They say that only PoW works because electricity is consumed during making the consensus. PoS has no anchor in the physical world and therefore cannot work. We will explain that Cardano has the best anchor it can have.
Basic principles of PoW and PoS
The network consensus of any blockchain network must ensure 2 key functions: security and decentralization. Both must be sustainable over the long term and scale with adoption. The quality of these features should be maintained over time, or ideally, grow with more users.
In order to create a PoW block, it is necessary to provide proof of solving a computationally intensive cryptographic task. Miners in the bitcoin network must purchase special hardware worth around $5,000 that is capable of solving the task. This activity consumes a relatively large amount of electricity.
All the miners compete with each other to see who can solve the task first, as only the winner gets the reward. In order to have a chance to get the reward, the individual miners must join together and split the block reward. They, therefore, join together in pools.
The basic principle of the Cardano network consensus is essentially similar. Those interested in participating in the network consensus must purchase ADA coins. They can then either run their own pool or delegate coins to their chosen pool. Individual pools do not compete with each other to see who can create a block in a given slot. Every 20 seconds, the network chooses a slot leader, to which it assigns the right to create a new block. The basis for the draw is the total stakes of all registered pools in the network.
Both PoS and PoW are systems in which the right to create a block is delegated to pools.
Finding an anchor in the physical world
In a PoW network, miners have to buy physical equipment and pay the energy costs. Both are physical resources. That’s why Bitcoin is said to have an anchor in the physical world. In the Cardano network, you just need to own ADA coins that are digital. They say that coins are not an anchor in the physical world.
First of all, it is important to note that digital coins have a market value because they are digitally scarce. This is true for both ADA and BTC coins. The physical anchor can technically be considered the capital invested in the purchase of the coins. It makes no difference to an individual if they buy a miner for $10,000 and pay the energy costs or buy digital coins. The buyer had to acquire the capital to make the purchase somehow, usually through their own physical or mental labor. The invested capital represents the skin in the game.
The difference, of course, is that the ADA holder holds his stake forever and cannot lose it. In mining, energy is constantly being consumed, so miners have to continually cover costs from the rewards they earn. Is that a fundamental difference? It’s definitely some extra worry, and if a more efficient miner comes along, it can drive others out of business.
There is nearly no fundamental difference between staking and mining. Unless the miner is displaced by competition, it still maintains approximately the same stake in the network. As the skin in the game is concerned, both the miner and delegator have bought their stake for $10,000. This is crucial. The miner spends, say, $1,000 on energy in a given period, but gets approximately a little more back in rewards. Let’s say $1,050. $50 is profit. The ADA holder also gets a reward for staking. In both cases, the reward can be used as an investment to expand the business.
It is not difficult for a miner to turn on the ASIC hardware and pay the energy costs once a month. The only thing to worry about is monitoring the value of BTC, as this will determine the profitability of the business. Below we will show that staking reward is not for free as many think.
Some may argue that the physical anchor is energy, not capital. But what is the difference between $10,000 worth of energy that you can sell on the market or $10,000 that you have in your wallet? From our perspective, none. If you have 10,000 USD worth of ADA coins, you can use them to buy energy or USD. Attackers are deterred by the high cost of an attack and the fact that they are actually attacking their own property. This is true for both PoS and PoW.
One could also argue that the history of the blockchain is protected by the consumed energy and to possibly overwrite the old blocks, the energy would have to be consumed again. That is a fair argument. Try overwriting Cardano’s history. It can’t be done because all stakeholders have skin in the game and it forces them to behave responsibly. An attacker would have to get private keys from a large portion of the pool operators, who would have to intentionally keep them. The other option is a brute force attack, which is a very computationally expensive process, say similar to PoW.
If you think about it, people can be considered the physical anchor. They’re the people who run the ASIC miner or hold the ADA coins. People make decisions about whether they want to participate in the decentralization of the network and to which specific pool they delegate their stake (coins or hash rate). In our case, a stake worth $10,000. The presence of energy in the case of PoW seems redundant to us.
If you think about the security and decentralization of networks, you will see that it is primarily about ensuring that decision-making power is distributed among as many independent actors as possible. People are important. The people are the ones who hold the stake. The greater the number of honest people holding more than half the stakes in the network, the more decentralized and secure the network will be.
If a single entity holds a majority stake, the network will be centralized, but it can be secure if the holder behaves honestly. It doesn’t matter if we’re talking about ADA coins or hash rates. The principle is the same.
Decentralization is more important than the nature of the resource on which decentralization is built.
