Summary ->> Contemplation ->> Closing
(C) Technology Issues
The technology space is getting matured but not yet ready for practical adoption due to its complexity and innate technological issues.
“Bitcoin is created through an energy-intensive ‘mining’ process that uses high computing power to solve a complex mathematical equation, ‘proving’ that an ‘anonymous miner’ used the process the network ‘agreed’ upon to build the blockchain record of transactions. Miners then get bitcoin in ‘reward’ for successfully completing the equation.” 23
If you were given a choice, what key words would you select that can describe the workings of Bitcoin from the concise description above? I have chosen three concepts as crucial to rightly define the bitcoin blockchain as a distributed technology: Mining, Miners, and Incentives.
Below, for each concept, I will describe characteristics and dynamics to see how certain aspects create a certain risk that hinders the technology from meeting prerequisite conditions I defined: mass scalability, security, efficiency, lower cost, simplicity, practicality, and environmental cost.
Total four factors are discussed: Mining, Miners, Incentives and Frictions. Whereas the first three factors are internal dynamics, the last factor is about dynamics outside the blockchain.
■ Mining Economics
The Proof-of-Work(PoW) consensus mechanism used in mining process involves following characteristics.
- The nature of the whole process of mining – ‘winning‘ competition among miners to get the right to create and add ‘a’ new block into the chain and thus receive ‘a’ new bitcoin – is a competitive process and is more of a lottery than a race.
- The miners compete to solve a difficult mathematical problem that is based on a cryptographic hash algorithm.
- All of the computers trying to mine bitcoin are in a computational race, trying to find a particular, somewhat random answer to a math algorithm. The algorithm is so complicated that the only way to find the desired answer is to make lots of different guesses. The more guesses a computer makes, the better its chances of winning. But each time the computers try new guesses, they use computational power and electricity.
- The first miner to get a resulting hash within the desired range announces its victory to the rest of the network. The victorious miner gets some new bitcoin(currently 12.5 bitcoins), as a reward for its work.
- All the other miners immediately stop working on that block and start trying to figure out the mystery number for the next one.
- The higher the Bitcoin market price becomes, the higher competition among miners who want to get some earnings. The opposite case works in opposite direction. √
- As the value of Bitcoin increases, the competition for mining new bitcoin increases. As more computing power is directed at mining, the computational problem that miners need to solve becomes more difficult. 24
- Ultimately, this game-like mining mechanism is attributed to higher environmental cost due to its required electricity, which can be otherwise used to help people in the poor economy. √
- A latest report estimates the computer power needed to create each coin consumes at least as much electricity as the average American household burns through in two years. 25
- Also, the total network of computers plugged into the bitcoin network consumes as much energy each day as some medium-size countries. And the network supporting Ethereum, gobbles up another country’s worth of electricity each day. 26
- It estimates that each bitcoin transaction currently required 80,000 times more electricity to process than each Visa credit card transaction, for example. 27
- The energy spent on mining bitcoin in 2007 alone has surpassed the average electricity consumed yearly by 159 nations. 28
- As much of the world’s electricity still comes from greenhouse-gas-producing fossil fuels, this means the exorbitant amounts of energy needed to mine cryptocurrency make it an environmental hazard, contributing global climate change. 29
- Furthermore, the high energy requirements for cryptocurrencies are also a stumbling block for mass adoption. 30 √
- The largest mining operations are springing up in parts of the world with cheap electricity, like China. Cheap power often means dirty power, and miners draw on low-cost coal and hydroelectric generators in China. 31
- One study showed a miner in China had carbon footprint that was “simply shocking,” emitting carbon dioxide at the same rate as a Boeing 747. 32
- Many virtual currency aficionados argue that the energy consumption is worth it for the grander cause of securing the Bitcoin and Ethereum networks and making a new kind of financial infrastructure, free from the meddling of banks or governments. 33
- The enormous electricity consumption with resulting environmental cost, that otherwise can be routed to the needy, is considered against the very ideals of Bitcoin’s promise of the egalitarian, distributed and inclusive system.
- The bitcoin core developers admit this and expect in the long run, they will move away from PoW as the way the network is secured, and will combine it with something else. 34
- However, due to absent leadership, any future direction is unknown and uncertain.
- Bitcoin mining is an essential process in Bitcoin security – the complexity and effort make the cryptocurrency system less vulnerable to attack.
- Once a certain level of acceptance, and therefore value, has been achieved in the bitcoin blockchain, altering the record for nefarious purposes would always demand more computer power (and therefore expense) than the rewards warranted. 35
- PoW is considered as the most secure consensus mechanism due to its required processing power(the hash power). PoW makes it extremely difficult to alter any aspect of the blockchain, since such an alteration would require re-mining all subsequent blocks.
- There is, however, a 51 percent attack risk where, by controlling the majority of the computing power on the network, an attacker or group of attackers can interfere with the process of recording new blocks.
- Due to energy concerns, some cryptocurrencies that involve blockchaining mechanism are adopting alternative consensus mechanism such as Proof of Stake(PoS) that doesn’t require use of electricity.
