The PoW versus PoS debate

The current big question in the battle between bitcoin and Ethereum, as ETH plans to move from Proof of Work to Proof of Stake, is which works best: PoW or PoS. although it has been an ongoing argument, it has been given some fresh prominence due to the steps Ethereum is taking to speed up the move.

Simon Chandler asks: “While the Ethereum developers have decided that PoS is the best way forward for Ethereum, the question remains as to whether it might offer advantages to Bitcoin, which, as a store of value, has different aims.”

According to Chandler opinion is quite divided in the crypto community: those supporting PoW believe that it is better fro Bitcoin, because it offers greater stability and security. The PoS supporters say that PoS offers similar security, and that it provides more simplicity and scalability, which is very important.

It also has less of an impact on the environment compared with transactions on the Bitcoin blockchain. Pierre Rochard commenting on Twitter wrote, “When Ethereum switches from proof-of-work mining to proof-of-stake, they’re going to push the “green” anti-Bitcoin narrative *hard*. It’s going to be well funded and highly coordinated. If you thought the 2017 scaling debate was ugly, this is going to be much much nastier.” Needless to say, the tweet brought up a lot of differing responses.

Chandler contacted a confirmed Bitcoiner who responded by saying the PoW vs. PoS debate isn’t even worth addressing, adding, “I don’t use shitcoins.” Those who are less partisan see both Proofs as having their own strengths and weaknesses, although it would seem ther is a consensus that PoW is better for Bitcoin.

The main ‘weakness’ with the PoS model is that it is “theoretically more prone to centralization and has the inherent security issue of using the native tokens of a blockchain to decide the future of those tokens or the blockchain,” according to Mike Collyer, CEO at Foundry, a crypto mining finance company. And even those who support Ethereum acknowledge that PoW has its strengths. Lex Sokolin, co-head at Ethereum-focused major blockchain company ConsenSys said, “One of the strongest advantages of proof of work is that it has worked as the chassis for cryptographic security for over 10 years, and now secures a trillion in value. It is technically and economically complex, which plays a role in attracting specialized mining companies to the work of maintaining the network.”

However, Sokolin also said, “Proof of stake is an easier-to-understand system, which allows easier participation through the staking of capital. It is also able to achieve similar security outcomes without the electricity consumption of the proof of work mechanism, and has been proven to work through a number of smaller but functional crypto economic networks.” He also explained why PoS is better for the Ethereum network, which is aiming to provide the digital infrastructure for a future decentralized/crypto-based financial system. “The blockchain-based economic activity that we see is now far above and beyond moving one type of value around on a single protocol. Rather, we see software executed by a global network across payments, lending, banking, investing, and insurance substitutes,” Sokolin said, and stated that this is the main reason Ethereum needs to move to PoS.  But it seems that this is a debate that will rage on in the crypto community for some time to come.

Our Bitcoin price obsession ignores its real value

As Bitcoin hovers around $50,000, expert thoughts have moved on to $100,000 as if this is Bitcoin’s next great milestone. But, as Tim Denning observes, this obsession with Bitcoin’s value to owners really misses the point.

Sure, if you bought Bitcoin a few years back, you’ll be delighted if it hits $100,000, but this Is not the end game of the leading crytocurrency. As Denning says: “Bitcoin isn’t an investment. Bitcoin isn’t a get-rich-quick scheme. Bitcoin is a different way of thinking.”

What we should be focusing on is mainstream adoption regardless of the daily price. Because when that happens it will signal that society has moved from a centralised model to a decentralised one. Bitcoin has no country, no government, and no office. There is no single owner of Bitcoin, and if you don’t like Bitcoin, it doesn’t care, because it’s just a algorithm that couldn’t care less about your criticisms.

Instead, Bitcoin is a quiet protest about inequality. It is above all honest. It is a true democracy.

The existing financial system excludes millions of people, and people want that to change, so they are waking up to the ways in which digital assets, such as Bitcoin and Litecoin, which are on blockchains designed for payments, are offering financial inclusion worldwide. That’s why so many people are talking about the topic and coming around to the idea of cryptocurrencies.

Let’s remember that we are still at the early evolutionary stage of Bitcoin and other cryptocurrencies. A lot of things could happen to any one of them. Denning even suggests it could get wiped out. How? Who knows, but such a thing has happened to tech companies in the past.

In a way, Bitcoin’s birth was an accident. Its mysterious creator/s were inspired as banking plunged the world into financial chaos. Nobody outside of the small community of crypto fans paid much attention to it until 2017 when it hit its first ATH. Governments could have banned it then, but didn’t, and it would be pretty much impossible for them to ban it now. The arrival of institutions in Bitcoin trading has protected the asset, besides the protest at such a move would be truly global, and probably led by Elon Musk.

