Our take on the POW vs POS show down in Crypto News Asia on Aug 6, 2018.
Even before Bitmain’s multibillion dollar public listing on the Hong Kong market, some investors are already pouring money into its pre-IPO deal. And why not.
According to one report, Bitmain hit a profit of US$1bil (unaudited) in the first quarter of FY2018 alone, close to the US$1.2bil it achieved for 2017. The report added that Bitmain is likely to hit a profit of up to US$3bil in FY2018.
Still, no one is disputing that Bitmain is making a lot of money doing two things it does well.
One from the design and sales of its specialised, cryptocurrency-mining, computer chip hardware. (Bitmain is the dominant maker of these application-specific integrated circuits or ASIC chips.) And two from running its market dominating cryptocurrency mining pools, such as BTC.com and AntPool.
The question is, is this a sustainable business model?
Bitmain’s mining prowess is based on the Proof of Work (PoW) consensus algorithm, which is how Bitcoin is mined until today.
With Bitmain said to be controlling significant amounts of the hash rate or the mining capacity for bitcoin, there is a fear that the network has become centralised. If a group controls more than 51% of the hash rate of a network, they could exert significant power over that entire blockchain.
This flies in the face of the underlying decentralisation philosophy of bitcoin and blockchain technology.
Hence is Bitcoin’s security at risk? The jury is still out on this.
For crypto evangelist Miko Matsumura, hardware can never totally undermine Bitcoin.
“The thing to note is that the software (or the underlying blockchain technology) is open source. If the community is fearful that there was a chance of a 51% attack, the software will be forked. Software moves faster than hardware. So software will always win,” he tells CryptoNewsAsia.
But Jeff McDonald, an advisor to NEM, and its former vice president, says the PoW algorithm had worked well as a proof of concept but faces challenges for real world needs.
“As far as security goes, Bitcoin’s PoW has proven to be quite effective and was good at bootstrapping the network. But as far as making the network efficient, I think it is not so good. Also, any other coin that isn’t Bitcoin but is using the same mining algorithm, is in great danger of its security being compromised. While PoW is a good proof of concept and does work for a few coins, realistically, it is not able to help the industry scale as a whole.”
Blockchain developer Caleb Lau of Celebrus Advisory, however, opines that while it is clear that a fork will be considered by the community if a threat is envisaged, the discussion around that would be an “arduous” one.
“You have to remember that Bitmain is a significant stakeholder in the ecosystem and will safeguard its own interests. In the discussion, there will be arguments that Bitmain has no malicious intent despite their large hash rate,” he says.
Caleb Lau: “In the discussion, there will be arguments that Bitmain has no malicious intent despite their large hash rate”
Lau points out that any one party does not even need to have a 51% hash rate to be a potential threat.
“Consensus algorithm designs have to consider an oligopolistic market, where cartels coordinate with one another, in a way that the majority is not incentivised to censor the minority nor attack the network as they would stand to lose more than they would gain”.
Proof of Stake versus Proof of Work
Enter the Proof of Stake (PoS) consensus algorithm. With the complications that have arisen from PoW, namely security fears, high mining costs and consumption of electricity, the PoS algorithm emerged. It was first created back in 2012 and has gone through a number of improvements by various parties.
In a nutshell, instead of building blocks through work output, the creator of a block in a PoS situation works in accordance to the amount of stake he already holds.
A London-based venture capitalist, who reckons that PoS “is the future,” explains the differences well.
“One of the main advantages of staking is that it eliminates the need to invest in expensive mining hardware. You just need to buy the coins and hold them in your wallet. The next thing to do is to sit back and watch as your the balance in your wallet grows.”
But he cautions that staking has its drawbacks. “Your coins will be locked up for the period of the stake. While this is not a problem when the coin is growing in value, it can lead to massive losses in a bear run. The amount you earn may not be enough to cover the losses that you incur from your coin’s declining value.”
Back to the prospects of Bitmain. The debate rages on if new protocols and forks in existing ones will limit the reach of Bitmain’s ASIC-type mining equipment and pools.
As blockchain developer and trainer Harpreet Singh Maan puts it, going forward the market for ASICs will be uncertain. “I feel there will be a new market of blockchain based servers (for processing power) and storage providers. Maybe this is what is getting companies like AWS (Amazon Web Services), Microsoft, & IBM interested in the blockchain space”.
Hence investors rushing to pile into Bitmain’s equity have to take a hard look at these issues to determine if the company they are investing in will continue to show the stellar growth it has been experiencing.