Ergo: Why Proof of Work?

Is Proof of Work Dead?

Ergo is a proof of work blockchain. The most common question an investor will have regarding proof of work is simply… Why? I thought Ethereum was abandoning proof of work? Isn’t proof of work dead? It is interesting to point out that Alex Churpenoy, the lead developer of Ergo, used to be a proof of stake developer.

If we rolled back the clock to 2015 and travel to San Francisco, we would find Alex working as a Proof of Stake cryptocurrency developer, and almost everyone in crypto was very much anti Proof of Stake. Fast forward to 2021, and market sentiment has shifted towards Proof of Stake, while Alex Churpenoy is now passionate about Proof of Work’s future. Perhaps he is simply a contrarian, or maybe he is onto something.

When you have an industry veteran who is somewhat of an outlier from the general consensus, you always find an interesting perspective.

So why proof of work?

Proof of Work itself without any features is a great machine that can develop an economy behind it. Ergo’s mission is to optimize proof of work while advancing the new extended UTXO model. The goal is to push the boundaries of what is possible with Proof of Work.

Proof of Work can evolve. However, progress in this direction has been slow as the focus of most proof of work projects has been creating the network effect and developing the economy on-chain versus evolving the potential of proof of work itself.

The technology behind Proof of Work has not been fully maximized. Rather past proof of work blockchains have focused their attention on improving the tokenomics, on-chain use cases, and Proof of Work’s market value.

Not maximizing Proof of Work has led to a lag in the evolution and growth of the technology’s underlying development. When a company or industry focuses solely on market adoption and forgets about innovation, it creates a position where innovators will capitalize on that evolutionary stagnation. This has been the case with Proof of Work.

Proof of Stake is not necessarily “better” for providing scalability. Proof of stake is currently more developed and now leads. However, there are known constructions to meet network bandwidth limits (Bitcoin-NG, Flux, NC-Max), and the overall consensus overhead in Proof of Work is no worse than in Proof of Stake. Proof of Work is underdeveloped. Ergo is trying to change that.

The underlying tokens are different by meaning also. In Proof of Work, they’re like commodities (digital gold). In Proof of Stake, tokens are more like shares of a decentralized corporation (also paying dividends via staking).

Proof of Work isn’t only about mining. Proof of Work protocols are widely studied, have high-security guarantees. They are friendly to light clients with full node security, additionally extended UTXOs are more friendly to off-chain and privacy protocols.

Ergo believes decentralization of services via light nodes will be the key to success, and it is hard to find light nodes with the same security properties in a Proof of Stake design. What does that mean, mobile lite nodes with full Proof of Work security. Given time, wearables may carry the hardware capacity to host a lite client with the same security properties. That my friends would be a game changer for anyone interested in the best security practices.

There have been notable advancements in Proof of Stake’s security properties, notably Ouroboros (Cardano) and Algorand have taken Proof of Stake to the new levels. Ergo is actively working to advance the underlying technology of Proof of Work.

Ergo and Cardano share a similar extended UTXO model, and both chains will build on the strength of their respective networks. They plan to collaborate and improve the extended UTXO model.

Questioning Both Paths Moving Forward: Proof of Stake

This is not intended to be FUD. Advancements require recognizing weaknesses. What are the potential shortcomings involved in both Proof of Stake and Proof of Work?

In Proof of Stake, the security model, the security model itself seems to be contradicted or weakened by the system’s velocity of tokens.

A token that is in use is not in place, staking, securing the system.

A token that is staked is not beneficial for the overall token velocity within the system.

These two mechanisms, liquidity and security, seem to contradict each other.

As tokens that are unstaked and actively circulating throughout the dapp ecosystem, it seems to weaken the system’s underlying security model.

Perhaps there may be some mechanism to collateralize staked tokens; however, this creates multiple synthetic calls on a single asset. It appears to me as a double-dip of sorts. In the event of market instability, will tokens that are staked and collateralized be “margin called” from their role in securing the stake pool? What are the security implications of this?

There also seems to be an issue that could arise as Defi yields in Dapps potentially offer a greater incentive than staking rewards. Will tokens remain staked, earning a smaller profit simply for the benefit of the network’s security? This seems contrary to the logic of maximizing returns.

The last concern I have long term is the rate of token inflation in uncapped projects. If the yield mechanism has to compete with Dapp rates for security purposes, will the rate of inflation be?

