Bitcoins Proof-of-Work and is there a future for this protocol?

Bitcoins Proof-of-Work and is there a future for this protocol?

Bitcoin is the oldest and largest cryptocurrency in the world, and because of this, it is commonly referred to as the future of money and finances. While there are very good reasons to think so, there is still one question that needs to be answered. Will Proof-of-Work not limit these advancements and what possible solutions are there?

Proof-of-work is a protocol that is used by Bitcoin to operate and it is the oldest protocol of the existing ones. Being the oldest it has some flaws and these flaws have the potential to stop Bitcoin from reaching the heights people are expecting it to reach. Because of this, today we will be taking a look at Bitcoin and the Proof-of-Work (PoW) protocol it uses, what potential problems there are with it, and how these might damage Bitcoins advancements.

“If you don't believe me or don't get it, I don't have time to try to convince you, sorry.” - Satoshi Nakamoto

What is the Proof-of-Work protocol?

Before we dive into this topic, let’s first take a look at what Proof-of-Work is and how it operates. Proof-of-Work, also known as PoW, is a consensus mechanism that requires huge amounts of computing power to operate. To put it simply, the Proof-of-Work protocol is a system where blockchain transactions and other activities are confirmed using a lot of computing power. For example, the Bitcoin blockchain creates a new block every 10 minutes and these blocks are then used to store information about a certain number of transactions. For these blocks to be confirmed, they need massive amounts of computing power, and here is where Bitcoin miners come into play. These Bitcoin miners use their excessive technological resources to solve complex mathematical problems and so confirm transactions. All in all, this is a very slow system that requires very tons of computing power and as such is very energy intensive. 

“As computers get faster and the total computing proof-of-worker applied to creating bitcoins increases, the difficulty increases proportionally to keep the total new production constant. Thus, it is known in advance how many new bitcoins will be created every year in the future.” - Satoshi Nakamoto

Bitcoin’s future with Proof-of-Work

Now we know the basics of PoW, so, why is it a problem for Bitcoin's future developments? Humans like when things are done fast, especially in the world of finances. We can see that every financial system tries to streamline its operations and make transactions as fast as possible. The main point of introducing SWIFT was so that international banking could be done in seconds, Apple Pay is another example of people taking advantage of making fast transactions as all you need is your phone and you can use it as a debit card. So as you can see, speed is really important in the world of finances, and this is where Proof-of-Work fails Bitcoin at the outset.

Bitcoin transactions now take around 1-2 hours to complete. While you can send Bitcoin in mere seconds you can only call it a day when it reaches the recipient's wallet and 1-2 hours is a very long time in the world of finances. Since Proof-of-Work needs multiple miners to complete the transaction and each miner needs to individually confirm these transactions, making this faster is hard. Hash is what determines the load on the Bitcoin blockchain and the higher the hash the more complex it becomes to complete transactions. What this means is that, as Bitcoin grows and grows, the hash power will increase, making it more complex to complete these transactions, thus resulting in the need for more processing power.

Another problem that Bitcoin faces is transaction costs. While we can say that these Bitcoin transactions are not expensive compared to traditional transactions, comparing them to other cryptocurrencies, the problem shows itself clearly. When you are making Bitcoin transactions, miners who are responsible for completing transactions take transaction fees, and if the demand on the blockchain is high, the higher fees are. Since 1 block is created every 10 minutes, not every transaction can be completed within each block and miners usually prioritize transactions that pay higher fees than lower ones, so if you are not ready to pay high fees, you can expect your transaction to take quite some time. Looking at this in the long run the problem might become even bigger. Since Bitcoin miners now receive rewards not only from transaction fees but also from the blockchain itself, these fees are not getting too high yet. But when Bitcoin reaches max supply and miners will stop minting new tokens, the only way miners will make money is through transaction fees. Since Bitcoin mining is an expensive operation, we should expect that fees will go up as time goes on. 

