Proof-of-Work (PoW) -based blockchains often become victims of their own success. The two contemporary realities that delimit the mining landscape and ensure that blockchains do not keep their initial promises are:
- the ongoing technological arms race, driven by inherent competitive greed;
- the increase in energy costs associated with Proof-of-Work mining.
PoW consensus-based blockchains have led to disparity and centralization in terms of hash rates. This concentration of mining power in fewer and fewer hands represents an attack on the fundamental requirement of blockchains, which is distribution and decentralization.
Furthermore, the motivation to increase mining power has had a ripple effect in terms of uncontrolled energy costs, potentially causing irrevocable environmental damage – a crux of the regulatory crackdown applied in China on Bitcoin (BTC). To ensure a sustainable future for blockchains and cryptocurrencies, the hash rate must be distributed more fairly, ensuring that the core components of distribution and decentralization are kept intact. This requires a review of the mining process and a restructuring of PoW systems.
The negative impact of mining centralization
Before looking at possible solutions, it is worth pointing out the extent of the problem. The PoW consensus was, and continues to be, essential to Bitcoin’s popularity, success, and enduring reliability. In particular, the PoW offers a solution to the known Problem of the Byzantine Generals through a configuration of incentives and a continuous commitment of resources, which make it impossible for a malicious party to interfere in an honest consensus system.
Distribution and decentralization remain crucial to resolving the dilemma in which the parties must agree on a single strategy to avoid complete failure, allowing widespread consensus on the “message” and eliminating the risk that some of the parties involved could be corrupt or unreliable. However, the more centralized a blockchain network becomes and dominated by a small number of entities, the less consensus protocol can work as a solution to this problem. The rise of huge ASIC farms allows a handful of powerful entities to exert considerable control over the blockchain infrastructure, thereby threatening its ability to remain distributed and decentralized and ultimately trustless.
This PoW consensus problem arises from the way miners are incentivized through competition for block rewards. While an essential part of the structure to keep the network secure, this ongoing race for profit can also create serious problems. In particular, it gives rise to the allegorical figure of the “cheating athlete problem”: when the prize of a competition is worth a lot, the participants will do whatever it takes to win, including cheating. Imagine a group of athletes at the start of the first of a series of races, where everyone will try to cross the finish line first and win the first prize.
There is a certain amount of luck in winning every race (it is not simply the fastest to triumph), but obviously the chance of winning increases with the speed of the athlete. Cheating, in this case, is defined as the acquisition of a substantial advantage over other runners through the use of technology and / or collusion, such that the winner of each race is not random enough to provide a solution to the generals problem. Byzantine (i.e., consensus distributed through a commitment of resources in a sufficiently haphazard manner).
It is for this reason that PoW systems lead to the development of increasingly energy-intensive machines and larger mining farms, reducing decentralization and distribution of the network and preventing the commitment of resources from acting as a reliable means of verification. It also increases the overall energy consumption of the network, potentially to a point where it could have a negative impact on the environment if not controlled.
Protocol balancing for blockchain mining networks
To develop a solution to the problem of the cheating athlete, it is necessary to start with the awareness that it is not the total hash rate of a blockchain network that gives it security; rather, it is how that hash rate is distributed. To this end, a solution is sought where redeployment is a key feature of the protocol (rather than being left to politics or centralized committees, no matter how well-intentioned they are).
It is possible to balance the chances of winning the “race” by applying a handicap to those runners who are significantly faster and giving an advantage to those runners who are significantly slower. In a blockchain network, this can be implemented through a peer-to-peer, thermodynamic balancing process, which regulates the individual hashing difficulty for miners in a fluid and verifiable way. This allows the network to move towards effective hash rate balance and bypass the worst centralization excesses of mining capacity on the network, all while continuing to operate autonomously without the involvement of trusted third parties.
There are many implementations of blockchain technology currently in existence, most of which possess some form of economic or monetary value, and employ underlying technology that aims to best ensure network security and efficiency. However, an algorithmic balancing protocol, which orients the network to a homogeneous distribution (even if not entirely, a completely “flat” network would bring its own economic and security problems) can achieve the optimal balance between distribution and economic incentive. This can substantially reduce monopolistic mining practices while keeping the ecological footprint of the network to a minimum by discouraging the continued increase in processing power through expensive technologies and the construction of large ASIC facilities.
A greener, fairer and safer future
The problems posed by the widespread centralization of mining that we commonly see today pose a significant challenge to the PoW consensus, but they shouldn’t spell its end. Emerging as a groundbreaking technological innovation, PoW solved a long-standing mathematical and computing problem that paved the way for the success of Bitcoin and many other cryptocurrencies, while promising an entirely new economic medium of exchange. However, we could run the risk of not fully exploring the disruptive potential of PoW simply by setting it aside.
Related: Staking Will Eat Proof-of-Work for Breakfast: Here’s Why
The similarities with the exploration of economic systems are evident. Capitalism is one of the largest and most progressive systems ever developed in human history: it has increased innovation, expectation and quality of life, opportunities for billions of people. However, if left unchecked, it can generate unprecedented wealth and inequality and potentially even bring us to the brink of climate catastrophe. Rather than abandoning it altogether, what societies generally try to do is balance the pros and cons of this system, to create a form of temperate capitalism in which greed and monopoly efforts are not allowed to completely dominate, so that a more responsible and forward-looking company can emerge and thrive. This is largely what companies have tried to implement (with varying degrees of success) in the form of redistribution of wealth through, for example, taxes, anti-monopoly laws, etc.
Likewise, the PoW consensus is a revolutionary invention, but it needs to be revised to curb the excesses of greed within the system. Collectively, we have the ability – and responsibility – to better align the PoW consensus protocol with the needs of the company and its original purpose, reducing monopolistic trends and preventing the centralization of cryptocurrency mining. Simply put, instead of reinventing the wheel (abandoning PoW in favor of risky alternatives), what is needed is a way to leverage the wheel more effectively to build a machine that connects and radically changes the world.
This article does not contain investment advice or recommendations. Every trade carries risk and readers should conduct their own research before making a decision.
The views, thoughts and opinions expressed herein are solely the author’s and do not necessarily reflect or represent the views of Cointelegraph.
Alexander Hobbs is the scientific director of Zenotta. Graduated in theoretical astrophysics, he is the author of numerous scientific publications in the field of supermassive black holes, the formation of galaxies and dark matter, and has participated in numerous international conferences and workshops. Prior to joining Zenotta, he held postdoctoral positions at the Institute of Astronomy of ETH Zürich, Switzerland, and the Institute of Computational Sciences of the University of Zurich.
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