Critics of the PoS claim that the reward is free. It is not. Staking is active work in which delegators supervise the work of pools in their own interest. Delegators only get rewarded if their chosen pool produces blocks. Economic incentives work very well in PoS. It is in the interest of the pool operators to get rewarded, so they are forced to perform well. Their stake is reinforced by delegated coins. All delegators supervise the pools and can delegate coins elsewhere at any time. I dare say that PoW miners are not as active in controlling pools as ADA stakeholders. This is because randomness plays a bigger role in PoW networks. This is another reason why I say that humans are the physical anchor.
In a PoS network like Cardano, coin holders have direct control over the consensus. This is not the case in PoW networks.
Ignore the nature of the resource and focus on the essentials
Now let’s forget what I wrote above. Let’s compare hash rate as a physical resource and digital coins as a digital resource. What we should be most interested in is not the nature of the resource, but the effect of network consensus on the key properties mentioned above and their long-term sustainability. In other words, more important is how many people can afford to join the network consensus, how incentives are set, whether honest participants can easily maintain a majority, and things like this.
The energy dependence of PoW is considered an advantage. Let’s focus on the disadvantages. Energy is a renewable resource, so it is not scarce, but it is expensive.
The downside is that Bitcoin must have a sufficient budget to cover the energy costs. The security of the Bitcoin network is thus directly dependent on the market value of BTC coins. When the value of BTC increases, miners can buy more energy. Unfortunately, the reverse is also true, so as the value of BTC coins decreases, so does security. As the block subsidy decreases every 4 years due to the halving event, the security budget also decreases. Compensating the budget through transaction fees is uncertain.
Energy has different values in different countries, which economically affects people’s ability to participate in the decentralization of Bitcoin. People can only participate if it is profitable. This is another disadvantage because ideally, everyone who is interested should participate in decentralization, even with little capital. With Bitcoin, we can see the gradual centralization of mining in the hands of big business. People are put off by the high upfront costs and the riskiness of mining.
ADA coins are a digitally scarce non-renewable resource and have a market value.
Cardano is protected by a precious resource, by its own coins. The advantage is that you only need a small amount of capital to participate in the decentralization of the network. Cardano network security grows with decentralization. Decentralization grows with the distribution of coins among stakeholders. A digital resource performs a better service than a physical resource in terms of key properties. In addition, the cost of running the Cardano network is 99.5% lower than Bitcoin, so the network will not have as pressing a problem with depleting the security budget.
With higher network adoption, the value of ADA coins is likely to grow, and with it, protection against the 51% attack may also grow. Currently, the cost of acquiring the resource needed for the 51% attack is higher for Cardano than for Bitcoin. The 51% attack on Cardano is more expensive but can be technically easier since the attacker does not need a large amount of hardware. Bitcoin is protected by a sort of extra physical layer. However, this advantage will diminish over time as more and more efficient hardware is developed. Technological progress essentially reduces the advantage of relying on hardware.
An attacker on a PoW network needs to pay for the energy and hardware. In Cardano’s case, he has to convince the stakeholders to sell him coins. They, even with the increasing value of ADA coins, may not be willing to sell as they may want to continue staking. Thus, they can only sell rewards. The attacker again overcomes the physical resource, namely the minds of the people holding their stakes. You could say that Cardano is protected the digital scarcity of coins that people may not be willing to sell.
Put simply, Cardano is protected by greed, and Bitcoin is protected by energy. Both can be considered physical anchors.
Conclusion
Both Cardano and Bitcoin are maintained by humans, and in order to get a reward from the networks, they have to buy the necessary resource. The value of coins is affected by demand. In the digital world, coins have no value. To be more precise, the network itself does not know what the coins are worth to people. People live in the physical world and make economic decisions that are beneficial to them. Holding ADA coins is a choice. Cardano has an anchor in the physical world even though it may not be obvious at first glance.
BTC holders do not actively protect the network. Demand increases the price of coins and this increases the security budget of Bitcoin. This is also true for ADA coins, except that Cardano uses coins directly for decentralization and security. ADA holders need to think more about where they hold their coins and what pool they delegate them to. They need to actively supervise the pools and delegate elsewhere if necessary.
BTC holders rely on the miners and pool operators to do their job well, but they do not have direct control over them. ADA holders have direct control over the network. I dare say the ADA holders are the physical anchor. People still live in the physical world.
This article was prepared by Cardanians with support from Cexplorer.
Read the article: Myth busting: Cardano has no anchor in the physical world | Cardano Explorer