The Bitcoin price barely matters at all: more importantly, Bitcoin is an idea that challenges the social view of ownership. Denning says: “When ownership changes, everything changes. Be open to the inevitable change coming. That’s the point of Bitcoin that seems to be missed.”

Private finance is taking crypto mainstream

Last year was a turning point for cryptocurrencies. It turned blockchain from being a space for geeks into one where governments, institutions and retail traders now had a seat at the table. The 2021 GameStop story also played a major role in a change of perception.

Most interestingly, as Alex Shipp explains in an article for Cointelegraph, “cryptography and its primary feature, privacy, have been relegated from the front-and-center role they once played as cryptocurrency’s main attractions.” This has been replaced by the enticements of DeFi apps that offer “enhanced liquidity, yield farming and unprecedented economic models.”

Will 2021 be DeFi’s big year?

DeFI has become the Shangri-La of cryptocurrency it seems. Its allure is pervasive across the cryptocurrency landscape, with investors enchanted by its “double-digit APRs and seamless user experience,” which holds better long-term prospects for them than the “subtle, systemic benefits conferred by a privacy-centric exchange.”

Privacy is no longer the primary reason for entering the crypto space. Moreover, as the perceived benefits of DeFi grow, consumers are more than happy to make trade-offs to keep it growing. They really don’t want to forfeit these for the sake of privacy.

DeFi is the current Disruptor-in-chief within an already disruptive community. Now we can expect another to emerge – PriFi, or Private Finance. This, says Shipp, “brings privacy back on-stage by bringing it back on-chain — that is, into the Ethereum and Polkadot ecosystems — to integrate privacy into a robust network of rapidly evolving applications of decentralized finance.”

It’s significant because until now, “privacy solutions have remained siloed on standalone, privacy-oriented blockchains, isolated from the ever-expanding features of the DeFi landscape.” This ‘movement’ wants users to be able to have access to privacy without any trade-offs. Shipp says it could not have come at a more critical moment. Why?

The answer is GameStop. I won’t reprise the story, because I’m sure you know it. However, one critical factor is that after the hedge funds got caught over-leveraged in short positions, centralized companies, such as Robinhood, Charles Schwab, TD Ameritrade and others, restricted trading “thereby protecting the remaining capital of the exposed funds.”

This caused outrage amongst the retail investors, because these companies had essential hung them out to dry. What they learnt was, as Shipp says, “For retailers in 2021, that has meant awakening to a pair of sobering realizations: that centralized markets only remain free as long as they serve centralized powers and that surveillance is a primary supporting feature employed by such power structures.”

The trading restrictions placed on the retail traders highlighted the need for “a new line of emergent derivatives: fully private, on-chain synthetic assets whose values are securely pegged to traditional financial instruments — stocks, commodities, bonds, insurance products and more.”

The crypto space is opening up in ways the first enthusiasts probably never dreamt of, and while it may not suit purists, it is driven by the demands of the market. You could say everything has changed, and nothing has changed – depending on your perception.

Will the Year of the Ox be bullish?

This year the Chinese New Year is on 12th February and traditionally this event appears to coincide with a ‘Bitcoin dump’ and resulting price drop. However, analysts believe that this year will be quite different, simply because the “impact of retail traders in China has been reduced,” Coindesk reports.

Instead, in recent months, institutional investors in the USA and Europe have been the main drivers of the current bull run, whereas in 2017, Asian retail investors were the driving force.

According to Muyao Shen Chinese language social media platforms have been discussing the possibility that the bull run might have to pause over the New Year holidays, and concerns about Bitcoin have been reinforced by news showing that some Chinese miners sold their Bitcoin in January. There is speculation that this sell-off might have been prompted by the miners anticipating a bearish sentiment arising around the Year of the Ox festivities, as traditionally “Chinese traders tend to withdraw their crypto assets and cash out,” Alex Zuo, vice president of China-based crypto wallet Cobo, told CoinDesk.

The Chinese tradition of giving money to family and friends at New Year is well established. Felix Wang, managing director and partner of investment research firm Hedgeye Risk’s China business explained, “They need cash so they need to liquidate some of their financial holdings, and that could lead to a little bit of pressure in some of the financial markets.”

There is also a need for liquidity, as businesses, including over-the-counter service and crypto trading desks, are closed for a week. Data collected over the past two Chinese New Years shows that trading volume on Binance, Huobi and OKEx were down during the holiday period, and data from TradingView on Binance’s bitcoin/USDT pair shows “in each of the past three years, bitcoin’s price went down before the Chinese New Year.”

Significantly, whilst the Bitcoin price drop at the holiday time was 37.2% in 2018, in 2019 and 2020, it was only 8.3% and 10.5% respectively.

But, as this is the Year of the Ox, perhaps a more bullish sentiment will be sustained with the majority of Chinese traders and investors betting on a positive market trend and so holding on to their Bitcoin.