How The Incentives Of Proof-Of-Work Are More Fair Than Proof-Of-Stake

This is an opinion editorial by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transitioning to the Finance Corps.

As Ethereum completes its transition to proof-of-stake consensus, I can’t help but notice the plethora of articles citing a 99% reduction in energy usage. The claims, however true, are misguided and counterproductive.

Proof-Of-Stake Incentives

Proof-of-stake validators need to lock up a bunch of coins in order to earn the privilege of validating transactions. Though this does eliminate the need for mining and therefore reduces power consumption, the incentives are such that the Ethereum network will progressively become more and more centralized.

The stakers will receive a cut of the transaction fees, as well as the new ether issuance for essentially making a portion of their stack illiquid. The counterparty risk-free yield incentivizes staking. The more you stake, the more you earn.

However, the more you earn, the more you can stake. It’s a positive feedback loop ensuring the largest bag holders can always stay ahead of the pack in terms of accumulation. With the way proof-of-stake works, it will also ensure that the biggest holders can always exert more influence over the network. Staking ETH as a full validating node requires 32 ETH. The counterparty risk-free yield ensures that the biggest bag holders can and will have the most nodes to generate the most income. In doing so, they can slowly but surely accumulate more and more control.

Combined with the deflationary claims from their fee burning, the price may very well go up in fiat terms, however, the more expensive ETH gets, the more out of reach it will get for the average pleb to fire up a staking node.

In addition, the complexity and risks associated with staking will also ensure a steady stream of outsourcing demand for staking. According to EthHub, “Beacon nodes are intended to be high-performance, highly available platforms … As such, their hardware requirements are anticipated to be server-grade CPU/SSD/networking connections.”

Furthermore, slashing risk coupled with inactivity risk means that there are monetary penalties to your staked ETH for simply losing your internet connection.

This basically guarantees that the majority of staking will be sent to solutions like Coinbase and other big exchanges. I don’t have server grade equipment with 24/7 internet guaranteed. Do you?

The more the staking supply centralizes, the easier it will be for governments to co-opt and censor. Just because it doesn’t happen right away doesn’t mean that it won’t happen in the future. The possibility of such censorship alone is enough to give pause.

📊 According to our #Ethereum Post Merge Inflation dashboard, 46.15% of the #proofofstake nodes for storing data, processing transactions, and adding new #blockchain blocks can be attributed to just two addresses. This heavy dominance by these addresses is something to watch. pic.twitter.com/KQdFNgGloD

— Santiment (@santimentfeed) September 15, 2022

Proof-Of-Work Incentives

Proof-of-work requires real-world inputs. The cost of electricity breeds innovation as mining service providers find novel ways to harness electricity.

There is much to be said along these lines, but the proof is in the pudding. Companies are already working with landfills and gas companies to harness and cap methane and wasted gas sources, thus reducing greenhouse gas emissions. Miners are also being harnessed to unlock thermal energy trapped in the ocean, a technique which has been theoretical until now because of the economic viability. There are too many stories like this to be written about in one article, but the incentives are clear. Bitcoin mining economics are driving innovation towards a cleaner and more sustainable energy future.

Variable costs are also a blessing, not a curse. Where proof-of-stake holders may only have to pay taxes on income, proof-of-work companies are frequently forced to sell in order to cover a plethora of input costs and capital expenditures. This ensures a more consistent distribution of coins.

The truth is that Bitcoin’s protocol is simply more fair. Anyone can run a node for about $250 and validate their own transactions. The 32 ETH required to spin up a node costs about $50,000 at the time of writing, putting it out of reach for basically anyone outside the Western 1%.

Proof-of-work is the innovation that drives energy innovation and novel ways to harness wasted resources. Proof-of-stake ensures the richest among us will continue to control the others who will never be able to catch up. To me, that sounds a lot like a more complex version of what we already have.

This is a guest post by Mickey Koss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

Wyoming Passes Bill to Secure Banking Relations for Blockchain Companies

The state of Wyoming has passed a blockchain bill that allows banks to provide banking services to blockchain companies in the state. According to the legislative document, the new bill would create a new banking category called the Special Purpose Depository Bank, a group of financial institutions in the state that provide banking services to blockchain-based businesses.