What is the historical rate of inflation in a healthy economy? This question’s metric is quite hard to get a truly accurate answer for as inputs vary globally and governments change their models periodically. However, a high inflation rate is a sign of risk.

Yes, in crypto land, high inflation can mean more significant returns from staking. However, benefiting from inflation is not always a sign of retaining purchasing power.

Millions of crypto enthusiasts have joined since the recent bull market began. Yet, the high inflationary forces in different market conditions may produce varied results. The high emission rate might end up creating additional downward pressure as users sell staking rewards.

While theoretical, these pose potential challenges to the honest mining majority that proof of work networks offers as a security mechanism.

There seem to be potential inherent advantages in not a design in which the network’s security and token velocity are conflicted.

A different area of concern I have underlying Proof of Stake is the mechanism of identity. If I look at a Proof of Stake as a decentralized corporation that incorporates identity and lending practices, the natural competitor to this service is the banking sector. While I would much rather use a decentralized system, I cannot disregard the financial services sector’s regulatory power globally. As central bank digital currencies develop, governments are the primary competitor to Proof of Stake systems and services.

Questioning Both Paths Moving Forward: Proof of Work

Proof of Work is not without its disadvantages. Proof of Work’s primary weakness is singular monopolistic powers that control large percentages of a network’s hash rate. This does create the potential for a small cabal of miners to band together and create security issues. The workaround is memory-hardened proof of work algorithms that are ASIC resistant. However, the reality is we live in a world of advancing technology, so this will always be a cat and mouse game. As ASICs improve, so must the memory hardening.

There is also the potential for FPGAs to act as an intermediate disruptive force. The benefits at the moment that are preventing FPGA’s from acting as a disruptive force are their costs. They are also notoriously fragile to overheating. Perhaps FPGAs will act as a disruptive force, or maybe market factors will bring them into the mainstream so the average users can pool and compete with larger outfits.

The other concern that is brought up with proof of work is the energy intensity. Living in a cold climate, I can attest that running electronics in the lower level reduces the amount of energy used for basic heating; however, proof of work can be power-hungry at an industrial scale.

As technology advances, it becomes more efficient. The watt/hash has been continuously improving and will most likely continue to do so. Large Proof of Work infrastructure is most profitable by finding the lowest electricity rate, as this lowers a miner’s cost of expenses. Large mining farms are most likely to form in jurisdictions that produce excess amounts of electricity, leading to favorable cost per watt.

The first principle of conservatism is to maximize the efficiency of what you produce. Our world as a whole is very energy inefficient. The amount of electricity, heat, and food produced often has a very high level of waste.

Proof of Work is only 12 years old. As computer technology improves, the watt/hash rate will continue to improve. The energy efficiency of electricity production and transmission is on a similar path of advancement. Proof of Stake is younger. Network challenges will come. The underlying technology will improve.

The greatest value of Proof of Work, in my opinion, is the security and privacy aspects. These are core to the initial foundation of the cypherpunk movement.

The security and privacy aspects of Proof of Work will continuously be under attack from multiple vectors. Maintaining and evolving these two elements are essential for the prolonged adoption of Proof of Work. Regulatory bodies will work to inhibit the growth of technology that circumvents their control. This may include attempts to restrict access of users to networks and tokens accessibility in specific markets. To remain resilient, privacy features must continually advance, and the decentralization of exchanges needs to continue.

Looking Forward with Perspective

Both types of distributed ledger technology are in their infancy.

The analogy I use in my thinking is the similarity between electric and internal combustion engines. At this point, each system is over 100 years old. Both have been redesigned multiple times. If we went back in time, I am sure you would find intelligent individuals who were completely convinced that there would only be one way forward.

The reality is Proof of Work and Proof of stake are both evolving technologies. Both network designs are nowhere near their maximum potential as a technology. Do both have strengths? Yes. Do both have weaknesses? Yes. The key is to iterate, improve, grow and evolve.

You also had a segment of the population who looked at the advancement in motor vehicles and were convinced that society would never abandon the horse. After all, motor vehicles do not reproduce, and they do not have a natural healing mechanism. Horses can find fuel themselves. Some logic could conclude that horses are better than motor vehicles.

Today we see a similar attitude regarding the benefits of having transactional data shifting to an electronic and secure form. When transactional data was physical, metals’ longevity as a store of value and mechanism of account, as the world continues to advance into the digital age, this may be less attractive. We will see.

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