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In his latest blog post, “What Proof-of-Work is Used For (in Bitcoin),” Dr. Craig Wright explores proof of work and its purpose—why it’s crucial to a blockchain network as well as law enforcement officials, and why a proof of stake system benefits criminals.

What is Proof of Work?

Dr. Wright explains how proof of work is a costly signal that tells nodes on a network how to act when there are nodes on the network that are in disagreement. It’s important to make the distinction that these nodes do not vote on the rules of the network, rather, they enforce the rules.

“Proof-of-work is not the security mechanism in Bitcoin; the publicity of the hash chain is,” says Dr. Wright. “Proof-of-work presents an economic signal, acting game-theoretically to incentivise the players’ honest behaviour and, alternatively, providing a punishment mechanism…Proof-of-work does not act to demonstrate that an entity is playing by the rules or that they should be trusted. It is merely a signal in a larger game.”

Beyond the value within the costly signal that is proof of work, a PoW blockchain provides its ecosystem with transparency that is not readily available in a PoS system. 

“Proof-of-work provides the ability to find out the location, the where, and who runs a node,” said Dr. Wright. “It is the threat of action, the ability for law enforcement to step in that maintains security in the Bitcoin network”

All of these features of PoW are vital to any company or individual looking to build a business that uses blockchain. Enterprises want there to be complete transparency as well as an anchored set of rules that individuals who are validating blocks must play by. That being said, all of these features of PoW are in stark contrast to how a PoS system operates.

Proof of stake threatens security and stability

“The primary reason for the attack on proof-of-work, alongside the attempted implementation of proof of stake and related systems, stems from the desire to remove accountability and allow anonymous actors,” says Dr. Wright.

A Proof-of-Stake blockchain allows its supporters to sway the network’s block validation and governance in a way that is not possible on a proof-of-work system while staying anonymous throughout their coercion. Rather than being able to identify how much hash is being contributed to the network, and where the hash is coming from, PoS lets individuals stay anonymous because it relies on a wallet address staking coins and tokens—individuals can do this without revealing who the owner of the wallet address is.

“With proof of stake, the principal investor can secretly own and control more than 50% of the network—without being detected,” says Dr. Wright. “Removing the propagation methods within Bitcoin reduces the cost of such a system, and allows the creation of a stock-based or securities-based model. Here, the stakeholder provides capital in consideration for voting rights. Such a perspective is diametrically different from one that comes with Bitcoin. Without identity, such bearer steaks are bearer shares as they more effectively allow the controlling investor to split their controlling share into multiple smaller amounts that vote based on an algorithmic link, hiding the manipulation created through the system.”

To learn more about the purpose of proof of work and the protections it provides both a blockchain ecosystem and its members with, as well as why proof of stake will unfortunately aid criminals and individuals with ill-intent in accomplishing their goals, you can learn more in Dr. Craig S. Wright’s latest blog post “What Proof-of-Work Is Used for (in Bitcoin).”

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