The Bank for International Settlements today released a new report that discusses the economics of how Bitcoin (BTC) achieves data immutability and explores what the future might hold for cryptocurrencies. The paper finds out that payment finality achieved through “proof-of-work” is extremely expensive and suggests to depart from proof-of-work to speed up payment finality of cryptocurrencies.
The BIS report entitled, “Beyond the doomsday economics of “proof-of-work” in cryptocurrencies identifies two economic limitations of which delays finality of payment of cryptocurrencies. First, that Bitcoin “counterfeiting” via “double-spending” attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of “mining” income via fees as user free-ride on the fees of other transactions in a block and in subsequent blockchain.
The report further explains that the proof-of-work can only achieve payment security if there is high mining income. Unfortunately, the transaction market could only generate adequate level of income. This results in deteriorating liquidity in succeeding years. In addition, the bulk of income of miners come from block rewards or newly minted bitcoins which are currently being phased out. It takes months before Bitcoin payment becomes final due to proof-of-work.
So the paper concludes with how technologies can affect the efficiency of Bitcoin and other cryptocurrencies. These technologies can help improve the economics of payment security but is not the ultimate solution to the problem.
The paper suggest that cryptocurrencies should depart from proof-of work since this is not sustainable anymore because of the phase out of block rewards. The cryptocurrency industry should explore the possibility of using other methods such as “proof-of-stake,” which is defined as:
a system in which coordination on blockchain updates is enforced by ensuring that transaction verifiers pledge their coin holdings as guarantees that their payment confirmations are accurate.
The full report can be found here.