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Computational Power the consensus cost of blockchain

· 5 min read
NEST Protocol

Introduction

In the world of blockchain, the cost of consensus determines the value of the blockchain. This cost is the computational power according to the current BTC model. Many people may focus on the application of blockchain, thinking that as long as there are enough applications on the chain, its value is the greatest. This is a typical thinking in operating around certain products, which is not applicable to blockchain. A public chain, if its consensus cost is high enough, i.e., the computational power is large enough, it is indeed more valuable compared to low computational power public chains. Many people will question this statement, saying that how can the computational power, which is maintained by the money of centralized institutions, represent value? This statement actually confuses the value and risk. The computational power determines the value, and the composition of the computational power and the applications on the chain determine the risk.

The cost of consensus determines the value of the blockchain

The consensus mechanism is the most special thing about blockchain. Unlike real-world consensus, blockchain is based on an algorithmic process that agrees on the transaction data on the chain, which in turn creates value. The value in our lives is also based on consensus. But other than the price on the exchange, most consensus does not have a serious process or coercive power, so it is hard to quantify. However, the interesting thing about blockchain is that this consensus can be metricized. For example, BTC cites an arithmetic metric, POS through a coin holding test, DPOS based on voting, etc. Do these differences in consensus represent differences in value and risk?

Usage scenario and the consensus risk

We believe this holds true, i.e., the cost of consensus determines the value of the blockchain. If the public chain or the corresponding token has the usage scenario, it will also indirectly reduce the consensus risk. On the one hand, the consumption of tokens is settled, on the other hand, the secondary market of tokens has a stable expectation, which enhances the purchasing power and thus brings certainty to the provider of computing power. These two aspects are regulating the consensus risk of public chains, but the consensus cost is always what determines the value.

Consensus mechanism and consensus risk

According to the design of BTC, the cost of completing a 51% attack becomes exaggerated when the computational power is large enough. Even if a successful computational attack is achieved, miners can fork from the attacked block and reassert the original consensus. It makes no sense for an attacker to get a blockchain system with no consensus. Therefore, once a public chain is maintained based on decentralized consensus, it will become very powerful, and the cost of this consensus, which seems irrelevant to the actual production, is the root of the value, while the production activity just makes the risk of consensus go down.

To exaggerate, even if BTC is not available anywhere, or no one wants to use it, it still has its current value as long as its consensus cost remains in the tens of billions per year.

What about ETH

ETH 2.0 shifted the consensus mechanism from POW to POS, which has a great impact on ETH, and this impact is mainly reflected in the high or low cost of assessing consensus. Currently the industry is not fully aware of this issue and simply analyzes the impact of the consensus change on applications and development. I think this is putting the cart before the horse, because how many applications are available for a blockchain system is only a matter of risk, not value. The merge is a switch in the value point of Ethereum, turning the value point of the token into a reduction in the supply of tokens.

A public chain with applications has a lower risk of maintaining value; a public chain without applications may have potential risk at the same consensus cost. We need to spend more effort to think about the comparative analysis between POW and POS, and how to compare the cost of both in one framework. In fact, as many people know, for a long time, the applications on EOS, from the number of participants to not worse than ETH, but the market cap is less than 20% of ETH, some people think it was due to the fact that asset-heavy projects like USDT or DEFI were not issued on EOS, which is not true.

Conclusion

The fundamental reason is that the consensus cost of POS is much lower than POW, no matter how many applications are on it, it can only surface that the risk is lower for a given consensus cost, it does not represent a higher value. However, there is no good framework for comparing the cost of POS and POW, and more people need to study and improve it.