The bill was passed unanimously by the state’s legislative committee 13-1, and it seeks to remedy the banking problems faced by blockchain businesses in the state.

“The rapid innovation of blockchain technology, including the growing use of virtual currency and digital assets, has resulted in many blockchain innovators being unable to access secure and reliable banking services, hampering the development of blockchain services and products in the marketplace,” the document states.

Traditional banks have not been friendly to blockchain companies in the “Equality State,” depriving them of secure and reliable banking services to the sector due to the strict banking regulations governing the state.

“Authorizing special purpose depository banks to be chartered in Wyoming will provide a necessary and valuable service to blockchain innovators, emphasize Wyoming’s partnership with the technology and financial industry and safely grow this state’s developing financial sector,” the document reads.

The banks under this category are expected to maintain equal reserves with the value of the deposits stored, which is above the fractional reserves kept by traditional banks, for money laundering and fraud prevention.

“At all times, a special purpose depository bank shall maintain liquid assets valued at not less than one hundred percent (100%) of its depository liabilities,” the document states.

This stipulation comes at a price, though. Namely, deposits kept with the Special Purpose Depository Banks won’t be insured by the U.S. Federal Deposit Insurance Corporation (FDIC).

The news was promptly shared on Twitter by Caitlin Long, co-founder of the Wyoming Blockchain Coalition, a group known for championing the adoption of blockchain technology in the state. Long noted in the tweet that the bills were passed despite “heavy opposition” from the banks.

BREAKING! #Wyoming legislative committee passed #blockchain#bank bill 13-1 over heavy opposition from the banking industry. Congratulations and thanks to all out supporters! pic.twitter.com/nQDjALykRk

— Caitlin Long (@CaitlinLong_) November 30, 2018

Known as one of the pro-blockchain states in the U.S., Wyoming had made history earlier in March 2018 when it passed five blockchain-friendly bills into law. Amongst which is House Bill (HB) 19 which exempts digital asset companies from dreaded money transmitter laws and regulations, and HB 70 which excludes cryptocurrencies from taxes in the state.

Here’s What Happened At Graceland’s Ethereum Conference

Throughout 2018, blockchain and cryptocurrency hackathons are taking place on every continent but Antartica. In the United States alone, conferences are happening in Las Vegas, Atlanta, Berkeley, Raleigh, San Francisco, New York City, Seattle and, of course, Silicon Valley. Some conferences will be more inclined toward a particular sector like Blockchain Health in Washington D.C. Others will target a specific demographic like Women4Blockchain in New York City. Some conferences will attract thousands in attendance; others might charge thousands of dollars for attendance.

In its first year, EthMemphis distinguished its place on the blockchain conference circuit for displaying an under-the-hood glimpse at what actually moves this young industry forward, specifically on the Ethereum network.

Taking place at the University of Memphis’ Fedex Institute of Technology, EthMemphis focused on Ethereum-based blockchain topics and projects applied to supply chain, healthcare, tourism/hospitality, education and law.

Specifically, the three-day conference consisted of a hackathon interspersed with a Saturday full of blockchain talks, technical workshops, drone racing and a collaborative effort between the Decentraland team of Buenos Aires and the Memphis Game Developers to create a game within the virtual world.

FedEx: Blockchain or Be Disrupted

Sean Healy, senior vice president of transportation for FedEX Freight, gave a keynote address. Healy stated that FedEX Freight is the least technologically sound arm of FedEx and, therefore, presents a huge opportunity for blockchain technology to be applied to supply chain logistics.

Healy explained the importance of FedEx CEO Fred Smith’s quote: “The information about the package is just as important as the package itself.” There are multiple parties involved in the cross-border shipping supply chain such as customs authorities, brokers and government agencies — all of which need information about a particular package. Maintaining a distributed ledger for package information would allow FedEx to significantly reduce operational costs by decreasing turnaround time.

Healy said that with regards the current uncertainty of U.S. regulations applied to blockchain technology, FedEx is encouraging federal and state governance to help set standards.