Energy prices will also be huge contributors to Bitcoin transaction fee increases as time goes on. Bitcoin miners need a lot of electricity to operate and this is especially true for big miner farms where hundreds of Bitcoin miners work 24/7. With the rising cost of electricity across the world, it is becoming more and more expensive for people to run these mining farms and one of the best solutions for them is to increase transaction fees to cover the additional expenses brought by the increasing cost of electricity. 

Lastly, there are regulatory problems that Bitcoin might face. Bitcoin miners use up a huge amount of electricity and they produce a huge amount of heat and emissions as a result. As the world takes climate change and other environmental problems more seriously, more and more regulations are being introduced across different industries. Because of this, crypto mining is heavily looked at as one of the first places to cut down when introducing these regulations. There were some comments made by the EU, suggesting that they might look at banning crypto mining altogether. While the likelihood of this ban taking effect is low, we should expect a lot of regulations on mining. This will make it less possible for many people to own and operate Bitcoin miners, and since the demand for Bitcoin is increasing, there will be a need for more miners. This is where the problem arises, there will be fewer miners while demand for these miners will increase which will result in the blockchain operating very slowly and the remaining miners charging higher fees.

What are possible solutions?

While there are problems that stand in the way of Bitcoin becoming the future of finances, there are some solutions that might help this crypto. These solutions could be hard to achieve but they can be crucial to guarantee the success of Bitcoin and to make it the future of world finances.

Moving to Proof-of-Stake

One of the steps Bitcoin can take to remove a large number of limitations is moving to the Proof-of-Stake (PoS) protocol. As we mentioned earlier, the Proof-of-Work protocol is a very slow, expensive, and energy-intensive protocol that requires a lot of computing power. While on the other hand, the Proof-of-Stake protocol practically removes all of these problems. Proof-of-Stake validations are done in a way where one validator is responsible for the majority of the process while other validators are there to make sure everything goes smoothly, this makes it much faster for transactions to go through. Proof-of-Stake also does not require expensive and energy-intensive hardware, which makes it much cheaper to operate, thus transactions made using this protocol can be way cheaper. 

The Bitcoin blockchain is a decentralized blockchain and every major decision is made by Bitcoin holders themselves. So if Bitcoin wants to move to Proof-of-Stake, it will need to get the majority of votes and this will pose a huge challenge. Since a very large amount of Bitcoin is owned by people running mining farms, they are less likely to vote in favor of Proof-of-Stake as they will be saying no to closing their farms and having to liquidate the hundreds of thousands of dollars they have invested in this hardware.

Lightning Network

Another potential light at the end of the tunnel is the Lightning Network. This is a layer 2 payment protocol layered on top of Bitcoin. It uses multiple payment channels between parties which makes Bitcoin transactions much faster. It also removes some need for a lot of hardware equipment and does not require as much electricity to operate as miners do. It has also introduced smart contracts and multi-signature scripts which have created more opportunities for the network.

But there are some problems associated with the Lightning Network that will limit its adaptation. It might recreate the hub-and-spoke model which the traditional financial system uses. This will remove some of the beauty of decentralization and make the Lightning Network operate similar to traditional financial systems. 

Final Thoughts

Bitcoin has been around for over a decade now and it has seen its ups and downs. Many people consider it to be the future of finances and that crypto, in general, will replace traditional fiat currencies. While the latter is easier to see, Bitcoin becoming the future of finance is much more challenging to accomplish. It runs on a very outdated protocol that is slow, expensive, and requires heavy infrastructure and energy to operate. This is made worse by the fact that the EU and other regions are trying to minimize the impact Bitcoin miners have on the environment by lobbying for different sanctions and implementing new laws to achieve this. 

But saying that Bitcoin does not have a future is a very wrong statement to make. This is an innovative asset that was the first to implement many innovations in the financial sector and there are always possibilities that new technologies and innovations will come along that will remove these limitations.