Too much of a good thing - The problem of value on the internet

When asked to list some of the greatest inventions in recent human memory, it is likely that the internet is somewhere near the top of your list. Not purely a useful tool for our everyday activities, but also a great facilitator of entrepreneurial innovation, the creation of the internet has catalysed a huge wave of secondary effects that have aided in our productivity. This can be aptly evidenced by simply thinking of all the largest companies in the world today, and how many of them are directly downstream of the internet inspired tech boom.

One of the great perks of the internet is that is eradicated the marginal cost of distributing information, enabling resources to be moved globally at a negligible price. The sharing of books, songs, apps, pictures and movies was previously dependent on some set of physical resources, but could now be sent by anyone to anyone digitally, with next to no startup cost.

The abundance of information available on the internet is the feature that makes it an important tool for the proliferation of knowledge, but this very same “abundance” raises issues of scarcity in the digital realm. As the pessimistic Murphy’s law will tell you, “every solution breeds new problems”, and the problems born from the absence of digital scarcity touch on the basic laws of supply and demand. ¹

When the supply of any given good increases, the subsequent value of the good falls, as it becomes much easier for the customer to get access to it. The friction-less nature of supplying resources on the internet poses significant challenges, as it is difficult to ensure that any product/content created by one entity, is not distributed and sold by another, preventing the entrepreneur from reaping the rewards of the time and energy expended on making the product. The lack of physical restrictions on the internet, allows for an identical product (photo, app, video) to exist on my computer and yours, without either of our experiences with the product being altered, and at no cost. The potential supply of digital products is limitless, not restricted by any resource that depletes as we use more of it, thus making it extremely challenging to impose real value on products on the internet.

Solutions have existed for some time to circumvent the problem of digital abundance, but all were previously reliant on a centralised authority with monopoly over distribution. Lyn Alden identifies software license keys and cloud-based accounts as methods to prevent unauthorised use of online products, with these being effective on a company to company basis. ² Although viable solutions to preventing digital piracy of specific products, both of these mechanisms are contingent on centralised authority, thus are vulnerable to censorship, monopolisation and single point of failure attacks. Centralised control is not an issue for a software company, as it is likely necessary for them to have full autonomy over their product, but it is a significant problem when attempting to create digital money.

Any one organisation that attempted to act as authority over a digital currency pre-bitcoin was exposed to a number of legal, financial and operational issues. The two most prominent attempts were Digicash and e-Gold, both of which were hindered through centralisation. Both susceptible to single point of failure attacks, the digicash company went bankrupt a few years after its creation (which didn’t bode well for the value of the currency), whilst e-gold was able to be regulated out of the existence, as the platform could not withstand external legal pressure from the US government, who would always be the metaphorical “bigger fish” when it came to monopolising currency creation.

To understand what makes Satoshi Nakamoto’s contribution to digital money so revolutionary, we must be able to fully comprehend the problems around creating scarcity on the internet without the reliance on a single entity, so to recap:

1. The transmission of information on the internet has no fixed supply, meaning data can be copied and transmitted with no negligible cost.
2. Without a centralised authority there was no way to ensure data was not being duplicated, thus some entity had to be in charge of validating transactions.
3. All attempts of a centralised authority to create digital value were subject to single point of failure attacks, being deemed as untrustworthy by the user base, or simply being susceptible to censorship restrictions.

All together we can call this the Double Spend problem.

The Solution? A few have been proposed - the first and most credible is proof-of-work.

Understanding proof of work

“Unfortunately, proof-of-work is the only solution I have found to make p2p e-cash work without a trusted third party. Even if I wasn’t using it secondarily as a way to allocate the initial distribution of currency, PoW is fundamental to coordinating the network and preventing double-spending.” - Satoshi Nakamoto ³

Although the bitcoin protocol was its most useful application, the concept of proof-of-work dates back to the 1990’s, when Adam Back invented “hash cash” as a method of stopping spam emails. Somewhat counter-intuitively, he decided the transmission of information across the internet was too effortless and some difficulty should be added to stop people exploiting (or just annoying) others by conducting too many transactions. Explained more concisely by Adam himself:

“Hashcash was originally proposed as a mechanism to throttle systematic abuse of un-metered internet resources such as email, and anonymous remailers in May 1997” ⁴*

To do this, he devised a micro cost function imposed in certain situations. Simply put, to prove you are an honest entity and not a spammer, you must exert a small amount of energy. This amount should be so insignificant as to be unnoticeable if sending one email, but would require considerable processing power if attempting to perform the action an excessive amount.