Hackathon

There were five prize categories at this hackathon: legal, supply chain, healthcare, travel and innovation.

In the legal category, the hackathon was won by “Blockchain of Custody.” Built on Solidity, Blockchain of Custody uses a blockchain to track the criminal evidence used during trials. The project was built by Joshua Shelton, Sam Borick (@mibzman), Christine Lee and Yucheng Zhang.

Congratulations to @ETHMemphis Hackaton Winners: Joshua Shelton, Sam Borick, Christine Lee, Yucheng Zhang – Legal Category: “#Blockchain Of Custody” // @tusharsingh@TroyParkes@uofmemphis#TeamFedEx#ProudToBeFedEx —o-o-Ộ-o-o— pic.twitter.com/DAQvxf5mug

— Sonia Farace (@soniafarace) May 20, 2018

In the supply chain category, “Organ Trail” won for creating a solution to accommodate fast, secure and error-free transportation of organ transplant data among multiple parties. Built using node.js/Solidity/OpenZepplin/ERC721/Ethereum, the project was built by Alex Fisher, Forest Fang, the ZhenPanda and the mysterious Nedodne.

“Ethereum Insight” won in the innovation category. Built by Rahul Raina and Kiko Lam, the project creates a querying layer — a simple API structured tool to filter data of ERC20 tokens — to drive insight about user behavior of ERC20 token holders.

EthKids Breeding Cryptozombies!

During the weekend, Bitcoin Magazine spoke with Meka Egwuekwe, executive director of the Memphis nonprofit, Code Crew. Code Crew mentors Memphis’s underrepresented youth to be tech innovators of tomorrow by teaching them how computation and digital systems work, and how to apply those principles to programming and software development.

Since 2015, Code Crew has taught more than one thousand students to code through summer camps, after-school programs and in-school electives. Of the 250 kids who participate in Code Crew weekly, 91 percent are black and Latino and 41 percent are female; 89 percent of all participants are more likely to study computer science.

On Saturday, Code Crew kids wrote their first smart contracts on the Ethereum network with Solidity code using CryptoZombies. CryptoZombies is a free platform that teaches newcomers and experienced programmers alike how to build commercial scale applications, especially games, on the Ethereum blockchain.

Our @_CodeCrew kids have been learning about @blockchain and @ethereum at @ETHMemphis. They’ve even written their first Solidity code using CryptoZombies! #BlockChain#GritGrindCodepic.twitter.com/k1oc07idT5

— CodeCrew (@_CodeCrew) May 19, 2018

EthMemphis Does the Infamous ERC721

The ERC721 token was a heavily discussed topic during EthMemphis. On Saturday, Airbnb’s Elena Nadolinski led a live coding workshop where she showed the audience how to build their own ERC721 token. The ERC721’s notoriety in the cryptocurrency and blockchain ecosystem is mostly attributed to the viral phenomenon, CryptoKitties.

Here is how Nadolinski explained the significant difference between ERC20 (most commonly used to make new cryptocurrencies) and ERC721 tokens: ERC20 tokens represent fungible assets such as currency; ERC721 tokens represent non-fungible or unique assets such as the Mona Lisa, concert tickets, or collectibles such as art or Pokemon cards.

DAppBoard Games, an analytics platform for tracking the use of Ethereum smart contracts, distinguishes the difference between ERC20 and ERC721 tokens another way: ERC20 is classified as a token and ERC721 is classified as some type of game.

One EthMemphis sponsor uses ERC721 tokens to allow for access to hotel rooms for a predetermined amount of time. BookLocal, is a travel and hospitality company that wants to simplify hotel booking and guest management by streamlining it on the Ethereum blockchain.

“Hotels will be able to mint their own ERC721 tokens based on how many rooms they have,” said Sardor Umarov, co-founder of BookLocal. “We see opportunity to empower destinations to work in partnership with local hotel operators, to lower the overall cost of distribution and to retain more revenue within local economies.”

In addition, BookLocal awarded special prizes to hackathon participants Sam Steele and Aaron Anderson for their work on the BookLocal platform.