The democratization of value creation and data exchange is a nightmare for all those who, since the Middle Ages, have built their prosperity on the hump of the working class.
The time is ripe for every single slave of capitalism to rise up and stand up against the authorities.
Bitcoin advocates present the Bitcoin generally and effectively as a saviour that has been created precisely for this purpose.
On closer inspection, however, Bitcoin is not a solution to the problem, but only a shift, because the incentive system of mining will inevitably lead to the same problems as we see in the current world economy. In contrast to state banks, which have the ability to print an infinite amount of money and make extensive use of this opportunity (read more), the number of Bitcoins to be created is limited, though. The Bitcoin’s incentive system, which consists of (1) a block reward and (2) the mining fee to be paid for transactions, however, will inevitably lead to Bitcoin mining becoming more and more centrally organised. This thesis is also supported by the fact that computing power has always increased with demand in times of FOMO (Fear of missing out). Thus it is already almost impossible for individuals to mine for bitcoins on their own hardware. Todays Bitcoin’s network energy consumption is about the same as Austria’s for a ridiculous 4.6 transactions per second (read more). For comparison: VISA makes an average of 1700 transactions per second and a single Bitcoin transaction requires about as much energy as 400,000 VISA transactions.
How does the Bitcoin’s blockchain work actually?
The Bitcoin consists of blocks that are stacked on top of each other to form a chain. A certain number of Bitcoin transactions are combined into a block and a cryptographic puzzle needs to be solved to ensure that the block is placed unchangeably on top of the previously created chain of blocks. As a reward there is a block reward, which is nothing but newly issued Bitcoins for the one who solved the puzzle. Additionnally miners get paid through the fees that users pay in order to issue a transactoin wherein the inclusion of the transaction in the next block is more expensive than in the later blocks. So time is money here as well and if many transactions are made, the transaction fees will inevitabely increase. Besides the block reward and the fees , there are other parameters in this system that control the development of the blockchain and thus of the Bitcoin.
The participants in the Bitcoin network are called miners, because they literally mine for new Bitcoins. First, all miners calculate the same cryptographic puzzle for each new block to be created. Whoever finds the solution first gets the block reward (the winner takes all). So there is a race to solve a cryptographic puzzle first. For a better understanding I make a short comparison with a lottery game in which only the jackpot is played. Every single participant could bet for himself to win the jackpot with a very small probability. Participation in a betting community increases the probability of winning, with the restriction that the jackpot is divided among all participants in the community. This is exactly why so called mining pools have emerged in crypto space. As a miner I can decide to invest in hardware myself and join a pool, or I buy computing power in the form of a subscription and receive a share of the block rewards awarded to the pool. The more computing power the mining pool accumulates, the more attractive it becomes in terms of predictability, as the rewards arrive more regularly. It can be assumed that, statistically speaking, the probability of solving the cryptographic puzzle first is greater with a large pool than with a small pool. The three largest mining pools currently (August 2019) account for 51.2% of the total computing power (Hashpower TH/s) of the Bitcoin network. This is not my understanding of a distributed system and bearing in mind that BTC is vulnerable to a 51% attack (read more), this may even rise serious security questions. The fact that the three largest pools BTC.com (20.1%), F2Pool (16.2%) and AntPool (14.9%) are all mining pools registered in China does not make it even better, I guess (read more).
Fixed and variable parameters
A further problem with Bitcoin is that not only the block size is fixed (currently 1 MB), but also the block time (currently 10 minutes), i.e. the interval in which new blocks are to be generated. These two fixed parameters lead to the fixed number of about 5 transactions per second the Bitcoin network is able to handle and are commonly referred to as the scalability problem (read more)
If the price of the Bitcoin rises, mining becomes attractive, which in turn attracts more miners. In order to avoid finding the solution of the blocks faster, the difficulty for the miners is increased. The higher computing power, which would be available by the many miners, is used thus ever more inefficiently.
