The lasting impact of Proof-of-Work (PoW) projects

The rising PoW project, Kaspa, has shown impressive performance recently, surpassing a hundredfold increase in just a year, and its market capitalization has entered the top 50.

The fact that a PoW coin has surpassed many other well-known projects raises questions about why PoW, a seemingly outdated mechanism, is shining so brightly.

There are two common explanations:

• In bear markets, funds converge on PoW projects with objective value assessments.

• After Ethereum switched to PoS, the remaining hash power needs new projects to support.

At a macro level, these two viewpoints are roughly correct, but a closer examination reveals that it is not that simple.

PoW in a Bear Market

In a bear market, funds will withdraw from narrative-driven assets and gather around assets with objective value assessment criteria. PoW coins have objective value because of the electricity required for mining.

But when a bull market comes, PoW lacks innovations like ICOs, DeFi, and NFT, and other narrative-driven projects take the lead.

The development of PoW has been 14 years since the birth of Bitcoin, becoming the industry’s air and water. People have become accustomed to PoW, and it has not impressed people for a long time.

Only when the industry faces various problems and new ICO/IDO/IEO crypto projects prove to be unsuccessful, people will pay attention to PoW again.

Therefore, PoW has objective value but also indicates that PoW lacks innovation in the crypto industry. Any PoW project with some innovation, coupled with effective marketing, will rise during a bear market.

Hash Power Support After Ethereum PoS

With Ethereum’s move to PoS, the original hash power needs new projects to support. This leads to another question: why haven’t many other PoW projects, besides Kaspa, performed as well? The main reason lies in the innovation of PoW projects.

Kaspa’s rise is not purely because of the PoW mechanism itself but because of the combination of PoW and an innovative DAG technology called BlockDAG, making it the fastest and highest transaction throughput Layer 1 PoW chain.

The market no longer buys into PoW solely based on the term “PoW”; something new needs to be brought to the table.

From the perspective of evaluating the fastest processing speed and highest transaction volume in Layer 1, many venture capital-driven projects like Solana, Aptos, and Sui have abandoned the PoW mechanism.

Kaspa’s emergence breaks this pattern, although its BlockDAG technology seems to be another form of the “big block size” approach.

This validates the previous point: PoW, when coupled with innovations, can rise successfully during a bear market.

Review of PoW Project Innovations

So, innovation in PoW is crucial. However, this discussion focuses on the narrative direction innovation of PoW projects, rather than technical innovations. Technical innovations will be discussed in another article.

Let’s review the innovation journey of PoW projects, mainly based on whether PoW projects entered the top 100 market cap as a distinction.

Bitcoin was the first successful PoW project. After Bitcoin’s success in the first phase, many followers gained market attention by forking and simply modifying some parameters. Examples include Litecoin, Dogecoin, Bitcoin Cash, etc.

Some even just reconstructed the code language of Bitcoin, like NEM, which was a rewrite of Bitcoin in Java to create an enterprise-level Bitcoin.

Therefore, the first phase of PoW innovation was mainly aimed at surpassing Bitcoin and filling the gaps in niche markets, even if the targeted markets may not seem valuable now.

The second innovation phase was the combination of PoW with PoS, represented by projects like Peercoin and Dash. The purpose was to use PoS for governance. After Bitcoin’s success, PoW’s value was amplified, which also fueled the development of PoS.

It was widely believed that PoS would play an equally important role as PoW or even surpass it, which still has an impact today, as seen in the development of DAO, which believes that various PoS mechanisms can facilitate efficient decentralized collaboration.

The third innovation was privacy-focused PoW coins, represented by Monero. Later, new privacy coins like Zcash, Grin, and IronFish appeared, but none could surpass Monero.

The main reason was that privacy is ultimately about meeting specific needs, and privacy technology itself is not the goal but merely a means.

It doesn’t matter how new the technology is if the privacy effect hasn’t changed much.

Additionally, privacy has network effects and requires significant liquidity for mixing. Monero’s user target was precise, mainly serving hackers, while regular users did not have a strong need for privacy compared to other users.

Another point worth mentioning is that new privacy projects tend to adopt PoW because true privacy requires a truly decentralized mechanism, and various PoS mechanisms can introduce centralization issues.

Without a guarantee of decentralization, privacy cannot be effectively achieved.

The fourth innovation was the combination of PoW with smart contracts, represented by Ethereum. Although Ethereum has now shifted to PoS, some layer 1 that use smart contracts continue to employ PoW, such as Nervos and Conflux.

The main reason for adopting PoW was that it provided the fairest token distribution system through mining, which has been proven to be a robust consensus mechanism.

The fifth innovation was the combination of PoW with DAG technology. DAG technology is not strictly a blockchain; its primary purpose is to increase the TPS of PoW chains and solve Bitcoin’s slow Layer 1 transaction problem.

