Consensus algorithms and the future of crypto mining
Uncertainty over the future of cryptocurrency mining has escalated over the past year as recent concerns regarding the environmental impact of bitcoin mining and the upcoming deployment of the Casper protocol on the Ethereum network may signal the beginning of the end for crypto miners. The impact of electricity consumption from mining may be debatable (see here and here), but the successful launch of Casper would raise significant questions about the energy usage and economic efficiency of proof-of-work algorithms currently governing bitcoin and a majority of altcoins.
With Casper, Ethereum aims to implement a consensus algorithm called “proof-of-stake” that will not require miners to operate. The new process relies on a protocol using the virtual assets held in wallets on the network to secure the system instead of miners contributing energy to hash an algorithm. Rather than miners and users doing their own separate things, each individual holding tokens will have the ability to validate new blocks of transactions in proportion to their “stake,” or the amount of tokens they control on the network.
Many have initially scoffed, “doesn’t that just mean the rich get richer?” Yes, it does. We will certainly explore this further. In addition to potentially eliminating the need for mining, implementing this new consensus algorithm will have significant implications for governance and economics of the Ethereum platform.
A New Algorithm
Mining has caused problems for a number of virtual assets due to the conflict of interest that can occur between miners when major upgrades to the system require a certain percentage of miners to implement. Even if an upgrade provides obvious improvements to the system, small but significant groups of miners may decide to go against the consensus and create their own “fork” of the system that either doesn’t include the upgrade or carries its own set of modifications. Insisting on a system based their own unique terms allows these groups to contribute a larger portion of hashing power on the new network and generate more mining rewards. If the new network manages to retain enough value, the miners may be able to generate a lot of cash without contributing much in the way of actual improvements to the system.
The political imbalance created by the use of miners in proof-of-work consensus algorithms creates a corresponding amount of economic inefficiency within virtual assets. Money and power may be two separate things, but politics and economics will always need each other. Remember when we talked about the rich getting richer? The fact that mining requires a participant to purchase hardware demonstrates the economic inefficiency of proof-of-work consensus algorithms relative to a system like proof-of-stake that automatically allows all users access to mining and transaction fees. Since users can be rewarded relative to their proportion of holdings on the network, to a certain extent we can think of the fees as a built-in control for inflation.
The economic inefficiency of proof-of-work algorithms means that in addition to miners reaping a reasonable degree of rewards for validating transactions, a portion of the reward could be considered extra, or an economic rent. Economic rents refer to cash flow that does not produce value for the system and we always want to eliminate them when possible. A proof-of-work algorithm assumes that as miners get closer to creating all of the tokens in a network, the value of transaction fees contributed by users will be enough to continue providing incentive for miners to keep securing the system. If a portion of the mining fees can be considered an economic rent, then a portion of the transaction fees necessary for maintaining the network could be considered excessive as well.
Will it work, though?
Some have expressed doubt regarding the potential for proof-of-stake or other consensus algorithms to replace proof-of-work. “Without physical work being done to secure the system, what’s to stop hackers from corrupting the validation of transactions?” Less than a decade ago, many asked themselves the same question with regard to the double-spending problem. Bitcoin managed to demonstrate that a physical process could be accomplished virtually by applying by applying blockchain to enable the trustless validation of transactions.
The increased efficiency of proof-of-stake or some other consensus algorithm not requiring miners will create the potential for lower mining rewards and transaction fees once it gains adoption, so whoever solves the problem has plenty of incentive to do so.
A glance at the future
What might happen if cryptocurrency mining goes out the window and things like computer memory and processing power comes to require less access to physical hardware? I seeing a trend toward decentralization in the need for hardware but remain unsure of what that will ultimately mean for consumers. Centralization of hardware in areas where it’s easiest (cheapest) to build while software and cloud networks decentralize access to the utility of the hardware makes the most sense but only time will tell.
While the impact of mining may not be enough to wreck a network entirely, this inefficiency has other implications to consider. Why build your decentralized application on a less efficient, more expensive platform? There’s certainly little reason to believe that major miners and hardware producers won’t rage against the dying of their light; after all, they do have a lot of money on the line. On the other hand, the steady march of progress carries forward with new and unforeseen developments. One thing is for sure: new and experimental projects will continue testing the integrity of the old.
