The Bank of International Settlements (BIS), recently published a report on January 21. The report examines the competence and durability of the Proof-of-Work (PoW) consensus and the future of cryptocurrencies.
The report examines the commerce of how Bitcoin delivers data immutability, and thus payment completeness, through costly computations, i.e. ‘Proof-of-Work.’ BIS posted on Twitter remarking the security and payments associated with the cryptocurrencies.
How secure are payments made in #Bitcoin and related cryptocurrencies and how efficient is such decentralised exchange? An examination of the economics behind proof-of-work in #cryptocurrencies https://t.co/oczBtfY46n pic.twitter.com/EcA1XO2prp
— Bank for International Settlements (@BIS_org) January 21, 2019
Proof-of-Work algorithms are a primary point of discussion, with the report suggesting two significant drawbacks:
- First, Bitcoin counterfeiting by double-spending attacks is quite profitable, making payment finish based on proof-of-work very expensive.
- Second, the transaction market cannot produce a fair level of ‘mining’ income through fees as users free-ride on the costs of other transactions in a block and the subsequent blockchain.
The above suggestions are questionable and thought-provoking, as it invites to question the future viability of Bitcoin as a transaction system and how it achieves payment finality through PoW.
The report highlights that the economic notion of payment finality can be explained as –
“A cryptocurrency payment can be considered as final once it is certain that from a certain moment of time onwards, it will never be profitable to undo the payment via a double-spending attack.”
The report mainly focuses on the economics of Bitcoin and hints that a 51 percent attack by malicious miners is essentially profitable. The report assumptions are based on various economic considerations of Bitcoin mining.
The report notes that a successful attacker would gain double-spent coins, by transaction fees and block rewards and this makes an attack inherently more profitable than honest mining.
The second significant discussion of the report is entirely focused on mining income. The proof of this section is that mining income from fees is not sufficient for miners to keep their mining equipment operational in the future.
Studying the process in which transaction fees fluctuate during various periods, it is advised that the transaction market cannot produce enough income for miners to remain profitable. This is because the way in which transaction fees work in the Bitcoin protocol; users can indicate the transaction fee of any given payment, and miners naturally look to include transactions with the highest fees in their mined block to increase their earnings.
The report concluded by assessing current technologies, “good money” is certain to remain a social construct rather than a technological one. The efficiency of decentralized exchange through proof-of-work is yet to be utilized. The alternative technologies would still need to demonstrate if they can function without institutional banking.
The report raises an important question for future research, whether and how technology-supported distributed exchange can complement and enhance upon existing monetary and financial infrastructure.