However, DAG technology usually requires trade-offs between decentralization and preventing double-spending. Examples of this are Kadena and Kaspa. Kaspa at the beginning of the article is an innovation in the technology of DAG.

From these five innovations, it can be observed that their essence lies in improving three aspects of blockchain: transaction speed, privacy, and transaction diversity.

New Opportunities for PoW Projects

These innovative PoW coins have representative projects that have entered the top 100 market cap, but beyond these five innovations, there are four other PoW innovation projects that have yet to be discovered. They are:

1. The combination of PoW and NFTs. Representative projects include HACD.art, PoW NFT, and Mineable Punks. From these projects, it can be analyzed that PoW can make NFT distribution more equitable, not controlled by a team. This is a common advantage of all PoW NFT projects.
   Additionally, since the number of blue-chip NFTs is limited, using PoW mechanisms to mint new ones is more reasonable, as demonstrated by MineablePunk. PoW can also enhance the long-term sustainability of NFTs since it allows for halting production when demand decreases and producing more when demand increases.
   HACD.art has adjusted the PoW difficulty to increase gradually, similar to Bitcoin, which will lead to longer mining cycles and ultimately larger hash power.
2. The combination of PoW and stablecoins. Algorithmic stablecoins have failed one after another due to their inability to achieve decentralization, large-scale adoption, and stability simultaneously. PoW addresses decentralization and large-scale issues (as proven by Bitcoin). The challenge lies in maintaining purchasing power stability.
   There are currently two approaches: Hacash uses three PoW coins to adjust stability in decentralized manner but cannot achieve stable fiat pegging, only relative stability in purchasing power. Meter, on the other hand, uses PoS governance to adjust stability. However, PoS governance coins are issued by the official, making the management somewhat centralized.
3. The combination of PoW and AI. The rise of AI-generated content has shown the future trend of AI. Running large AI models requires massive computational power, and this opportunity has mostly been monopolized by large companies. Combining PoW and AI can break this monopoly, forming a decentralized AI model network that mines through PoW and performs AI computations, projects in this direction include Bittensor and Tromero.
   However, finding a purpose for PoW and innovative solutions at the technical level is challenging. The effective operation of a blockchain requires a smooth hash rate curve while solving real-world problems involves discrete and sporadic difficulty.
   The evaluation of results also relies on human decisions, ultimately leading to centralized solutions. For example, Bittensor uses PoW coin staking to make decisions.
4. The combination of PoW and Bitcoin. This innovative combination is proposed by Hacash as “Bitcoin one-way transfer,” where the risk compensation of Bitcoin transfer is carried out using one of the PoW coins in the Hacash three-coin system. The value and driving force lie in the adjustment similar to the ancient gold-silver-copper system.
   If Bitcoin’s one-way transfer is successful, there may be new PoW projects like Litecoin’s one-way transfer, becoming the next detonation point for the narrative of PoW projects.

Why Is PoW Considered Outdated?

We can see that the unique value of PoW and its innovation opportunities are still ongoing. But why does the crypto industry consider PoW outdated?

The main reason is that PoW lacks the “explosive” points that Ethereum gained (mainly ICOs), allowing Ethereum to lead industry development. Additionally, to prove the correctness of PoS, people intentionally compare PoW and PoS on a single level of consensus.

However, from the perspective of the mechanism, PoS’s value primarily depends on the innovation brought by Ethereum’s smart contracts, rather than being directly related to PoS itself. The failure of the PoS chain Peercoin is evidence of this.

Apart from PoW lacking explosive points and being attacked by PoS on a single-dimensional consensus level, five other reasons have influenced its perception:

1. Pursuit of new narratives. PoW appeared at the beginning of the entire industry, but newcomers to the crypto industry are mostly attracted by the latest trends, focusing on new but not old narratives.
2. Energy consumption. PoW’s energy consumption is misunderstood as unnecessary waste, leading some people to resist it.
3. Difficulty in innovation. Innovations based on PoW are more fundamental and difficult and are closely related to economics or economic models. There are not many teams capable of making meaningful and differentiated improvements.
4. PoW is not favorable to project teams. The mechanism’s essence is closely linked to the fairness of token distribution, which benefits the community but becomes an obstacle to project teams seeking profit. Few teams have the motivation to work on PoW-related projects.
5. PoW is not favorable to venture capital. With the industry’s development over more than a decade, the involvement of venture capital has greatly increased, even becoming the dominant force in most projects. The token cost of PoW mechanisms is not conducive to quick capital exit.

These seven points are the main reasons for PoW being considered outdated. However, Bitcoin, based on PoW, has consistently maintained the top position in the market cap and continues to demonstrate its value.

PoW’s success goes beyond Bitcoin alone, and there are still opportunities for PoW, but more people need to reexamine and pay attention to PoW and innovate based on PoW.

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This article was originally published by Ken You on Hackernoon.