Proof of Stake: A stake through Proof of Work’s heart? (2024)

Proof of Work (PoW) isn’t dead. It isn’t even dying. However, it is moving slower, and that’s as good a reason as any for a mining operation to shift to another consensus mechanism. While PoW-based bitcoin (BTC) has surged more than +700% in the trailing 12 months, that’s not where the bragging rights are. NEM (XEM), for example, is up +825% in that period while Cardano (ADA) is up a surreal +3,600%. What they have in common is that they rely on Proof of Stake (PoS) for consensus. Ethereum (ETH) which is actively converting from PoW to PoS, is up +1,100%.

And it is ETH more than anything that has triggered an upstream rush toward PoS mining. Even so, that isn’t the only driver and at least one company, BTCS Inc. (OTCQB: BTCS), has been ahead of the curve.

Incentivizing the right things

While PoW might have been the best tool available in the foundational 2008-2009 period, it is by comparison very expensive to generate.

“PoW mining requires the purchase of specialized computers that depreciate rapidly in value as they are typically run very hard in less-than-ideal conditions,” says Charles Allen, CEO of BTCS, one of the first publicly traded companies in the crypto space – but clearly not one of the last. “With the dozens of public companies now plowing into bitcoin mining, it is very difficult to ascertain if there is a high, or even a positive, business case because actual return on investment is extremely opaque.”

Proof of Stake: A stake through Proof of Work’s heart? (1)

While Allen’s company traces its lineage back to the dawn of the crypto era, it is keen to stay ahead of industry trends, and the pivot away from PoW is emblematic.

“With PoS mining you purchase digital assets then stake them in order to set up and operate nodes,” Allen continues. “PoS has very attractive gross margins and the underlying digital asset has the potential to appreciate in value as opposed to owning a specialized computer that has no appreciation potential whatsoever.”

Picking a direction, then burning coins

At the beginning of 2021, BTCS held barely a hundred nodes on Ethereum’s beacon chain. As of this writing, that’s up to 240. Even so, that represents a mere 0.21% of the network. Allen expects his company to continue raising its ETH profile and is also considering an expansion into staking operations for other PoS chains.

Which specific chains, though, is still a matter of conjecture. According to Allen, there are three criterion the first is the chain’s quality, that is, the token’s utility, liquidity, underlying technology and related considerations, the second is revenue potential, and the third is what Allen calls “technical difficulty,” which is how difficult it is to commence operations.

One thing Allen is certain of at this juncture: There is no going back.

“At present, we have no PoW mining operations and are unlikely to re-enter that line of business,” he says.

So, what does going forward look like? After all, there are only so many nodes to be established on so many chains. It might soon be time for BTCS to pivot yet again.

“As a first step, we plan to expand our PoS operations into other disruptive blockchains,” he continues, “following which we plan to launch a staking-as-a-service platform to allow others to stake their cryptocurrency holdings through us.”

Proof of Stake: A stake through Proof of Work’s heart? (2)

This last step – essentially putting staking capacity up on the cloud for others to buy at the retail level – might prove to be the bold move that will spell the beginning of the end of PoW.

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