The founder of BitShares talks about the advantages of the POW mechanism

The author Daniel Larimer (BM) is the founder of Bitshares. This is a blog he wrote yesterday. In this blog, he proposed some new understandings and views on POW and a new concept - stake-commitment proof-of-work (SCPOW). I have great respect for everyone who works seriously. BM is a respectable person. I translated his blog not because I agree with all his views. My purpose is to understand some of his ideas through some of his writings, because the emergence and development of any thing are driven by ideas. Bitshares was also born out of BM's ideas, and at this stage it is mainly developed by his ideas. People who have read BM's blog will know that he is a person with feelings. I was also attracted by BM's great vision. In fact, BM is doing really well now. The Bitshares blockchain project is basically the most mature product at this stage. It has a very wide range of application scenarios, but it has not yet been applied. The process of development and growth of any thing is actually a process of continuous trial and error. The decisions made by each of us should not be simply concluded by right or wrong. "Trial and error" is not wrong, but not trying is wrong. We must be patient and tolerant to correctly view the process of trial and error. What we are participating in now is something that no one has ever done before. There are no ready-made templates and routines. There is only constant exploration and trial and error. There is no shortcut. Since we are fortunate enough to join this experiment, we should treat it with a learning mentality. We should argue but not quarrel, and we must not make personal attacks. Doing so is internal consumption and useless. Consider doing something practical for Bitshares within your ability. Salute to every friend in the community who has silently contributed to the cause of digital currency in his own way.

I have always believed that POS (proof-of-stake) is better than POW (proof-of-work). After more than a year of POS practice, today I want to challenge my own beliefs. In the past, I have argued that POW wastes resources, and the same result can be achieved with POS, which is a more cost-effective way. Today I wonder if POW also has some value?

Mandatory Disclaimer

The following content is merely some opinions and views on POW and does not constitute a suggestion for the dilution ratio of BitShares or changes to the voting algorithm.

Workload Definition

If we want to discuss the merits of POW, it can give us a useful definition of workload. In physics, workload is defined as: power * time. W = PT

In general, I prefer to think of work as something you have to pay people. If you don't pay anything then the work is zero, and Bitcoin meets both definitions of POW. If there is no reward, no one will be willing to spend money to make specialized hardware and consume electricity. Therefore, the difficulty of Bitcoin blocks represents a mathematical proof of the amount of labor worth 25BTC that has been paid. The conclusion is that if you pay a fixed investment in a competitive market, market competition will drive the corresponding workload reward to earn back the money.

We can think of Bitcoin's workload (W) as difficulty (D) or hash rate (HP)*10 minutes.

W=D=HP*10m

In the POS system, the only rights we have are also called equity. Imagine that you agree to hold the tokens for a period of time in the future as work. No one will give up liquid or locked funds without getting the expected returns. The value of the returns will therefore be proportional to the amount of work required. Similarly, the value of Bitcoin mining is proportional to the amount of work required.

Based on the understanding of workload and the value of liquidity, we can build a POW system that does not require a large amount of funds to pay for electricity or buy mining hardware. This POW system requires money to be transferred to another person. In this case, the tokens of those who have circulation needs will be diluted, and the money will be transferred to those who firmly hold the tokens. This will delay the short-selling pressure and have the effect of driving the token price up in the short term.

There are two ways to implement POW with stake:

1. Depends on how long you have held the coins in the past.

2. Depends on how long you commit to holding the coins in the future.

I will offer you to consider that what someone did or did not do in the past is a risk-free sunk cost similar to renting a mining rig day after day. In other words, committing to hold tokens for a future time is a high-risk cost similar to buying a mining rig that takes a year to earn back the initial investment. In terms of security, the value of the token in the future is what matters most, which is why the second option is better.

Everybody hates politics

As blockchain becomes more and more complex, politics becomes a big problem. POW has a great feature that it is independent of politics. At the consensus level, its mathematical algorithm is simple, transparent, and completely decentralized. In theory, anyone can join the network and generate blocks.

In fact, POW has become a pay-to-play model, where people who are willing to spend a lot of money join to maintain the network profitably. The security of this system comes from the opportunity cost of mining a specific block. In fact, miners have long-term capital expenditures to maximize their own interests.

Politics is inevitable

We can draw this conclusion from the BitcoinXT debate: politics is inevitable. POW does not eliminate politics, it just changes politics into another form. Instead of weighted voting on the blockchain, it is replaced by voting by mining pools or the Bitcoin Foundation. The operators of the mining farms ultimately decide which fork to support, while users can only decide how much CPU power to use.

Because politics is inevitable, it is important to use direct voting on the blockchain. Bitcoin and Peercoin use voting as a signal for each block produced, but this is not the only and most convenient way to vote. Voting can be done by indicating "coindays" or committed stake transactions. This voting can even include collective voting of block producers, who should produce blocks using DPOS (delegated proof of stake).

The main challenge with Bitcoin and Peercoin’s POW systems is that only knowledgeable people who can afford to run a full node can participate in the voting process. The Bitcoin ecosystem solves this problem through cloud mining, where non-technical people can hire people to mine on their behalf through “voting for a proxy”.

