Bitcoin must abandon the Proof of Work (PoW) system if the cryptocurrency is to solve current issues. It is the conclusion according to the Bank for Internation Settlement (BIS).
Why Is Proof of Work an Issue for bitcoin?
The worlds most famous cryptocurrency, Bitcoin, uses the consensus algorithm Proof of Work. It is a requirement to define an expensive computer calculation, also called mining. The computers need to solve the calculations to create a new group of trustless transactions. It is a very slow and costly process which, according to BIS is unsustainable.
The paper shows that two economic limitations affect the outlook of cryptocurrencies that use proof-of-work. The first lies in the extreme costs of ensuring payment finality in a reasonable space of time. The second is that these systems will not be able to generate transaction fees that are adequate to guarantee payment security in future.
After surveying the market for transactions and the way fees are determined, the paper finds that the liquidity of cryptocurrencies is set to shrink. When the total supply of bitcoin is out, transaction fees alone will not sustain mining expenses. It implies that the bitcoin mining could become slow and unusable.
“Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final unless new technologies are deployed to speed up payment finality.”
According to a previous article, covered by Toshi Times, around 800,000 miners had to shut down business. Because of the falling bitcoin prices, the expenses were greater than the profit which left the miners with no choice.
What can save bitcoin and must the blockchain leave proof of work?
However, updates and so-called second-layer solutions such as the Lightning Network could help. However, the only fundamental remedy would be to depart from proof-of-work. It would probably require some form of social coordination or institutionalisation.
Ethereum is the second largest cryptocurrency and does just that. They are trying to move over from Proof of Work to proof of stake (PoS). However, the upgrade Constantinople got delayed because of a vulnerability. This vulnerability, if exploited, would allow malicious actors to repeatedly get ETH out of a smart contract through a bug similar to that which led to the DAO hack.
Meanwhile, developers create new blockchain in attempts to create more scalable solutions. While Bitcoin can only perform around seven transactions per second, there are those who claim to be able to sustain millions per second. Dexon is one blockchain who stated that they would become the first to reach one million transactions per second.
It could be that Bitcoin will be the world standard, but there is a possibility that other blockchains prove to be a better version. However, the fact is that Bitcoin is the most used blockchain in the world.
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Dennis Sahlström has been trading and investing since 2012 and has for the last two years been consistently profitable. He has been in the crypto- and blockchain space since the middle of 2017 and realized its potential for our world, not least how it is transforming the society we live in. He has now created an education platform, together with the wealth coach Marcus the Maria. They teach regular people how to invest and trade in the cryptocurrency market with proven strategies. If you want to learn more and feel like its time to get into this new asset class, download our free book and register to the next live training to get your future in cryptocurrencies started.
