The blockchain industry has voted with its feet, and Bitcoin-style mining for cryptocurrency has largely been relegated to the scrap heap of history, at least for new chains.
Bitcoin, the first and largest blockchain, uses mining — also known as proof-of-work (PoW) — as its consensus mechanism, meaning the way the blockchain is secured, new information is added to it, and new bitcoins are distributed. Other major blockchains that use similar mechanisms include are Bitcoin Cash, Litecoin, the memecoin Dogecoin and the privacy coin Monero.
Mining has gotten a lot of bad press in the last few years, and not without cause. For one thing, it uses an enormous amount of power.
For another, it doesn’t scale all that well. With new information added only every 10 minutes, Bitcoin tops out at four or five transactions per second (TPS). Not nearly enough for a modern payments system that wants to compete with Visa’s current 65,000 TPS maximum.
Which are the two main reasons why the No. 2 blockchain, Ethereum, is scheduled to start switching from PoW to far more environmentally friendly proof-of stake (PoS) Ethereum 2.0 in the culmination of a years-long development process.
And yet, plenty of people still think PoW is the best solution, especially for payments cryptocurrencies used primarily as a payments currency — more secure and decentralized than PoS and able to increase its speed using Layer2 blockchains like Lightning Network.
So, here’s the case for PoW.
The argument for PoW begins with the security of the blockchain baked into its consensus mechanism.
Basically, it’s a race to solve a math puzzle, with more computing power giving you a better chance of coming in first. Even down around 70% from its all-time high, $20,000 bitcoins mean $125,000 is given away every 10 minutes. As a result, the computing power is poured into that race uses nearly as much power as is used annually by Pakistan.
Unlike mining, proof-of-stake uses validators who essentially put up a bond for good behavior, that gets slashed for poor work quality or dishonest behavior. Validators are selected randomly, but in line with the size of their stake. So the more crypto you can afford to lock up as a stake, the more you’ll make.
The argument that PoW is safer begins with the cost of mounting a 51% attack that would let a bad actor gain control of the blockchain and double spend tokens. You’d need to gain 51% of all computing power to attack a well-established PoW blockchain. On a PoS blockchain, you’d need 51% of the funds staked.
In both cases, the security depends on the maturity of the blockchain, the number of people either mining or staking. But, the argument goes, mining requires something outside of the blockchain itself, an external source that can’t be hacked. Proof-of-stake validating has a far lower barrier to entry, although major blockchains make it high enough that funding attacks are unfeasible.
Besides, bitcoin proponents point out that a lot of the energy used now by bitcoin miners is renewable — especially since China kicked out the miners using its horribly polluting old coal-fired plants.
Then there’s the simplest argument: Bitcoin’s PoW security has stood the test of time Proof of stake, especially at large scale, is a lot newer.
Particularly on smaller chains, it’s too easy for validators to build bigger empires, especially as PoS staking generally involves letting other investors loan their tokens to a validator to increase their stake and the amount of control they have.
The flip side of this argument, however, is that the cost of bitcoin mining equipment and power it requires are so high that only a few major mining firms control the majority of it.
And there are PoS offshoots like delegated proof-of-stake which have a limited number of validators. The problem with that system became clear when the Ronin Network hack, in which a crops-chain bridge protocol was hacked of $625 million when a hacker compromised the passwords of five of the nine validators.
“This hack reflects the continuing challenges that blockchains and operators face in balancing user experience and security,” Flora Li, head of the Huobi cryptocurrency exchange’s Huobi Research Institute, said back in March.
With popularity soaring, she noted, the operators “took shortcuts to relieve network bottlenecks, cutting down the number of nodes that needed to be validated for transactions to just five of nine nodes, making it easier for hackers to exploit.”
Increasing the number of from five to eight, as Ronin’s operators did “doesn’t solve the fundamental problem of how proof-of-stake blockchains can keep transactions fast, user-friendly, and energy-efficient without compromising security.”
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