Bitcoin uses the same proof-of-work principle to arrive at consensus in a decentralised network without the need for any human governance. By utilising energy as an arbiter for truth, it ties infinite digital abundance with a finite resource in physical world, creating scarcity on the internet. Michael Saylor explains this in a somewhat sensationalised description of the proof of work mechanism saying:

“Satoshi opened a portal between the physical realm and digital realm…bringing to life a formally dead realm consisting of only shadows and ghosts.”⁵

In bitcoin’s PoW system, participants compete to solve a puzzle finding a special number called a nonce that, when hashed, produces a desired output. The likelihood of solving the puzzle is dependent on the processing power each member is dedicating to the network, hence the more energy you put in, the more chance you have of finding the nonce or “mining a block.” Each participating member is encouraged to be the one to solve the puzzle, as they are gifted with the fees from all the transactions they verify, as well as acquiring a “reward block”, which means they get ownership of the newly issued bitcoins.

Crucially, the puzzles in the bitcoin protocol are difficult to solve but very easy to verify, meaning every participant can check almost instantaneously if another member has solved the puzzle before them, and can begin work on the next one. If any member wants to be dishonest and attempts to double spend (the issue outlined earlier) or cancel a payment after it has been validated, then they would need to put in enough processing power to out compete the entire rest of the network combined, to make their chain longer, and to provide “proof-of-work” of a different, more complete version of history. Not only is this very difficult, becoming exponentially harder after each block is mined, but the participants would be much better off putting this energy into mining the new block and not undermining the network. Although Alfred famously states to Batman when describing the Joker “some men just want to watch the world burn”, ⁶in the case of bitcoin, you would need most men to want to watch the world burn, in order to undermine just one transaction.

In a PoW model, every member is able to get a complete record of completed transactions, by just tracing back where the energy has been exerted in the network, and accepting all the validated transactions in whichever chain is the longest. This creates an immutable ledger or “blockchain”, which means all payment disputes are settled according to a set of impartial laws, backed by energy and devoid of all human error.

Proof of Stake - An Eco-friendly upgrade?

Whilst Satoshi’s use of the proof-of-work consensus mechanism was undoubtedly an innovation at the time, there are some who champion proof-of-stake consensus as an alternative, arguing that the energy input into bitcoin has environmentally damaging consequences.

Proof-of-stake eliminates energy as an input for validating transactions, instead trusting a set of validators to approve activity on the network. To become a trusted validator node, you must take some the given coin, and lock it up in a deposit meaning you can not spend it, this is called “staking.” The more of the coin you choose to stake, the more likely you are of being chose to approve transactions, receive transactions fees, and get issued the new coins that are created. The condition for getting new blocks no longer is dependent on the amount of work put in, but on how much of the network you already have ownership of.

This method of consensus has some high profile support, with the likes of Vitalik Buterin, founder of ethereum, publicly advocating for PoS claiming,

“Proof-of-stake reduces Ethereum’s energy consumption by 99.95% making it far more environmentally friendly.”

Most major cryptocurrencies outside of bitcoin operate on a proof-of-stake model, so to critique it as a consensus mechanism is to critique the fundamentals of the alt-coin space. Outside of Bitcoin, there is no other crypto that exists with decentralised enough control over their monetary policy that a switch could not happen in the future, as evidenced by the second biggest cryptocurrency (Ethereum) switching in 2022.

If proof-of-stake is not a trustworthy consensus mechanism than any currency that operates using it, or any currency with the potential to switch to it should be deemed untrustworthy. The following paragraphs will firstly assert why proof-of-stake is built on false premises and then detail how it fails to solve the double spending problem by reintroducing self-interest and centralised elements to the network.

Bitcoin is not bad for the environment

The most popular justification for a proof-of-stake system is that bitcoin is bad for the environment, due to the negative externalities caused by the energy intensive mining. Staunch defenders of bitcoin will often take the stance that the energy consumption of the network is a necessary condition to overhaul the banking system, and should thus consume energy unapologetically.

Author of the bitcoin standard, Saifedean Ammous, draws comparisons between the increase in energy consumption caused by previous feats of entrepreneurship, contesting that living standards were unaffected by the car displacing the horse, or sewage systems replacing outhouse cleaners. Following from this, Saifedean asserts that in replacing a primitive banking system, the use of energy is not only permissible but entirely expected.