Voter apathy

The challenge we all face in a DPOS model is voter apathy. Many people forget to change their votes after voting, or they choose a proxy to vote for them but forget to follow up. This often results in the incumbent being voted out or a new one being elected. Now voter apathy is a sign that the incentives in the system are not completely balanced.

These are some of the benefits of migrating from DPOS to a DPOW (delegated-proof-of-work) system. When people who have long-term investments in a project have power, they will be motivated to vote because they cannot sell their tokens in the short term. Under the existing DPOS system, most users choose to passively accept the choices made by others, or vote with their feet and sell their tokens if they don't like the results.

When users have the power to "vote without commitment", the whole community starts playing the game of "heads-I-win, tails-you-lose". [English background knowledge] heads I win, tails you lose heads I win, tails you lose; this sentence means "you lose for sure". English word game, a bet method to decide the winner by flipping a coin to see the heads and tails. During the game, a person can only choose one side. If a person chooses heads to win, he must admit defeat if the coin falls tails up. This phrase plays a word game, no matter what the result of the flip, "I" will be the winner. Your winning the election means that a few people will withdraw and then secretly undermine the value of the token.

Eliminate exchange risk

The POW-based equity commitment is good for reducing the weight of centralized exchanges holding a significant percentage of the network. In the BitShares system, about 25% of the equity is in the hands of a few large exchanges. These exchanges choose not to vote, which does not help maintain network security, but the risk still exists that they can control the entire network at any time if they can start voting.

With POW based stake commitments, exchanges will not both vote and guarantee withdrawals on demand. The best case scenario is that exchanges will keep their assets in tiered commitments so that they can maintain withdrawals on demand.

Is POW mode a waste of resources?

It is a real question whether spending a million dollars a day on POW is a waste of resources. To answer this question we need to compare several options. For the purpose of this analysis I am going to assume that the cost of POW is a fixed cost and then see what problems it solves. Bitcoin and other similar currencies that use the POW mechanism solve several problems at the same time:

1. Determine when the next block should be produced.

2. Determine who should produce the next block.

3. This makes the cost of creating sidechains expensive.

4. Select the best blockchain.

5. distributed.

6. Additional benefits (such as primecoin)

The above six points show that mining is a very inefficient way to determine when and who will produce a block. Because it is impossible to reach a consensus in advance on the time and person issues, a lot of work is wasted. Solving the remaining four problems means that it can be used as a means to justify the cost.

The capital expenditure of Bitcoin mining forces a self-reinforcing lock-in mechanism. People commit to the project, invest in equipment and are then forced to sell it to the market, driving long-term price increases in Bitcoin to recoup their costs and make a small profit. Distributing new coins through mining provides an easy way for new users to get them without having to buy them. None of this is without value.

If the BitShares system uses dilution to pay those who produce blocks, it will eventually maintain network security with the same cost and objective proof as Bitcoin.

This will enable the BitShares system to solve problems #3#4#5#6 while retaining the other advantages of BitShares, such as 3-second block generation and no need for a mining pool.

So the question of whether POW is a waste of resources depends only on the additional value associated with the cost. In the case of Bitcoin and Peercoin, the side benefit includes the creation of specialized hardware. In stake-commitment proof-of-work, the side benefit is that a large percentage of tokens removed from circulation can increase the value of tokens currently in circulation. In other words, rather than investing in hardware and electricity outside the ecosystem, money is invested in the ecosystem for long-term support.

When proof of stake commitments are adopted, value flows from those who need to circulate it to those who choose to hold it for the long term. This creates an investment tool rather than just speculation.

Investors vs. Speculators

Sometimes it is useful to distinguish between an investor and a speculator. An investor puts money into an exchange in exchange for equity that may not be touched for several years. This money is directly used to build the company and contribute to its long-term value. A speculator, on the other hand, can trade entirely in derivatives because they only care about price fluctuations. In other words, speculators trade frequently without loyalty. Most people say that speculators provide liquidity, allowing people to enter and exit the market with less volatility.

It is difficult for a startup to place 100% of its outstanding shares on the open market to attract new investors, as the newly created shares will compete with the existing circulating shares. For this reason, most startups choose to tie up investor funds and not allow circulation until they go public or have a similar circulation event.

By diluting speculators and compensating long-term investors, you can have the best of both worlds. If all investors lock in their investment for a considerable period of time, dilution will not affect investors later. In other words, if one investor wants to float then other investors will profit.

Allocation Problem

A new company distributes shares in proportion to the contribution to the company. If two founders contribute equally in the first year, they each own 50% of the shares. If one of them quits in the second year, his shares in the second year should account for 67% of the previous ones, and the remaining 33% will be distributed to those who have contributed.

Based on this theory, it is reasonable for the company to dilute the shares to those who have contributed. The only question is whether the work done is valuable. Take the partners as an example. If the remaining partners dig holes in the second year and call them back, the founding partners will be very crazy because it does not increase the value of the shares.

From this perspective, fees, which allow individuals to pay into a responsible fund for the long-term benefit, are a way to regulate price fluctuations, just as paying miners who receive less and less value as their work increases, provides lasting value.

in conclusion

Through this year's experience in operating DPOS, I have come to the conclusion that some form of POW is actually very valuable and useful for the development of the ecosystem. In the short term, diluting 15% of speculators to compensate long-term investors is very helpful in maintaining network security, building loyalty, and creating a profitable system.