One of the dynamics that I haven’t seen mentioned in the debate between PoW and PoS consensus mechanisms is that of signalling.

A while back, I came across this post on game theory and signalling, and it got me thinking about how consensus mechanisms differ in terms of their use of signalling as a behavioural-economic primitive.

Signalling in Proof-of-Work Systems

Under PoW systems, good signalling is extremely costly, and causes races to the bottom.

Costly signalling

From the aforementioned post:

If a dozen millionaires are wooing Helen of Troy, the most beautiful woman in the world, and willing to spend arbitrarily much money on her — and if they all believe Helen will choose the richest among them — then if I only spend $10,000 on her I’ll be outshone by a millionaire who spends the full million. Thus, if I want any chance with her at all, then even if I am genuinely the richest man around I might have to squander my entire fortune on diamonds. This raises an important point: signaling can be really horrible. What if none of us are entirely sure how much Helen’s other suitors have? It might be rational for all of us to spend everything we have on diamonds for her. Then twelve millionaires lose their fortunes, eleven of them for nothing. And this isn’t some kind of wealth transfer — for all we know, Helen might not even like diamonds; maybe she locks them in her jewelry box after the wedding and never thinks about them again. It’s about as economically productive as digging a big hole and throwing money into it. If all twelve millionaires could get together beforehand and compare their wealth, and agree that only the wealthiest one would woo Helen, then they could all save their fortunes and the result would be exactly the same: Helen marries the wealthiest. If all twelve millionaires are remarkably trustworthy, maybe they can pull it off. But if any of them believe the others might lie about their wealth, or that one of the poorer men might covertly break their pact and woo Helen with gifts, then they’ve got to go through with the whole awful “everyone wastes everything they have on shiny rocks” ordeal.

As this scenario illustrates, if we can ensure trust between parties, signalling need not occur, reducing costs all round. Proof-of-work blockchains attempt to ensure trust between parties, but rather than removing the need for signalling, this trust is enabled through signalling.

Compare the above quote to the following scenario: