The Bank of International Settlements (BIS), recently published a report on 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.
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 “This makes an attack inherently more profitable than honest mining unless there are strong disadvantages in terms of costs for short-term rentals, a price collapse following any double-spending, or deterrence through overarching coordination.”
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 concludes stating that “at least judging based on current technologies, in the digital age too, good money is likely to remain a social construct rather than a purely technological one: the efficiency of decentralized exchange via proof-of-work exclusively is much lower than would appear at first sight, and alternative technologies still need to demonstrate that they can function without institutional backing.”
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.