Connect with us

Bitcoin

Bitcoin and other cryptocurrencies must migrate from PoW, says Bank for International Settlement in a research paper

Avatar

Published

on

Bitcoin and other cryptocurrencies must migrate from PoW says Bank for International Settlement in a research paper
Source: Unsplash

Bitcoin’s search volume for the global market as a whole piqued in Q4 of 2017 when it’s price hit an all-time high of ~$20,000.

This search volume for Bitcoin far exceeded that of Gold, Silver, US Dollar. Much of the appeal/attraction for Bitcoin or other cryptocurrencies comes from the fact that there is no central controlling authority and the fact that one can be their own bank.

As exciting and promising Bitcoin sounds, a paper published by Bank for International Settlements says otherwise. The paper titled “Beyond the doomsday economics of “proof-of-work” in cryptocurrencies” mentions how Bitcoin’s Proof-of-Work [PoW] consensus mechanism has two flaws. The paper also touches on the economics of Bitcoin and PoW, whilst imploring what the future might hold for Bitcoin and other cryptocurrencies that are based on similar consensus algorithms.

The first limitation that the paper stated was that Proof-of-Work axiomatically requires high transaction costs to ensure payment finality.

As per Satoshi Nakamoto, double-spending is an attack by a large miner controlling a significant fraction of the network’s computational power. The paper stated:

“Nakamoto’s definition of payment finality (although not explicitly spelled out as such) is thus operational: the deeper a payment is buried in the ledger, the less likely an adversary with given computational resources will succeed in a double-spending attack.”

Double-spending on such a network of nodes would actually be more profitable than mining, hence, the blockchain for Bitcoin includes “economic payment finality” –  the instant that payment to another party is completed, at which point the receiving institution has irrevocable access to the money.

This can be avoided by incentivizing miners with a very high required ratio of income as compared to the transaction volume [the amount that can be double-spent].

Moreover, the paper provided a rough example that the mining income must amount to 8.3% of the transaction volume, which is a multiple of the transactions fees in today’s mainstream payment services.

The second limitation that the paper stated was that the system cannot generate transaction fees in line with the goal of guaranteeing payment security and that the system either works below capacity and users’ incentives to set transaction fees are very low or the system gets congested and suffers scalability issues.

Furthermore, the paper noted:

“Underlying this is a key externality: the proof-of-work and hence the level of security is determined at the level of the block one’s transaction is included in, with protection also being provided by the proofs-of-work for subsequent blocks… While each user would benefit from high transaction fee income for the miner, the incentives to contribute with one’s own fee are low.”

The paper concluded that PoW can only achieve payment security if mining income is high, but the transaction market for Bitcoin will not be able to generate an adequate level of income. As a result, the liquidity is set to deteriorate substantially in the future.

The paper stated:

“A simple model suggests that ultimately, it could take nearly a year, or 50,000 blocks, before a payment could be considered “final”.”

Moreover, the research indicated that the second-layer solutions for Bitcoin and other PoW-based assets like the Lightning Network or Sidechains can improve the economics of payment security but they in themselves still face scaling issues.

Due to the above-mentioned facts, the liquidity of Bitcoin and other digital assets that have forked from Bitcoin and PoW based cryptocurrencies will eventually need to migrate from PoW consensus algorithm to a more fitting and evolving consensus algorithm.





Subscribe to AMBCrypto’s Newsletter




Follow us on Telegram | Twitter | Facebook



Akash is your usual Mechie with an unusual interest in cryptos and day trading, ergo, a full-time journalist at AMBCrypto. Holds XRP due to peer pressure but otherwise found day trading with what little capital that he owns.

Bitcoin

Bitcoin’s volatility – an indication of growth or regression?

Biraajmaan Tamuly

Published

on

Bitcoin's volatility indicated to be a key aspect of its current success
Source: Pixabay

Market volatility plays a huge role in the financial ecosystem of assets and cryptocurrencies are regularly linked to its predominant effect. Whenever Bitcoin exhibits a rapid price movement in the market, the majority of the critics tagged the digital currency with extreme volatility and state that it would eventually lead to its downfall, since crypto assets cannot be trusted on a long term basis.

This assumption was recently widely questioned as data showed that over the last few months, the volatility rate had actually decreased for Bitcoin but the community continued to talk against the coin’s development solely on the basis of the crash witnessed by BTC after the bull run of 2017.

Pierre Rochard, a bitcoin enthusiast, recently spoke about the situation and stated, that the volatility might actually be one of the reasons why Bitcoin was starting to find prominent success in the market.

It was suggested that Bitcoin had been accumulating value over the years through various implementations and at specific time frames, short-term traders were causing an effect on the price, which would cause the “incidental price surge”. The price surge would then undergo correction and witness a fall but the price would continue to grow at a progressive rate.

The aforementioned reason can be backed by the fact that Bitcoin had indeed outperformed the likes of commodities like gold in the recent market analysis, and it was released that Bitcoin attained more profit in the long-term returns and risks asset trade in comparison to the S&P 500.

A recent data also exhibited that since 2013, any investment that included 5 percent Bitcoin to 95 percent fiat currency gathered more returns and lesser risk than the S&P 500; which also witnessed losses in 2017.

Twitter user @1Mark Moss indicated that Bitcoin was growing at it’s natural growth rate and stated,

“The volatility is the difference between perception and reality. And the reality is BTC continues to progress, just not as fast as the perception makes it seem sometimes… just part of the natural evolution.”

However, another user @JordiMorris1 explained that the people had more to do with the volatility and anything else. He said,

“The relationship of people towards Bitcoin is volatile. Bitcoin is predictible by nature, its production is stable independently of how crazy people go about Bitcoin. No sense to blame on Bitcoin.”





Subscribe to AMBCrypto’s Newsletter


Continue Reading

Trending