When Satoshi Nakamoto unveiled his groundbreaking idea for a peer-to-peer electronic cash system, it was hailed for its idealism. It offered financial independence, free from the grips of central banks and corporate behemoths. Yet, my experience with hyperinflation in Brazil means I understand the importance of financial self-determination. However, as the saying goes, not everything that glitters is gold. This sadly rings true for the Bitcoin protocol’s proof-of-work (PoW) mechanism.
On the surface, PoW is a symbol of decentralization. It seemingly distributes power to miners, thus upholding the decentralization promise. However, a deeper delve reveals a shift towards mining centralization. Large node operating companies are the true beneficiaries, with economies of scale favoring their operations at the expense of smaller miners.
As the CoinDesk 2023 Mining Week report unveiled, in October 2021, the Bitcoin network was dominated by a small group of miners. Ten percent of the miners controlled 90% of the network, with 0.01% controlling about 50% – enough to seize control. This centralization, rather worryingly, mimics the oligarchic dominance we sought to evade.
Alternate models like proof-of-stake (PoS), employed by Ethereum, appear to proffer ecological and democratic benefits. However, the Ethereum mining traditionalists would likely posit, this option may not be as egalitarian as it seems. While transaction fees remain static, Ethereum’s elite are growing richer. A single entity, Coinbase, controls 11.5% of the network, a power dynamic which, if applied to the Federal Reserve, might arouse serious concerns.
This poses a critical dilemma. How can a system be optimized to incentivize all players toward the same goal? Is it even feasible? Today, the fissure between miners/validators and network users causes a clash in interests. Network users want faster, cheaper transactions. Miners and validators, however, prefer to maximize profits. This dichotomy mirrors the bitcoin Blocksize War, sparking a negotiation between faster transactions and miner profitability.
Though conflict is an inevitable characteristic of any system, the abuse of power can lead to unfair results. The importance of awareness and transparency in managing divergent interests is imperative.
The good news? Options exist beyond PoW and PoS systems. Burgeoning consensus mechanisms are evolving,hoping to align incentives between miners and users. The aim is to create a synergetic, fair system, where both parties win.
Satoshi’s key success may have been solving the Byzantine Generals Problem, where a distributed pool of miners agreed on a single truth without central authority’s control. But, we discovered that these fundamental economic laws can lead to a win-lose situation between miners and users.
The future challenge is to transform mining into a mutually beneficial game, possibly by learning from our political systems. Ideally, we should consider incentivizing miners beyond monetary rewards. Ultimately, blockchain’s promise lies in its ability to provide true financial democracy. Let’s ensure that promise does not lose its lustre.
Source: Coindesk
