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Proof of Work Vs Proof of Stake

Crypto's environmental concerns have become too significant to ignore. TThe industry must abandon the economically inefficient proof of work model in favour of proof of stake if it is to survive

The crypto world is in the middle of a battle. The Bitcoin currency of the internet, mined through proof of work, is considered by some to be the only actual blockchain currency. As opposed to proof of work by a community, proof of stake is seen as more environmentally friendly.

Founder of Strike, a lightning network payment platform that powers El Salvador's use of Bitcoin, Jack Mallers is an ardent proponent of proof of work. Following Sam Bankman-Fried's criticism of Bitcoin as a payment system, he spoke with Insider.

Digital assets are facing significant challenges based on these competing ideas. Crypto's environmental concerns have become too significant to ignore. Rostin Behnam, Chairman of the Commodity Futures Trading Commission, and crypto billionaire Chris Larsen think the industry must abandon the economically inefficient proof of work model in favour of proof of stake if it is to survive. Mallers, however, disagrees. He said, "Bitcoin's proof of work creates an innovative, inclusive, and iterative method of digitally transmitting value."

Crisis of Verification

How blocks on a blockchain are verified is at the center of the proof-of-work and proof-of-stake drama. A computer creates a new block as proof of work by solving complex mathematical problems. Proof of stake involves miners, known as validators, adding new blocks to a blockchain. An owner of a proof-of-stake network stakes a large amount of their cryptocurrency and receives newly mined cryptocurrency to validate new blocks.

Proof of stake technology is more environmentally friendly than proof of work due to its significantly lower carbon footprint. Mining new Bitcoin requires significantly more computational power due to the decentralized nature of proof-of-work. Tesla CEO, Elon Musk, for example, sees this as wasteful even if he is an enthusiastic supporter of crypto.

The CEO of FTX, billionaire Sam Bankman-Fried, recently made headlines saying that, “Bitcoin isn't a payment network because proof of work is "expensive and environmentally destructive." According to Bankman-Fried, proof of stake networks are most efficient, lightweight, and less energy-consuming.

Even though Mallers' company, Strike, is one of the largest Bitcoin payment processors globally, he disagreed with Bankman-Fried's assessment of Bitcoin's viability as a payment platform. He called it either "severely incompetent or maliciously misleading." Taking advantage of Bitcoin's lightning network actively, Strike has partnerships with companies such as Shopify and countries such as El Salvador. Bitcoin's proof of work network, according to Mallers, is the "only true type of blockchain."

True Decentralization

According to Mallers, "one of the major benefits of proof of work is decentralization." Mallers added that proof-of-stake validation was so far removed from the ethos of decentralized blockchain technology that it should be treated as a security similar to Tesla or Apple stock. Mallers went as far as to suggest that proof of stake does not solve any of the same "real-world problems" of decentralizing wealth creation that Satoshi envisioned.

The Lightning Network

Bankman-Fried's claim that Bitcoin's base layer is not a fast payment method was accepted. According to him, layer 1 of Bitcoin's blockchain is not optimized for speed or payments, but instead aims to be a digital instrument that is accessible to the world, similar to gold.

However, they disagree on this, limiting Bitcoin's ability to be used as a payments platform. Bill Mallers believes that protocols that operate on top of Bitcoin's original codebase - called "layer two solutions" can make Bitcoin a viable digital currency. As proof that Bitcoin allows value to be transferred in milliseconds, he specifically pointed to the lightning network, a layer two protocol that Strike uses.

Price of Creation

Bill Mallers' final argument in favor of proof of work is that Bitcoin derives its value from the high economic and environmental costs associated with its creation. "Something must be created for it to have value. If creating money were free, there would be a lot of it. It would be hyperinflated, it would be politicized, and it would have no value because it is scarce, predictable, and hard to produce," he said. Additionally, he noted that Bitcoin's high environmental costs ought to be considered in context. Bitcoin miners deliberately find "abundant, low-cost energy," and this poses an environmental risk to Bitcoin that is far greater than its actual cost.