Never one to mix his words, Allen Farrington contributes to this position in Bitcoin is Venice:

“We should not make our support of Bitcoin contingent on so-called environmentalists talking points that are themselves contingent and may change in the future, particularly given the spectacularly awful record of the so called environmentalists have with respect to the single cause they claim to favour.”⁷

Whilst appreciating that there is credibility behind both Saifedean and Allen’s claims, especially when considering the bad track record of climate scientists predictions surrounding bitcoin, (Look no further than the WEF’s 2017 article or the magnitude of errors produced by the New York Times), I would like to approach from a different perspective. Rather than to discredit climate activists, or to use the ignorant predictions of the few to undermine the wide array of good environmentalist science that exists, it seems that both aforementioned authors provide more than enough ammunition to showcase that bitcoin is a driving incentivizer for renewable energy expansion, and thus works in perfect unison with the pro-climate initiative.

The premise that the PoS model is necessary largely hinges on PoW being unsustainable. For this claim to hold merit, bitcoin would either need to be detrimental to the climate in the short or long run. In the short run, it drives innovation in the energy industry, as it is monetises the utilisation of cheaper forms of power. In the long run, the removal of unsound money from the monetary system, will remove any incentive to strip mine capital on the basis of low time preference, and will directly encourage people to nurture and replenish natural resources.

The short term benefits of bitcoin mining on the energy industry are more easy to prove, as there are already multiple communities in which absolute poverty has been largely alleviated due to changing of energy incentives. My essay “Bitcoin on energy” delves into many of these examples, which are also wonderfully detailed by Alex Gladstein in the 2024 Bitcoin conference, in which he concludes:⁸

“You are wasting energy if you are not mining bitcoin.”

The reasoning behind this claim is rather simple. Bitcoin mining prevents energy waste by monetising stranded and excess power that would otherwise go unused. Vast amounts of energy are lost due to inefficiencies in power generation and distribution, but Bitcoin miners can capture and convert this surplus into hard money. As the mining process is so competitive, anyone not using these cheap, stranded energy sources will be forced out of the market (including miners using fossil fuels). Additionally, Bitcoin mining stabilises renewable energy projects by acting as a flexible buyer of last resort, ensuring profitability for solar, wind, and hydro producers when the grid cannot absorb excess power. Many renewable initiatives that would previously have gone unfunded, now have an extra economic incentive that will drive their investment. This is why we have the bitcoin industry become more green, a trend compiling year on year, as non-renewable resources fail to compete with the new green energy incentives.

The long term implications of returning to a sound money standard would be overwhelmingly beneficial to the environment. This can be harder to conceptualise as it has not had time to manifest itself at scale, but I think it can be successfully articulated through the comparison of two farmers.

Farmer Fiatello is on the fiat standard and using unsound money. Farmer Satoshi is on the bitcoin standard and is using the sound money. (To steal Joe Bryan’s names)⁹

Farmer Fiatello takes a short-term, extractive approach to his farm. Easy credit and inflationary pressures push him to maximise immediate profits at the expense of long-term sustainability. He clears forests for quick expansion, overworks his soil with mono-culture farming, and relies heavily on chemical fertilisers and pesticides to boost short-term yields. Since debt is cheap and money loses value over time, he continually borrows to expand operations, depleting natural resources without considering long-term consequences. Erosion, soil degradation, and declining biodiversity follow, leaving his land exhausted and increasingly dependent on external inputs. As inflation erodes his purchasing power, he is trapped in a cycle of overproduction, debt servicing, and resource depletion.

Farmer Satoshi takes a long-term, conservation-oriented approach to his land. Since his money retains value over time, he is incentivised to save, plan, and reinvest wisely rather than recklessly expand. He practices crop rotation, soil regeneration, and sustainable grazing techniques, ensuring the long-term fertility of his land. Instead of leveraging debt for short-term gain, he prioritises self-sufficiency and efficiency, reinvesting profits into better infrastructure, renewable energy, and diverse crops that improve resilience. His careful stewardship allows him to maintain a productive and thriving farm for generations, rather than extracting wealth at the expense of future viability.

Proper capitalism, for which the free market for money should be a prerequisite, is about the nurturing and replenishing of capital, not the low time preference induced strip mining of natural resources we observe under a fiat standard.

Which farmer do you think is better for the environment? The conclusion seems apparent. The proof-of-stake advocates that label bitcoin as “anti-eco” seem to be greatly misinformed, greatly dishonest, or desperate trying to justify the existence of an alternative coin for their own financial gain.

Refuting the claims that bitcoin is a threat to the climate movement is not a criticism of the functionality of Proof-of-stake - more a discrediting of the marketing tactics used by PoS advocates when insisting the mechanism is a necessary upgrade on PoW. There are however, some key trade off’s in the way the two systems operate that are worth exploring…

Proof-of-work mirrors gold - Proof-of-stake mirrors fiat.

“There is no odour so bad, as that which has arisen from goodness tainted. If i knew a man was coming to my house with the conscious design of doing me good, i should run for my life.” - Henry David Thoreau from Walden.