About every 4 years the compensation for the Bitcoin miners is halved (block reward halvening). In order to ensure that mining after a block is halved is still worthwhile, the price of the Bitcoin must continue to rise. This model, again, attracts more miners due to the profit prospects, which in turn increases the difficulty and thus the demands on the technology. The only logical conclusion for the success of the Bitcoin is that energy consumption will increase inexorably (read more). It is not to be expected in the foreseeable future that without a technological quantum leap, the computing power per energy unit can be increased to the same extent (read more) as was the case in the 20th century. Quantum computer technology may still be an exception, but statements on computing power and electricity consumption are not reliably possible for this still very young technology. In addition, the cryptography of the Bitcoin would have to be radically adapted, because it is already clear today that the encryption algorithm of the Bitcoin (SHA-256) will be easy to crack for future quantum computers with 1500 or more qubits. Today, this goal is expected to be reached in the 4th decade of the 21st century (read more), although recent reports suggest a more rapid development (watch the video).
If the development of the required hash power of the last two Bitcoin halvings is repeated until 2020, the energy consumption of the Bitcoin will increase by a factor of 5 until next halving in May 2020 and then by a factor of 15 until the following halving in 2024. In 2020 the energy consumption would approximately reach that of Italy and in 2024 Bitcoin network’s energy consumption will exceed that of the USA. By 2028, the data indicate a further increase in the energy consumption of the network by a factor of 4.
The basic idea behind the Bitcoin, namely to create a currency that exists independently of the monetary banks and is therefore not at the mercy of the intervention of the monetary authorities, is grandiose. But its implementation is catastrophic for our environment. In addition, the security is not guaranteed, the longer the less, because as already mentioned, the three largest mining pools share more than 50% of the hash rate, with the trend tending to increase. The dynamics of centralization and monopolization, which we know from our capitalist economic system, can already be seen in the Bitcoin network.
The fact that a not to be underestimated part of the energy used for the Bitcoin consists of non-renewable energy, which is also mostly cheaply produced in China, makes the whole thing even worse (read more or even more). At a time when we know the effects of greenhouse gases and already feel that any unnecessary use of fossil fuels leads to unnecessary environmental pollution, it is our responsibility to look for alternatives. Alternatives that remain decentralized, that function in a resource-conserving way and yet offer security in the area of data and value trading and distributed ledger technology in general.
In any case, the Bitcoin is not the Holy Grail or the Sorcerer’s Stone, as it is often portrayed by those who have fallen for it. We have not yet succeeded in producing gold from pure energy. Seen in this way, the Bitcoin in its exaggerated form simply shows that mankind’s handling of energy is unfortunately still geared very briefly to the individual’s own profit and the satisfaction of its own needs. However, we should bear in mind that wherever a few make big profits, many others lose out. In the case of Bitcoin, this would not only be the great mass of people who will lose, but also the environment and nature.
Ironically, I haven’t met a Bitcoin Maximalist who didn’t calculate in USD at the end, because the Lamborghinis they dream of can still only be paid with FIAT money today. Very few Bitcoin maximalists are interested in the decentralized argument, the vast majority is interested in maximizing their own profit, but they tacitly accept that they are promoting a system that is largely built from cheap and dirty energy and controlled from China.
If you are interested in an alternative, you might want to look into IOTA (iota.org) and maybe also into my last blog post “From selfishness to cooperation - Why IOTA is the future model” where I explain why the competition model, like the one used by Bitcoin, will not prevail.
References in order of appearance
The Author declares that the content of this article is his own perspective on the topic. This article focuses on the Bitcoin, as it is the crypto currency that has by far the largest market capitalization. The author is member of IOTA Evangelist Network IEN and holds some investments in IOTA. The content of this article shall by no way be an investment guide. The author encourages the readers to do their own research (DYOR) especially when it comes to invest into cryptocurrencies.
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