proof of work consensus model

Proof of Work Will Fail Bitcoin: Bank of International Settlements

The Basel-based Bank of International Settlements (BIS) released a research paper titled “Beyond the doomsday economics of “proof of work” in cryptocurrencies” on Monday, January 21, 2019. The paper is authored by the Principal Economist at BIS, Raphael Auer and it explains that the block processing mechanism of Proof of Work will fail the world’s largest cryptocurrency Bitcoin.

The Bank of International Settlements is popularly known as the ‘central bank of central banks.”

In the research paper, economist Auer based his theory of Bitcoin’s failure around its issuance schedule. As per Auer, the low fee nature of Bitcoin transactions will eventually become obsolete owing to the decline in Block rewards.

He also claimed that on-chain processes will start taking a longer time- from hours to days, to even months.

Auer wrote in the paper:

“And with block rewards – which, at present, represent the vast majority of miners’ income and thus underpin the security of payments – being gradually phased out, the security of payments is also set to deteriorate.”

The paper also covers technology solution such as SegWit and Lightning Network which serve to solve the scaling issues associated with Bitcoin.

Even though Auer accepted that second-layer payment protocol of Lightning Network might witness adoption in the future, however, he seemed critical about the long term advantages of the system.

Auer elaborated in the paper that there is a trade-off between centralization and efficiency. He explained,

“Thus, 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.”

This research paper, interestingly, comes days after a Blockchain Developer by the name of Bryce Weiner asserted that Bitcoin mining will come to an end.

In this statement on Twitter, Weiner was critical about Bitcoin’s supply limit. Weiner claimed that the ability to mint your money is what gives digital currencies their true power.

Subsequently, in the same Twitter thread, Weiner praised the Proof of Stake mechanism.

Weiner claimed that Blockchain Technology will hugely benefit the marginalized population.

As per his claims, coins based on the Proof of Work consensus mechanism, such as Bitcoin, are meant for the privileged, while staking-eligible coins are for the underserved.