Too Much at Stake — Why Proof of Work really sucks.
Proof of work is often pitched by its proponents as the only “right” blockchain consensus algorithm, based on “real” economic incentives. Spending money on hardware and electricity the miners have “skin in the game”, they have a finite resource and they have to use it wisely in order to maximize their profits. Conversely, competing consensus algorithm through Proof-of-stake is deemed insecure, since miners don’t actually spend anything tangible, all they need to have is some coins with not so-well-defined value.
But if we look a little deeper we understand that the same argument applies to Proof of Work.
After all the miners are paid for their hard labor by tokens with highly volatile value as well. Miners should be consistently in profit, that is all their costs has to be covered through the value of the tokens paid to them for the upkeep of the network. This very simple point is not so clear in bull markets, but becomes quite poignant in bear markets situation, when miners suddenly realize that their work is basically unpaid for.
It is quite important that there’s no economic mechanism for miners to obtain consistent profits. No algorithm guarantees that, economic incentives existing in Bitcoin do not guarantee that at all. It basically makes the whole mining business speculative in good times and altruistic in bad.
I would call it “Too much at stake” problem, and I think it can be much worse than “Nothing at stake” of POS. At least in POS it can be dealt with though protocol enhancements, in POW it’s hard to think of an algorithm that would make sure miners make money consistently.
It reality economic incentives of POW mining are vague and inconsistent. Fluctuations in total hash network power caused by changing profitability due to token price volatility can pose a serious security risk, all of a sudden 51% attack become possible in a network that was healthy just a while ago.
Probably there are avenues of fighting this, for example paying miners variable token amounts tied to token price, through using oracles and actual token market price. But it is quite obvious that Proof-of-work has its own skeletons in the closet, they are just biding their time to come out.