- But it is far from clear that the method will be as secure as the one used by Bitcoin. Vitalik Buterin has been fiercely attacked by bitcoin advocates, who say his proposal of PoS will lose the qualities that make virtual currencies valuable. 36
- The competitive nature of PoW process involves a certain level of difficulty for solving math problems to generate a hash for a new block that is mined in every 10 minutes “on average“. The actual block time can vary from 10 minutes up to 1 hour or more.
- 10 minutes is the amount of time that the bitcoin developers think is necessary for a steady and diminishing flow of new coins until the maximum number of 21 million is reached (expected sometime in 2140). 37
- The difficulty of the calculation (the required number of zeroes at the beginning of the hash string) is adjusted frequently, so that it takes on average about 10 minutes to process a block. 38
Speed versus Security
- There is a trade-off between mining process and the speed of the bitcoin network. “It pays for autonomy by sacrificing efficiency.” 39
- The 10 minutes of block time is considered slow to accommodate increasing transaction flows. √
- PoW is the core principle to maintain the network’s security that cannot be changed. It appears the bitcoin network is trapped here at this stage. √
- New development efforts to overcome this issue are consistently being made within the bitcoin network.
- The block time of altcoins, such as Ethereum and Ripples that opt for alternative consensus mechanisms, is around 15 second or faster.
- However, we cannot guarantee the security of these alternative consensus mechanisms, because it’s unproven yet. √
- In business adoptions, experts and analysts warn that the technology isn’t a fit for every transactional business process. 40
- Because records, or blocks, require cryptographic verification before new ones can be inserted, it can be inefficient for business applications that require speedy transaction settlement. 41 √
- They are skeptical on blockchain applications adopted outside of cryptocurrencies; The argument is that it’s slower and more expensive to deploy than traditional transactional technologies such as a centralized relational database. 42 √
Blockchain Size versus Security
- Large, public blockchains are inherently more secure than smaller private blockchains. It’s because, to compromise a blockchain, an attacker must compromise over 50 percent of the participants or blocks, and do so faster than new blocks are created. 43
- Small blockchains can be faster and easier to compromise, especially if all the related “secrets” are stored in one place or company. In fact, many security experts question if single-company blockchains are even needed. 44 √
- Blockchain’s advantages only occur when they are distributed past a single security boundary. Still, we’re likely to see many private, small blockchains, simply because blockchains have the potential so solve complex financial transactions in seconds, and because smaller blockchains are likely to become components of far larger hybrid and public blockchains. 45
Block Size (Transaction Capacity) versus Network Integrity
- Bitcoin’s transaction volume per one block is about 6, which is very limited and this is attributed as the main obstacle for the bitcoin blockchain’s scalability. √
- Bitcoin’s block-size limit of 1MB, limits the amount of possible transactions on the network, which increases confirmation times, or the required transaction fees, or both. As such, it decreases Bitcoin’s utility as a payment system, which could slow down or restrain adoption. √
- This could even limit Bitcoin’s potential as a widely-used technology – or require more complicated solutions to realize that promise. 46 √
- Moreover, Bitcoin’s block-size limit is probably the single most important parameter controlling the cost of operating a full node. It limits the required CPU cost of verifying transactions, it limits the bandwidth cost of sending and receiving transactions and blocks, and it limits the disc space cost of storing the blockchain. 47
- Since PoW is a fundamental element for maintaining the bitcoin network’s security, to overcome this low transaction volume (with the constant block time of 10 minutes), they instead went ahead with a hard fork with a increased block size of 8 MB at the expense of network integrity in 2015.
- Increased block-size limit would allow a smaller percentage of users to directly influence the consensus rules, creating a potential 51% attack as well as concentration risk. 48 √
- And importantly, Bitcoin users who would like to run a full node but can’t, are excluded from Bitcoin’s consensus process. 49 √
- Under such circumstances, rather than empowered participants of a networked consensus process, many worry that Bitcoin users could increasingly become consumers of a product offered by the few entities able to run and support full nodes; miners, companies and, arguably, developers, too. 50 √
- There are still much debate and internal conflicts going on within the network community. This is also a leadership issue. √
- Also, the hard fork in 2015 with increased block size put some miners in disadvantage affecting their incentive schemes.
- If the block size increase is too large, it would put low-bandwidth Chinese miners at a disadvantage compared with miners in other parts of the world. Receiving new blocks to build upon would take longer; and when they did find a new block, they would take longer to send it out to the rest of the network. These delays would ultimately result in the network’s rejecting some of their blocks. They would lose out to miners with more bandwidths whose blocks propagated faster. 51 √
Social Malaise: The Greedy Knows No Limits
- Each mined bitcoin makes future bitcoins harder to create.
- Electricity is the number one operational cost to a bitcoin miner. For that reason, many bitcoin miners “borrow” resources to mine bitcoins, either at their employer’s locations, or by spreading bitcoin-mining malware. 52 √
- Today, many of the biggest malware botnets are simply to mine bitcoin(bitcoin miner malware). It’s still unauthorized use of a computer or device (they often hijack online video camera equipment and routers), and it costs the victim money. It also slows down the hijacked computers. 53
(End of Part 5. To be continued in the next article)