PoW vs. PoS in a bear market

Critics of PoS have argued that Cardano will not survive even a single bear market because the value of ADA coins will drop and it will be easy to commit the 51% attack. That hasn't happened to any running PoS blockchain yet. The decentralization and security of the Cardano network have not fundamentally changed during the bear market. The number of delegators keeps growing as well as the number of pools that produce blocks. The Cardano network gives a healthy impression. There are articles in the media about PoW miners being forced to sell their accumulated BTC to avoid bankruptcy. Some have already been forced to sell ASIC hardware or stop mining. Others may declare bankruptcy in the coming months if the market value of BTC does not rise soon. The hash rate, which until recently was reaching new ATHs, has begun to fall. This news is disturbing. Let's think about how the fundamental properties of PoS and PoS blockchains are changing in the bear market and how holders are affecting it.

TLDR

• It's smart to take advantage of the cheap ADA and start staking in a bear market. This is happening and the decentralization of Cardano is growing.
• It is difficult for PoW miners to go out of business without loss or move elsewhere. Bitcoin security is declining and there may be centralization tendencies.
• Mining is risky and relatively complex while staking is easy and essentially risk-free.
• The possibility of committing an attack has nothing to do with whether getting a reward from a network is associated with risk.
• Even if the value of ADA coins were stagnant for many years in a row it would be economically worthwhile for people to stake.

Cardano in the bear market

Markets behave cyclically, and the alternation between bull and bear markets is quite natural. The security of blockchain networks is dependent on the market value of the projects' native coins. As the market value of coins decreases, security decreases. Cardano and Bitcoin affect this in different ways.

When the economic situation is bad, the demand for risk assets which include cryptocurrencies decreases. People sell coins more than they buy them. The low market value of coins can be an opportunity for new business for some.

The distribution of coins among holders is important for Cardano’s security. The higher the coin distribution, the higher the decentralization and thus security of the network. Starting to participate in the decentralization of the network and getting rewards for it is very cheap in the case of Cardano. You can literally just buy a few ADA coins and pay a registration fee for staking. The entry cost is in units of dollars. Cheap ADA coins are a good opportunity to start with staking and make a good profit in a bull market. For existing delegators, it is easy to expand the number of ADA coins and thus earn higher rewards.

Cheap ADA coins on the market can be a lure for an attacker. He needs to get more than half the number of ADA coins that are used for staking. That's approximately 12,500,000,000 ADA coins. However, high attacker demand increases the market value of the coins. The attacker is not alone in buying coins and he has to compete with new delegators. The rise in market value may slow the sell-off of ADA from current holders who have been thinking about it. Green numbers usually attract new buyers regardless of market sentiment.

Once holders buy ADA coins, they can hold their stake forever with no incidental costs. No one can take away their stake. The only option is for the holders to sell the ADA coins voluntarily. All delegators receive staking rewards every 5 days (if the pool has produced at least 1 block) regardless of the market value of the ADA coins. ADA holders don't want to sell at a loss, so it is smart to hold and wait for a bull market. In the meantime, they accumulate rewards. ADA holders will not go bankrupt because staking is unprofitable. Delegators can sell rewards periodically and still hold the same amount of ADA.

We don't know what stage of the bear market we are currently in, but we can say that the decentralization of the Cardano network is very slowly increasing by about a few thousand new delegators per month. Delegators are not forced to give up their stake (unless they have financial problems) and can continue to participate in the decentralisation of the network.

Bitcoin in the bear market

BTC coins serve as a reward for miners. Consequently, they have no direct function in the PoW consensus. Bitcoin's resistance to a 51% attack is more dependent on the market value of BTC. Holders who endure a bear market and don't sell reduce the supply of coins in the market and thus increase their market value. This affects the size of the reward for miners.

The problem is that if the value of BTC is low for an extended period of time, mining can be unprofitable compared to a bull market. Miners need to manage their rewards well and accumulate BTC for a rainy day. They should consider whether to sell coins in a bull market to be prepared for a bear market.

Many miners have underestimated the current bear market. BTC mining is unprofitable in most places where it takes place. Miners are in difficult situations. The cost of entry for mining is high. The big ones have bought thousands of pieces of ASIC hardware and power contracts. They paid for rooms, cooling, and staff. They can't quit easily and without a loss.

Miners might have a large reserve of accumulated BTC coins that they are forced to sell at the worst possible time. In addition, if multiple miners are selling, supply can exceed the demand and the value of BTC stagnates or declines. This only exacerbates the problems.

It is not easy for miners to hand over the business to someone quickly. Moving ASIC miners to another country with cheaper energy is financially and time-consuming. In addition, in times of crisis, there may not be interest in taking over the mining business.

The low market value of BTC forces miners to shut down machines, which reduces Bitcoin security. The Hash rate is still high at the time of writing and an attack is unlikely to happen. An attacker would have to buy up ASIC miners from bankrupt miners and I don't think they would be interested in doing that. However, it is a possible scenario, as the attacker can behave like an honest miner and receive rewards from the network. Gradually (for a few bear markets) he can buy up ASIC hardware and one day become the dominant miner.