Thoreau’s scepticism toward self-righteous do-gooders was a commentary on the socialist vs capitalist ideological battle in the 20th century, but carries a very translatable message about all systems of governance. None are inherently evil, but the incentives they create shape human behaviour, often in ways that corrupt their intended purpose. No political or economic system fails because of abstract principles alone; failure arises from the actions of the people within them, responding to the incentives they face. It is human error, not the system itself, that produces corruption, inefficiency, or centralisation. Only in the results of a system, its ability to prevent or amplify such errors, can we judge its moral standing.

This principle applies directly to blockchain consensus mechanisms. Proof-of-Stake (PoS) and Proof-of-Work (PoW) are not inherently good or bad, but the incentives they create dictate their long-term viability as decentralised systems.

PoW, by design, ties mining to real-world resource expenditure (electricity, hardware, and labour), creating an objective competition based on work done. The incentive structures of bitcoin mining mirror that of resource extraction in the physical world, such as mining gold or oil. Extracting resources requires large overhead costs, with commodity miners not having much control over their expenses (fuel, equipment, energy), meaning they are very sensitive to price changes of the product they extract, with many going bust in recessionary periods. Bitcoin is similar, with miners not normally benefiting from economies-of-scale, as cheap energy supplies are usually only found in small amounts, and the unpredictability of the BTC price making monopolising the market difficult. In PoW, an entity incentivised to try and dominate the market has no option but to continuously prove their contribution through measurable work.

The severance from physical reality causes proof-of-stake to trend towards centralisation. Instead of requiring real effort, it simply rewards those who already have coins with more coins. At its core, PoS is a self-reinforcing wealth loop:

1. The more coins you have, the more staking rewards you receive.
2. The more rewards you receive, the more influence you gain over the network.
3. Over time, a small group of early or wealthy participants accumulate disproportionate control.

This concentration of power is not an accident but rather is an inevitable consequence of PoS. Unlike PoW, which requires ongoing work to maintain dominance, PoS only requires existing wealth. It is a closed system where the rich get richer. Sound familiar? It should, because it mirrors the mechanics of the fiat degeneracy that bleeds the wealth of workers globally, where those closest to money creation (banks, central institutions) consolidate control over time. Just as central banks print money without tangible backing, PoS allows large stakeholders to reinforce their dominance without expending real effort.

The parallels in governance between fiat money and cryptocurrencies lead to similar outcomes for the people using it as a store of value. In a highly centralised PoS system, the majority validators can collude to reject transactions, blacklist addresses, or impose arbitrary rules, just as traditional financial institutions do. We’ve already seen this happen with Ethereum, where OFAC-compliant validators now dominate block production, effectively enforcing government sanctions at the protocol level.

With PoS, those who control validation effectively dictate monetary policy. Inflation, deflation, transaction fees; these parameters are no longer governed by immutable rules, but by the consensus of a small, self-interested elite. There is great irony in the resemblance of PoS crypto and the central banking model, as it is the very institution that Satoshi Nakamoto invented Bitcoin to escape from.

“Proof of stake is akin to someone minting fake gold (all at once) and keeping half for themselves & putting the other half into circulation. Proof of work requires you to dig 1 million times before 1 unit is found. One is fair distribution while the other requires privileged.” - Preston Pysh on X (very academic I know.)¹⁰

PoW is a network that naturally decentralises over time, with a multitude of competitors sharing in the currency issuance, with it becoming harder to control the market over time

PoS is a network that naturally centralises over time, with a few competitors sharing in the currency issuance, and it becoming easier to control the market over time.

Incentives define outcomes, and as history has shown, systems that require trust eventually fail due to the inherent fallibility of those in power. The question isn’t whether PoS is designed to be centralised, but whether its structure makes centralisation inevitable.

Verify don’t trust vs trust don’t verify - A matter of security.

“Ethereum will run on a more secure consensus mechanism than Bitcoin when it moves to proof of stake… the new consensus mechanism will make it safer, by making attacks against the network more costly to run.” - Vitalik Buterin shortly before $1.4 Billion of ETH was stolen from Bybit in biggest ever crypto heist.

At the time of writing this the top Ethereum developers are considering pushing through a hard fork to defund hackers, possibly linked to North Korea, (although not sure of the credibility on that), that stole $1.4 billion from Bybit. This is an impossible ultimatum for Vitalik, as to roll back the chain would be to concede that ETH is centralised; but to ignore Bybit’s request is to allow bad actors to keep the $1.4 billion and to catalyse a huge internal battle.

