Bitcoin mining; is it necessary?
/Last month the second largest cryptocurrency by market capitalization, Ethereum, underwent the so-called “merge”. And in so doing has ended proof of work mining for that project. The implications for issuance, scalability and security are beyond the scope of this conversation. However, it does beg the question that if it is possible to reduce energy consumption for one crypto by 99% or more, then why does Bitcoin need mining? Should Bitcoin abandon proof of work and greatly reduce its own energy footprint as well?
Source: Ethereum Network Hash Rate.
Before we can really answer the question I posed, it’s worthwhile to recap exactly what Bitcoin mining is and how it works today. Bitcoin proof of work is a process by which anyone can submit solutions to a network of peers that will satisfy a certain requirement. In Bitcoin’s case, the solution required is a number that will hash with a certain number of leading zeroes.
If we rewind time back to the genesis block, when Bitcoin started - the problem was trivial. Imagine being asked to guess a number between 1 and 100. Eventually you guess the number and in so-doing you would have won the prize of 50 BTC and have been able to add a block to the blockchain. Over time, the guessing game got more complicated and you would have to guess a number between 1 and 10,000, or 1 and a billion. The so-called “difficulty” of the problem is illustrated by the following chart.
Source: Difficulty – Blockchain.com
Out of the gate it might seem like this increasing hash rate would lead to a power-consumption arms race given the fact that Bitcoin’s has been the most successful crypto project to date and is mined all over the world. But it turns out that miners are quite effective at seeking out cheap power and often-times from unexpected and stranded sources that would otherwise not be used at all.
In the image above you can see equipment that mines Bitcoin using methane that would otherwise be flared off, essentially not used for any purpose. This project isn’t a one-off either, it was recently reported that Exxon was piloting a similar trial.
In a similar fashion, Bitcoin miners have sought out power facilities once constructed for producing lumber that were lying dormant in Canada and repurposed them for Bitcoin mining, even creating some jobs in the process.
The truth about our power grid in the United States is that we have ample energy, but few ways to move that power around to where it would be best suited. There are many places where power capacity exists, and many other places that could use more power as evidenced by the rolling blackouts in California. But the grid is disjointed and would benefit greatly from ways to store and distribute energy as needed (a smart grid for example). So rather than thinking about Bitcoin mining as simply an energy tax that we can’t afford, I think of it as a creative way to utilize stranded energy with positive externalities.
But perhaps the most pressing question is why proof of work is necessary at all. If Ethereum doesn’t need it, then why does Bitcoin?
First of all, it’s worth noting that Ethereum’s switch to proof of stake will need time in the wild to be battle tested. Sure, the merge has gone off without a hitch. But there are billions of dollars on the table and hackers have shown no lack of initiative and creativity when it comes to finding exploits and taking advantage of any weakness they can. This is not to say that Ethereum’s move was excessively risky, but simply that the road is long and there will probably be some more lessons learned along the way.
Bitcoin’s value proposition stems from the fact that it’s censorship resistant and fairly well decentralized. Despite the fact that the base layer of the blockchain is slow (only processing a few hundred thousand transactions per day), the Lightning network has been growing for years now at the same time that Ethereum and friends have been working on Layer twos and the PoS transition.
Interestingly, the Lightning network functions on the same order of magnitude in energy reduction as Ethereum's PoS; essentially a 99% or greater reduction in energy consumption.
The last point I want to make here is that PoS does have a centralizing effect that does not exist with PoW. Namely, without the requirement of large capital outlays such as those required to purchase mining equipment and facilities - capital becomes more flighty and bandit style. Whoever has the most ETH can simply plunk it down with their friends and you have the largest staking pool. With the recent OFAC actions and the situation surrounding Tornado Cash, it’s worth thinking about just how much control is readily yielded to regulators.
In order for a system to be reliably censorship resistant, it needs to be one step removed from the heavy hand of regulators. Try as they might (and I get it, they have a very difficult job), their efforts are often misguided and can lead to unfathomable complications. The Tornado Cash situation for example. Simply “interacting” with a Tornado Cash address is a crime. But since there's no way to stop someone from sending you a transaction it’s possible to engage in “criminal action” without taking any action at all. Case in point is the celebrity .ETH addresses that were sent tainted funds for anonymous crypto users. Whoops!
To sum up, PoW is the system that we know to be the most secure, decentralized and censorship resistant. PoS may work for Ethereum, and I certainly hope that it does. But at this point I think we’re far from declaring it a clear winner and necessary for Bitcoin’s roadmap.
Thank you,
