The term Proof-of Work (PoW) pops up quite a few times in the cryptoverse and by now even if you don’t know much about it, you’ve probably guessed that it’s an important part of the crypto dictionary. The PoW is basically an algorithm used by Bitcoin (BTC) and a few of the other crytpocurrencies. And despite it being used by the king of cryptos, it apparently does have flaws. A new study from the Bank of International Settlements (BIS) recently put forward the argument that PoW is not sustainable in the long-term and needs to be replaced.
Now we might’ve been skeptical about such a statement too, that is if wasn’t coming from the bank, which is regarded as the central banks of central banks. In its research report published on Monday, BIS claimed that the PoW, which depends on a network of powerful computers in order to secure the network, is an extremely expensive affair. And the bank ardently believes that the only solution to this problem is to avoid using the algorithm altogether.
The author of the report, Raphael Auer serves as a principal economist for the monetary and economic department at the BIS. He further clarified the rationale behind this narrative in the report; he explained that there are two fundamental economic limitations of the PoW algorithm.
Firstly, Bitcoin (BTC), while being the biggest crypto out there, does has its vulnerabilities and one of them is double spending or 51 per cent attacks. Which obviously require state of the art and extremely expensive protection, based on the PoW.
The second limitation is that as the system stops the process of giving away Bitcoin (BTC) as block rewards to miners, the algorithm will fail to generate transaction fee “in line with the goal of guaranteeing payment security.”
Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality
Therefore, Auer suggests that further development of blockchain tech is imperative and is very much needed in order to speed up payment finality and keeping the liquidity of cryptocurrencies intact.
Auer further suggested second-layer solutions such as the Lightening Network, however he emphasized that the only fundamental solution would be to “depart” from PoW. But solutions to such complex problems don’t come that easy. He mentioned that the suggested alternative, the Lightening Network, is also not without its concerns because choosing the alternative would be a trade off between efficiency and centralization.
But Auer believes that in order to find solutions, it is important to take a look at the big picture and ponder on how the entire crypto ecosystem can complement and actually improve the existing financial and monetary system, instead of just replacing it. He concluded saying,
The current technology seems unlikely to replace the current monetary and financial infrastructure. Instead, the question is rather how the technology might complement existing arrangements.
For further details, stay tuned to BlockPublisher.