To clarify, no blame for this particular attack is as a direct result on the PoS system, as it was an exchange rather than the Ethereum base layer that was compromised by hackers. However, the attack was as a direct result of the complexity of the ethereum smart contract code and could not of occurred on bitcoin. This takes us to a point that is directly relevant to the PoS vs PoW debate: More code - More complexity - More surface area for attackers to exploit vulnerabilities on the network.

Proof-of-stake requires a degree of magnitude more code than proof-of-work, with the complexity of the system making it less secure. In PoW the security is remarkably straightforward, as any person attempting to create “spoof transactions” or just be a dishonest actor, will simply not be validated. Their punishment is the cost of the energy they put towards mining, to create an alternate version of history that the network deems to be worthless. By removing energy as an input, PoS has the added problem of having to incentivise its users to act honestly. The current solution is called “slashing”, by which validators try to check if other nodes are voting on multiple chains, trying to confiscate any coins that are being staked dishonestly. Simplicity is king and unfortunately this process is very complex, with each solution only catalysing more problems, raising the very difficult question - How do you get someone to care about behaving honestly, if there is no punishment for dishonest behaviour linked to the physical world?

Problems surrounding the complexity of the PoS system are only compounded when considering it has no unforgeable history. Without an objective, irrefutable ledger tied to physical work, Proof-of-Stake introduces a deeper security risk: the inability to independently verify history. In Proof-of-Work, every block is backed by real-world energy expenditure, making the longest chain with the most accumulated work the indisputable source of truth. Any node, at any time, can sync from the genesis block and mathematically verify the entire history without relying on external trust.

In contrast, Proof-of-Stake lacks this inherent security anchor, meaning that if a node goes offline for an extended period, it cannot cryptographically determine the correct chain upon reconnecting. Instead, it must trust centralised sources (validators, exchanges, or developers) to tell it which version of history is valid. This “trust, don’t verify” approach creates attack vectors such as long-range attacks, where past validators can rewrite history, and weak subjectivity, where new participants must blindly accept a given checkpoint rather than independently verifying the chain from scratch. This brings up the same problems we have become familiar with, namely censorship and manipulation. PoW fundamentally avoids these problems by ensuring history is always verifiable, immutable, and beyond the control of any single entity.

Final Thoughts: Does Proof-of-Stake have a use case?

For fear of ignoring some of the arguments made by Proof-of-Stake proponents, some concessions must be made about the PoW model. Transaction settlements are generally quicker on PoS than the bitcoin base layer, and although resolved by the bitcoin lightning network, these transactions do not immediately appear in layer 1 settlement. As well as this, on small scale projects, the barriers to entry to the PoW model are likely too high, as it requires a sufficiently decentralised network, of which only 1 exists.

If a Proof-of-Stake and a Proof-of-Work coin were both launched today, the PoS coin might offer greater initial security, because PoW requires a great amount of energy, accumulated over a long period of time for a decentralised network to be effective. However, this is precisely why Bitcoin stands alone.

A decentralised, irrefutable, secure and incorruptible ledger already exists; and through history money has converged towards the good with the best credentials - the most salable asset. As PoS model can not create a currency more salable than bitcoin, and as a result of being built upon the same broken foundations as the fiat economy, it has no use case as a consensus mechanism for money.

However, this highlights the true purpose of PoS. It is the preferred choice for those looking to create and control their own coin, rather than partake in a genuinely decentralised and censorship-resistant system. The supposed benefits of PoS (speed and efficiency) are little more than marketing gimmicks used to sell fundamentally weak, centralised projects. In reality, PoS is not an innovation but a tool for creating and profiting from worthless tokens, where insiders and early adopters retain control under the guise of decentralisation. If the only reason to choose PoS is to make launching a new coin easier, then its primary use case isn’t technological advancement - it’s facilitating the next wave of Ponzi schemes and rug pulls.

Bibliography (of sorts)

Footnotes

1. Arthur Bloch - Murphy’s law - Page 8 ↩

2. Lyn Alden - Broken Money - page 377 ↩

3. Email from Satoshi, Used by Jack Mallers in Prague 2024 ↩

4. Adam Back - hashcash.org ↩

5. Michael Saylor’s GALA 2022 Kenote Speech ↩

6. The Dark Knight - Michael Cain talking about Heath Ledger (no pun intended) ↩

7. Bitcoin is venice - A capital renaissance - p226 ↩

8. https://www.youtube.com/watch?v=24waV3Fwvow&t=3500s ↩

9. https://www.youtube.com/watch?v=YtFOxNbmD38&t=1036s ↩

10. Preston Pysh on X - 14th May 2021. ↩