Ethereum: A Generational Investment

Hal Press

To understand why PoS is more efficient than PoW first we need to understandhow either mechanism provides security. The purpose of the consensus mechanism is to validate transactions and provide protection against a 51% attack. The efficiency of a consensus mechanism can be measured by the issuance required to generate a unit amount of security. In other words, how many dollars the network has to pay out to receive $1 of protection from a 51% attack. For PoW, the cost of a 51% attack is primarily the hardware required to obtain 51% of the hashrate. So it comes down to how much money miners require to invest $1 in mining hardware. Given that mining hardware only lasts a couple years and miners generally demand a healthy profit margin, generally it works out to 100% return on investment in the first year. This means that to buy $1 of mining hardware miners require $1 of issuance. They can then use this hardware for 2 years and turn a profit. In this context, the network needs to issue $1 of supply each year to generate $1 of security. In reality the efficiency is actually worse than this as this doesn't account for utility costs which also push efficiency down.

In the case of PoS stakers are not required to purchase hardware, so the question becomes what return do stakers demand to lock up their stake in the PoS consensus mechanism. Once locked these stakes act as protection against a 51% attack as an a attacker would need to purchase enough stake to represent 51% of the total. In general, stakers require ~10 (maybe lower over time but we can assume 10% to be conservative) return to lock their assets in PoS. This means that to gain $1 of security a PoS needs to issue $0.10 of issuance. This 10x more efficient than the PoW mechanism and actually contains several conservative assumptions so in reality it is actually greater than 10x more efficient. To conclude, this means that a PoS network can issue 1/10th the issuance of a PoW network and be just as secure. In the case of ETH they will actually issue about 1/3rd the issuance and the network will be 3x as secure as it was during PoW.

[1] The only other large assets that arguably have structural demand is BNB. I believe its structural demand is the primary reason it has been able to maintain it position as the 3rd largest asset despite a significant negative narrative and lack of growth. It trades at 2x the Market Cap/Revenue multiple of ETH despite whatare in my opinion significantly worse secular fundamentals. To me this very fact is a large proof point in favor of the impact structural demand can have on price action

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