Bitcoin’s proof of work system goes far beyond the protocol. Bitcoin creates the basis for a proof of work economy. Proof of work is important because it requires perpetual value creation at the cutting edge of innovation to maintain network position. In other words, passive ownership of the network is very difficult to achieve. The incumbents are subject to constant, rigorous, open competition, from all challengers, at all times. If the incumbent cannot keep up, it is immediately replaced and the network seamlessly carries on. No need for voting, no need for subjective debate, and no need for politics. The best player wins.

Now imagine if we could apply the same proof of work concept to the broader economy. What would that look like and why would that be important? First let’s understand how the current economy works. The current economy, with little exception, is completely centrally planned in a top-down structure. Many people associate central planning with government. This is true, however, it goes far beyond that. Virtually all private businesses operate as central planners as well. They just do so non-violently. This forms what we currently have in a proof of stake economy.

Proof of Stake Networks — Two Drawbacks

In order to change a proof of stake network, you must persuade the stakeholders that doing so is both beneficial to the network AND to the stakeholder’s personal interest. This relationship poses two detrimental challenges. First, no matter how smart the stakeholders are, recognizing a new innovative idea is very difficult. Second, the stakeholders are incentivized to protect personal interests before the interest of the greater network.

What’s the Big Deal?

These two drawbacks are relevant in both proof of stake and proof of work, but the key distinction being the proof of stake system requires permission from the incumbent stakeholders. If permission is not granted from the stakeholders, the only option to amend the network is to create a completely new network from scratch. Creating a new network is difficult as it incurs high switching cost and high startup cost. This barrier to entry allows the legacy proof of stake business to passively profit from the network to the extent that a new network cannot replace it. The advantage of proof of work is that anyone can amend the network from WITHIN the already existing system.

What Does a Proof of Stake Business Look Like?

Blockbuster is a perfect example of a proof of stake business. The business presumably had a board of directors and shareholders responsible for maintaining success of the Blockbuster network. In order to change the Blockbuster network into a streaming service (Netflix), approval of the Blockbuster stakeholders was required. The Blockbuster stakeholders did not upgrade the network because they either did not see the value in streaming services, or they believed streaming services would reduce their profit margin.

As a result of Blockbuster stakeholders disallowing the network upgrade, Netflix created a completely separate network to make the old Blockbuster network obsolete. Oddly enough, Netflix retained the same proof of stake system and will soon succumb to the same fate as Blockbuster. In order to be published on Netflix, the content creator must again receive permission from the Netflix stakeholders. The Netflix stakeholders, no matter how smart they are, are not capable of centrally planning the best content for all of its viewers. Additionally, the Netflix stakeholders are never going to approve of a change which allows publishers to monetize content without their permission (decentralized Netflix).

Hybrid Proof of Stake/Proof of Work Businesses

The evolution that is the Internet has brought the first wave of hybrid Proof of Stake/Proof of Work businesses. Among these are YouTube, Facebook, Amazon, eBay, Uber, and many others. These businesses created a proof of stake management layer, with a proof of work products/services layer. Changing the YouTube/FB/etc protocol still requires approval of the network stakeholders, but service providers within the protocol are subject to rigorous, open competition. The best YouTube content creators get the most views. The best sellers on eBay get the most sales. The best drivers on Uber get the most rides. If the service providers fall behind the cutting edge of innovation, they are immediately replaced by new entrants within the network.

Stakeholders like YouTube/FB/etc created massive value when building the network, but generate little value today. The greater network would stand to profit far more if their platform fees were removed from the system. Of course this is in direct conflict with the stakeholder’s personal interest so it will never happen. The platform fees are tolerated to the extent that a new network cannot overcome the switching cost.

What did hybrid PoS/PoW Businesses Solve?

The Hybrid PoS/PoW business model has mostly solved the first issue with PoS: Anyone can come in with new ideas and compete. This takes most of the burden off would be central planners as new ideas are left to the open market. The hybrid PoS/PoW model does not solve the second issue with PoS: Upper level stakeholders are incentivized to protect their personal profit margin, before the profit margin of the greater network. This means hybrid PoS/PoW systems still retain high platform fees and censorship from government.

What would a PoW Business Look Like?

A complete PoW business means anyone can compete without permission and anyone can change the protocol without permission, within the already established network. This means open competition of service providers, and the removal of passive stakeholders (business owners/government). No longer will you ask permission from employers or governments. The best value producers win. Always. Participants of the network express their acceptance of the system through voluntary interaction. One trade, one vote.

The hybrid PoS/PoW business model has been the best method of scaling a semi-PoW system. That is until now. Bitcoin provides the foundational building blocks for building a complete PoW economic system. This system is called Freedom Network.

Freedom Network — A PoW Economy

Once the individual can prove who he is and what he can do without a middleman, the need for centralized businesses is eliminated and a Proof of Work economy is born.

We have proposed a system for a voluntary economy without relying on a central arbiter. Bitcoin addresses are used to register pseudonyms within the network. Peer attestation is used to build a profile. Hosting location and content integrity is achieved by linking the user’s address and content hashes to the on-chain identity. Protocols for trade are market agreed upon standards designed by developers and affirmed by users. Routing is facilitated by competing indexes matching broadcasts from producers to requests by consumers. The user expresses its acceptance of the system through voluntary participation. Attackers are economically punished through segmented competition. Any needed rules and incentives can be enforced with this consensus mechanism.