The proof-of-work (PoW) algorithm which is being used by bitcoin and various other cryptocurrencies is not something to depend upon in the long-term and this will need a replacement soon, claimed a new study from the Bank of International Settlements (BIS).
BIS is considered to be the central bank of central banks and this bank, on Monday, went on to publish a research report stating that PoW, which is being used by Bitcoin and many more crypto-companies, uses a network of powerful computers with the help of which, it secures the network, but this is “extremely expensive” and the only alternative is to “stop/quit” using such an algorithm.
The author of the research report is Raphael Auer, who is a principal economist for the monetary and economic department at the BIS who went on to say that there were two fundamental economic limitations of the PoW algorithm. The first one being that bitcoin is vulnerable to double-spending or 51 percent attacks, which means it will need “extremely expensive” protection which would be based on PoW. The second reason being, when the system stops awarding bitcoin as rewards to miners, the algorithm won’t have the ability to generate transaction fees which would be in line with the goal of guaranteeing payment security.
He further suggested- “Simple calculations have suggested that once block rewards become zero, it might take months before a bitcoin payment is finalized and unless new technologies are deployed to speed up this payment finality method, bitcoin will not be of much use.”
Auer went on to say that blockchain tech developments need to speed up their payment finality and this will help them keep the liquidity of cryptocurrencies intact.
He added- “Second-layer solutions like the Lightning Network might prove to be of some help, but the only fundamental remedy to this problem would be to quit adieu to proof-of-work, and this would apparently require a better form of social coordination or institutionalization. But the lightning network is also not ideal and has its cons. For example, it can be seen that there will be a trade-off between efficiency and centralization in the presence of a scaling solution. Such solutions are no magic bullets since they have their own scaling issues.“
The research paper stated that, as of Jan. 3, 2019, a total of 362 committed bitcoins out of 544 committed bitcoins had been associated with a single website, which meant two-thirds of the lightning capacity at the time was being controlled by one entity.
Auer stated that he believes that it is essential to look at the bigger picture and answer how the crypto ecosystem might be able to complement and improve over the existing monetary and financial ecosystem instead of replacing it.
He concluded thus- “The current technology doesn’t seem to replace the current monetary and financial infrastructure. Instead of focusing on this, the question is how technology might be used/tweaked to complement the existing arrangements.”
In September, the BIS published a report on crypto markets which indicated that “their valuations, transaction volumes, and user bases reacted substantially to news related to regulatory actions” since they have largely remained unregulated.