Why Bitcoin (and Only Bitcoin) Needs Proof of Work

The comment I receive most on why Bitcoin won’t work is its significant energy consumption. Most comments sound something like, “If Bitcoin were a country, it’d rank XXth in terms of energy consumption. There are many more energy efficient alternatives for reaching consensus1.” While Bitcoin’s energy consumption is indeed impressive, I will make the case for why this energy consumption is necessary for Bitcoin as “digital gold.”

The purpose of proof of work (PoW)2 is to secure the network and create energy-dependent immutability. Bitcoin produces work for securing a global currency worth approximately USD 200 billion at the time of this writing. The more energy and therefore hashing power3 that is committed to that security, the more secure the network is and the harder it is to attack the network. In the Bitcoin protocol, hashing4 is used as part of the mining process to write new transactions. Therefore, if over 50% of the hashing power is achieved, the attacker could theoretically write fraudulent transactions. Indeed, “51% attacks” have been used to successfully attack smaller coins with less hash power like Bitcoin Gold5, which is one reason PoW is suited for Bitcoin but not other coins.

Because hashing power follows cryptocurrency prices (most miners mine only when it is profitable), hashing power increases correspondingly as the value at risk becomes higher. If Bitcoin indeed becomes a global store of value similar to gold (market cap ~USD 7 trillion), we should be willing to expend more energy to make sure that the Bitcoin network remains resistant to any single player taking over a majority of the hashing power. Furthermore, as the mining reward declines over time by half every four years, the incremental incentive to mine goes down and therefore the energy committed goes down.

I believe part of the problem is that Bitcoin’s energy consumption is easy to criticize because the headline energy consumption figures are very obvious. No body complains about the energy that is consumed when you use your credit card, but there is energy expended to support the data centers for fraud protection, corporate office towers, bank vaults, and armored diesel trucks. Additionally, over 80% of energy used to mine bitcoin6 derives from renewables compared to less than 20% in the United States Economy7. As mining is location independent (doesn’t need to be near population centers), Bitcoin is effectively subsidizing alternative energy projects in areas that don’t have the infrastructure to deliver the power to population centers.

While there has been an enormous explosion in consensus mechanism experimentation over the last three years, including proof-of-stake, distributed proof-of-stake, and proof of capacity, these mechanisms have significant downsides. Firstly, it is a system in which the rich “automatically” get richer. Network participants don’t need to invest in the most efficient mining equipment or search out the cheapest energy sources, they simply stake their existing assets. In such a system, it is easy to form an oligarchy as early network participants hold the most coin (at cheap prices) and therefore get the most block rewards for their staked coins. As they are “staking” their coins for these rewards, they are effectively drying up liquidity (supply) and therefore driving prices even higher for later participants. Indeed, 10 wallets hold 50% of all EOS token8, which utilizes distributed proof of stake.

Such a concentration of voting power isn’t necessarily an issue for many use cases like processing on-chain gambling transactions and indeed different governance models are suited to different use-cases, but we wouldn’t want this level of concentration dictating the world’s future store of value, digital gold. PoW consensus utilizes significant (sustainable) energy, but this is necessary for securing the network and no other consensus mechanism to-date is better suited for securing Bitcoin as the digital store of value.

Notes and Sources:

1 Consensus mechanism refers to protocols that make sure all network computers (“nodes”) are synchronized with each other

2 Miners around the world utilize application-specific machines (ASICs) and energy (hashing power) to find solutions to one-way functions (SHA-256) for the right to confirm transactions (“mine”) and receive a reward

3 Hashing power is the power that a computer uses to run and solve hashing algorithms

4 Hashing transforms a string of characters into a (usually shorter) fixed-length value

5 https://cryptoslate.com/prolific-51-attacks-crypto-verge-ethereum-classic-bitcoin-gold-feathercoin-vertcoin/

6 https://bitcoinist.com/bitcoin-mining-renewable-coinshares/

7 https://www.eia.gov/todayinenergy/detail.php?id=38752

8. https://bitcoinist.com/50-percent-eos-tokens-10-addresses/

Finance @ cLabs, shaping Celo

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