looking at whales and seeing how to what extent they can be regulated to essentially capture the network and so that's how i'd phrase that right so you you somehow acknowledge you know and kind of highlight the the outsize power that you know the the stakers might have

but i think it's the the the miners those who own hash rate have the exact same outsize power right it's just and at the end of the day both proof of work and proof of stake are proof of capital and so one of the questions we should we should be asking ourselves is you know how much capital is required to go overwhelm the system that's one of the key questions around economic security and it turns out empirically that proof-of-stake is vastly superior by roughly an order of basically an

order of magnitude 20 x better from an economic efficiency standpoint to go raise that that barrier to entry to actually perform a 51 attack now you one thing that you said which is that you know there could be these external attackers but that could also be kind of endogenous attackers and this is the exact same situation in my opinion for proof of work and proof of stake like you could take for example a company like genesis mining they're effectively a custodian

of hash rate they have customers who will basically just send funds that's all they do they hold the miners and they can you know be regulated in the exact same way that the custodian can be regulated now the key critical difference and is it goes back to the the the counter attacks that the community can do you mentioned that in proof of work you could have more hashrate come in well i i don't think that's the the expected

outcome and the reason is that if a 51 attacker comes in they get to collect ev every single piece of reward every single piece of issuance every transaction fee goes to them and the reason is that they can mine a chain where they're all the only miner they win every single block and no one else wins block blocks and so the honest miners what are they going to do they're going to turn off their miners because it doesn't make sense to be spending electricity and not get get income and then what's

the next step well they're going to want to liquidate their assets they're going to want to sell their hardware and then what can the attacker do well now the attacker can buy this this hardware for pennies on the on the dollar and basically reinforce themselves um as as the attacker and it's kind of this this really terrible situation and even if for some reason or another the community despite you know a totally compromised blockchain despite the price of bitcoin

maybe having crashed quite significantly manages to to make a counter a counter attack which is not against their rational interest because they would likely be losing money uh in in in that process the counter-attack would take months if not years to organize on the other hand in the context of of proof-of-stake you have a very straightforward mitigation which is just take the attacker and remove them from the validator set this is what's what we

call kind of a forced exit now it turns out that in in ethereum if you want to join as a validator there is an activation queue so it takes time to go from non-staked effer to state ether and if you want to double the amount of staked if it takes roughly 200 days so at a minimum what you can do is you can kick out the the attacker and that buys you 200 days but of course the the community has more powers than

that one of the things they could do for example is totally destroy all the rewards that have been accrued so far in addition to doing the forced ejection or they could do like something even much more nuclear is that they could just destroy the whole stake of the attacker and if they do that we're actually in a position where we can bound the number of times that an attack could happen in the first place let's imagine for example that there's 10 million if that's honest and that's staking if you want to do an attack you're going to need another 10 million eve and every

time you make an attack you lose a 10 meter leaf now if there's only 120 million if in circulation the attack can only be done you know 11 times so really in the in the case of healing these attacks it's it's almost black and white the proof of stake is clearly superior than proof of work so there's a bunch of points they respond to so i'll try to go linearly i guess um the first point is that the difference between mining uh as basically the source of

control versus staking as a source of control is that staking requires little or no you know there's no almost no entropy there right so once you hold the power you accrue more power whereas in any mining business including physical commodities and then now extending into into digital commodities with with you know mining of say bitcoin and or other blockchains it's a very capital intensive business you have to constantly put in fresh capital in order to maintain those rewards and so it actually doesn't really accrue a lot of value for the miners other than on the