The Foundation of Consensus: Economic Effects are the Lifeblood of Blockchain

There are reader comments:

"In a bad market, POW provides a strong bottom line. When the price of Ethereum drops and falls below the shutdown price, just stop working; this way, Ethereum's lower limit is relatively high."

"The large stakers in POS have no mining costs. When the term ends, they can sell off their stakes if the market looks bad. The game rules are most unfavorable for retail investors."

Regarding the pros and cons of POW and POS, I have shared my views in previous articles. Although I have certain doubts and misunderstandings about POS and am still in the learning process, when it comes to staking, there are still quite obvious differences between POW and POS.

The actual cost for validators who stake ETH is not low. One reason is that the POS consensus mechanism imposes penalties for mistakes during the validation process. Apart from intentional malice, any "dereliction of duty" (such as going offline or making mistakes) during the validation process can lead to some degree of staking penalties. Therefore, to engage in stable and reliable POS staking, the operational requirements are not low.

In handling "malice" and "dereliction of duty," POW cannot compare to POS. The POW mechanism imposes no penalties on wrongdoers, nor does it recognize "dereliction of duty."

As for the current Ethereum POS mechanism's disadvantages for retail investors, Vitalik proposed a solution long ago that will be implemented in the near future:

Decomposing the functions of validators into block producers and block validators. Block producers will be required to stake more ETH and use stronger, more efficient hardware to improve the overall efficiency of Ethereum; block validators will require less ETH, allowing more retail investors to participate in staking and validating blocks even with light wallets.

In summary, it aims to improve operational efficiency in a more centralized manner while validating the network in a more decentralized way.

All of this is an analysis from a technical perspective, discussing which consensus mechanism is better or how to improve the existing consensus mechanism to make it better. This is certainly necessary and should continue.

However, if we delve deeper, beyond technical guarantees, consensus guarantees are, to some extent, more important. And consensus guarantees will increasingly become associated with economic effects over time.

Using "material determines consciousness" to describe this relationship is quite appropriate.

The stronger the economic effect of a blockchain, the stronger its consensus will be. A blockchain with weak economic effects, no matter how decentralized or secure its consensus mechanism appears technically, will ultimately decline.

"Bitcoin is gold, Litecoin is silver."

This phrase should still be fresh in the memories of veteran players, right?

Litecoin, like Bitcoin, uses the POW consensus mechanism. Litecoin was once one of the top assets in the crypto ecosystem. But now we only hear that Bitcoin is "digital gold"; do we still hear anyone calling Litecoin "digital silver"?

In the vast majority of crypto media, we hardly see news about Litecoin anymore.

Why?

In terms of "symbolic significance," it cannot compete with Bitcoin; in terms of ecosystem, it has nothing. Under these circumstances, its consensus gradually dissipating is inevitable.

In an early article, I shared a concern about Bitcoin:

If it solely relies on transaction transfers and gradually halving block rewards, unless Bitcoin's price continues to rise in the future, there will come a day when Bitcoin's price stabilizes, leading to diminishing attractiveness for miners, which poses a security risk to the Bitcoin network.

This concern was pointed out incisively by many pioneers in the Bitcoin ecosystem long ago.

So what can ensure that Bitcoin's price continues to rise in the future?

Is it merely the consensus formed by characteristics like "decentralization," "censorship resistance," and "scarcity"?

It seems our predecessors did not provide a clear answer at that time. Moreover, in the past decade, Bitcoin's price surge has made us almost unconcerned about this worry.

But it always exists.

However, if Bitcoin could develop an ecosystem like Ethereum, this concern could be completely eradicated.

So when the inscription ecosystem emerged, what excited me even more than the profit effect was the hope that this concern could be completely eliminated.

Unfortunately, the Bitcoin ecosystem did not take off, and this concern will inevitably resurface. The only hope left to completely alleviate this concern, in my view, is:

The crypto ecosystem experiences true economic prosperity, with viable business models, real cash flow, and profits, thereby allowing the economic benefits of this thriving ecosystem to spill over to Bitcoin as a collectible.

In this way, it can not only remain youthful but also continually reach new heights.