Since Bitcoin’s creation, mining has been an essential driver of cryptocurrency’s growth. By restricting the production of new bitcoins to computers solving complex problems, Satoshi Nakamoto enshrined scarcity into Bitcoin’s DNA. By entrusting the integrity of all balances and transactions on the network to consensus among miners, Bitcoin built a revolutionary decentralized trustless network. The mining process imbued a community of millions with a strong economic incentive to support Bitcoin’s growth and future success.
But there are serious drawbacks associated with cryptocurrency mining. The biggest is the environmental impact. As both Bitcoin’s value and the computing power required to mine it has increased, so too has cryptocurrency mining’s energy consumption. During Bitcoin’s explosive growth in 2017, mainstream media outlets published a raft of alarmist articles comparing Bitcoin’s energy consumption to countries including Ireland and Nigeria. With a majority of the world’s governments committed to combatting climate change, the energy-intensive mining process is a huge black mark against cryptocurrency’s long-term viability.
By distributing decision making across a global network of miners, Bitcoin was supposed to be completely decentralized and beyond the control of any single entity. But cracks appeared in this utopian vision with the hard fork of Bitcoin Cash and recent creation of Bitcoin Cash SV. As we explained in a recent article, a contentious hard fork of Bitcoin Cash has pitted rival mining groups against each other, with each seeking to use superior hash power to claim supremacy.
The fallout of the Bitcoin Cash hash war has deepened an already-entrenched cryptocurrency bear market. As the value of Bitcoin and other cryptocurrencies has fallen, so too has the profitability of mining operations. Bloomberg reports that 24% of Bitcoin miners have ceased operation since August. This has accelerated since the Bitcoin Cash SV drama, with as many as 800,000 Bitcoin miners shutting down over the past month.
Alternatives to cryptocurrency mining are growing in popularity. EOS uses a Delegated Proof of Stake (DPoS) consenus mechanism, where token holders vote for representative block producers who then verify network activity. Ethereum is also planning to incorporate Proof of Stake (PoS) into the network’s Ethereum 2.0 update. The directed acyclic graph (DAG) network model used by IOTA and NANO sees transactions verified by other adjacent transactions in a process IOTA calls ‘The Tangle’.
Reduced energy consumption isn’t the only advantage these alternative consensus mechanisms offer. Bitcoin often suffers from slow transaction verification and high fees, and solving these problems was one of the main motivations behind the Bitcoin Cash hard fork. While Bitcoin Cash and Bitcoin Cash SV have increased block sizes to combat these problems, consensus methods which don’t rely on mining may be able to eliminate these problems altogether. The DAG structure of IOTA and NANO and the form of DPoS used by NEO allows for transactions that are feeless and near-instant. A pure Proof of Work (PoW) mining consensus method like that pioneered by Bitcoin and still used by Ethereum has been shown to be slower and more expensive than virtually any alternative.
So with seemingly superior alternatives now available and Bitcoin mining in decline, are the days of minable cryptocurrencies numbered?
While Bitcoin was always supposed to be a borderless digital currency, issues with transaction speed and cost have seen its main use case become as a form of digital gold. This has been exacerbated by the fact that most HODLers expect - or at least hope - Bitcoin will increase in price over the long-term. If you expect an asset to appreciate in value, why would you use it as currency? And conversely, if it cannot practically be used as currency, what purpose does it serve besides being a speculative investment?
Moving back to the original vision of a functional currency was one of the main intentions of the Bitcoin Cash hard fork. Other projects have sought to incentivize holding of their tokens in other ways. NEO and VeChain both reward holders of their main token with a secondary token - GAS and VeThor, respectively - which are then used to facilitate other transactions on the network. The DPoS model used by EOS rewards large stakeholders with a share of network transaction fees, and it is expected Ethereum’s proposed PoS model will function in a similar way.
Edward Snowden’s recent comments on consensus mechanisms have drawn a lot of attention, with most focusing on his depiction of PoW as being environmentally destructive and overly beneficial to the already-rich. However, his take on PoS was equally scathing, with CCN quoting him as calling it “a direct handout to the rich in the hope that their greed will keep the system running”.
What About Decentralization?
One of the biggest arguments in favor of a mining-based PoW mechanism is that it allows for a network to be truly decentralized. Most networks that don’t use Bitcoin-style PoW mining have been criticized for being overly centralized. Ripple is a prime example, with the entire supply of XRP being pre-mined and released at preset intervals. NEO has faced frequent criticism for the centralization of its consensus.
An IOTA-style DAG Tangle theoretically allows for pure parallel transaction verification, but DAG networks still currently require some degree of overriding consensus mechanism, as transactions cannot always quickly find adjacent transactions to be verified by. NANO and Byteball use nominated witness nodes for this function, while IOTA currently relies on a centralized Coordinator, with plans to eliminate this at some point in the future. TrustNote blends DAG with traditional cryptocurrency mining in order to balance the benefits of parallel transaction verification with true decentralization.
Since migrating from Ethereum to its own mainnet earlier this year, EOS has suffered sustained criticism for a raft of issues related to its DPoW consensus mechanism. Several nominated Block Producers (BPs) had their status revoked almost immediately amid accusations of acting maliciously. More recent controversy has centered on the concentration of BPs in China. EOS has repeatedly acted to reverse transactions that were deemed fraudulent. While this is standard practice for established financial firms such as VISA and MasterCard, it is anathema to ardent supporters of Satoshi-style decentralization. If a centralized entity can reverse transactions at will, you don’t really own your own tokes - or so the argument goes.
But the recent drama surrounding the Bitcoin Cash ABC v Satoshi Vision hash war shows that mining doesn’t make a network immune to the perils of decentralization. The backers of Bitcoin Cash SV attempted a 51% attack to seize control of Bitcoin Cash. This attack type involves an entity in control of 51% or more of a network’s hashrate, or mining power, acting to assume malicious control over the entire blockchain. SV’s backers were eventually fought off by the efforts of mining groups led by Bitmain, but as our article on the drama explains, hashrate had to be diverted from Bitcoin mining to stave off the attack on Bitcoin Cash, leading to an instant drop in Bitcoin’s US Dollar value. SV’s backers may have failed in their ultimate aim of gaining complete control of Bitcoin Cash’s network, but the episode shows the economic chaos anyone with the necessary resources can wreck on a minable blockchain.
Bitmain has itself recently been accused of several instances of foulplay. A lawsuit has been launched for $5 million, alleging that Bitmain uses new customers’ computing power to boost its own mining operations before the customer has fully set up their own account. An article on Seeking Alpha goes further, suggesting that Bitmain may have deliberately driven down Bitcoin’s price to assert market dominance prior to an upcoming IPO:
“We think that driving down, or allowing the price of Bitcoin to decline is akin to a classic price war to consolidate the industry and put competitors out of business. Not allowing competition to sell units effectively starves them of capital and weakens their ability to conduct R&D, and even survive in some cases.”
A Third Way?
PoW and PoS are by far the dominant current consensus mechanisms, each with its own advantages and hazards. But blockchain is still a new and rapidly-developing form of technology that is far from reaching full maturity. It is very possible that an ideal consensus mechanism will arrive within the near future.
Its a problem some of the brightest minds in the blockchain space are working on, but it is also an incredibly difficult problem with no room for the slightest error or vulnerability. It requires impeccable security and the agility to respond to currently unimagined future developments.
For now, PoW has proven to be the most secure, stable, and scalable consensus mechanism. While Bitcoin has suffered from issues related to transaction efficiency, it has so far proved immune to attempts to attack or hijack the network. But with Ethereum moving toward PoS, PoW and mining may indeed have had its day.