A bankrupt miner is unlikely to sell hardware to individuals. It is more likely to sell it to a competitor or another bidder with a lot of capital. This may lead to higher network centralisation. With Bitcoin, miners have an economy of scale advantage. Hobby mining is often unprofitable and disappears with each next halving. Miners have to disable ASIC hardware which reduces the security of Bitcoin. In addition, decentralization may be decreasing. The tendency towards centralisation of mining has been observed for some time. A bear market can only exacerbate this. It is unlikely that the big miners will go bankrupt and hobby mining will resume.

BTC holders can do almost nothing. A large portion of BTC is held by institutions and when they decide to sell, it negatively affects the market value of BTC. Many people are happy to take advantage of a good buying opportunity, but demand is still very low. The bankruptcy of FTX may result in a lack of interest in cryptocurrencies by institutions. Many claim they are already leaving the space. Sentiment can change at any time and the blockchain sector is here to stay, however another crypto-winter cannot be ruled out. If that happened, there would be a lot of cheap ASIC hardware on the market that nobody would want. Hardware manufacturers and basically all CeFi companies would be in trouble.

Comparison of PoS and PoW in a bear market

So far, all indications are that both networks will survive the bear market. Cardano is certainly not doing any fundamentally worse than Bitcoin. Even though the bankruptcies of PoW miners may give a negative impression, sooner or later someone will take over their business.

Staking is much more inclusive than mining. This can be seen as one of the factors that help Cardano survive the bear market. People want to secure passive income and participate in the decentralization of the network. In the case of mining, this is very difficult. ASIC hardware is expensive and if someone wants to get started, they need to have a cheap energy contract. This is hard to get for small consumers. Moreover, energy is getting more expensive in almost all countries. ASIC hardware is also quite noisy and produces heat. Even that has to be dealt with somehow.

Mining is risky and relatively complex while staking is easy and essentially risk-free. Sometimes you may encounter the opinion that if staking is risk-free, it cannot secure the network well. People don't realize that decentralization is built on holding the resource. In the case of Bitcoin, it's ASIC hardware and electricity whereas with Cardano it's ADA coins. Anyone holding more than half the resource has a chance of committing the 51% attack. In both cases, the attack is very expensive and hard to imagine. The possibility of committing an attack has nothing to do with whether getting a reward from a network is associated with risk. It's just about getting the right amount of resources.

If someone bought a large amount of ASIC hardware and destroyed Bitcoin, the hardware would likely lose value (the attacker could mine another PoW coin). Something similar is true in the case of ADA. If there is a demand for staking and ADA holders don't sell, the attacker has no chance of getting the coins elsewhere. Imagine the attacker somehow manages to get 13,000,000,000 ADA coins. If he destroys Cardano, ADA coins lose value and he loses his wealth. The principles are the same in both cases.

Attack resistance in the blockchain is built on the assumption that there will always be more honest actors than attackers. The smaller the number of a single point of failures, the better. PoS has an advantage in that as the adoption of the Cardano network grows, the distribution of ADA coins will also grow. This increases security. Large ADA holders will emerge just as large PoW miners emerge. These players are single points of failure. It is advantageous when mechanisms are set up to decrease their numbers. We are unlikely to see this happen in PoW mining without major technological innovation. For Cardano, the chances are better and the current positive trend in the growth of ADA holders is proof.

As far as the stability of the market value of BTC is concerned, it would be more profitable if the coins were held by a large number of people than by institutions and old whales. They can dump a large number of coins on the market and thus affect mining. Note that in the case of Bitcoin, the distribution of coins only affects the security of the network, while in the case of Cardano it also affects decentralization. In bear markets, when large sell-offs occur, Cardano may be more robust than Bitcoin as it retains decentralization and thus security to some extent.

The upcoming halvings will have a major impact on Bitcoin's security when the reward will be reduced again. The next one will occur in 2024 and the reward will be reduced to 3.125 BTC. Bitcoin essentially has to make a new ATH and the value of BTC should not fall back to current levels. I dare say that would wipe out a lot of miners. Bitcoin's security is based on the assumption that the value of BTC will steadily increase at least enough to compensate for halving. Once that stops, Bitcoin may have a security problem.

Cardano has the advantage that ADA coins are taken from the reserve every 5 days and there are no such dramatic sudden changes in the rewarding mechanism. Even if the value of ADA coins were stagnant for many years in a row it would be economically worthwhile for people to stake. Network security and decentralisation would not be affected.

Those networks that profit enough to be able to reward consensus participants will be economically sustainable in the long term. This is only possible if they are useful and people pay the fees. This must be true even in a bear market. HODL does not generate profit for the network. In a bear market, interest in using blockchain networks is waning. This must change. However, that is a different topic.

Conclusion

PoS critics were wrong when they said PoS would never work, and they were wrong that Cardano would not survive a single bear market with this consensus mechanism. Cardano's network is healthy and we don't see any security or decentralization issues. Bitcoin miners are fighting for survival, which doesn't make a good impression. Some miners will go bankrupt or go out of business, but Bitcoin will also survive. However, it is not just a matter of survival, but of ensuring that the fundamental attributes of the networks in the bear market remain the same, or ideally grow. It is premature to draw conclusions yet, as the bear has not gone away. We can evaluate this with the arrival of the bulls.