Does Proof-of-Work… Well… Work?
When I became familiar with blockchain in 2013, I quickly recognized that the introduction of scarcity into the internet economy would change it forever. The limited supply of bitcoin and the introduction of new coins every 10 minutes started a rat race of bitcoin miners in which miners went from being a decentralized network of individuals to a huge industry with “corporate” miners owning thousands of machines.
How did we end up here? To answer this question, I spent about three years of my time and I managed to get the results peer-reviewed and published in the academic journal Electronic Markets.
As Bitcoin was not taken very seriously back in 2013, I embarked on a quest during my master’s degree studies at the Vrije University Amsterdam to find out how big the business behind the first successful blockchain was. I took a deep dive into all available public data to find out how large and profitable the mining industry is. It turned out to be a rapidly growing multibillion-dollar business that is in an intense hardware arms race for the fastest, most efficient and most profitable bitcoin mining computer.
With the Proof-of-Work approach of mining, all mining computers compete to create the next block in a blockchain. The faster such a computer is, the bigger the chance to find the next block and get a reward of newly created bitcoins. This incentivized a lot of people to invest in hardware to be the one that finds the next block. It’s a bit like the gold rushes in the 1800’s where people buy shovels and pickaxes to be the one that finds the next gold vein.
In the early days of the Bitcoin network, it was possible to mine bitcoins by using the GPU of your PC’s video-card. The competition for mining bitcoins intensified when ASIC computers entered the market. These specialized mining computers are only useful for bitcoin mining and quickly evolved in terms of their computing power and energy efficiency. This competition for the fastest and most efficient mining rigs had many winners and losers. Turning on the newest hardware meant you were able to mine more bitcoins at a lower cost than other miners in the network. Those older miners saw their mining profits dwindle until the moment it was better to turn the hardware off, as the electricity costs were higher than the bitcoin gains. The leftover value of this hardware was basically zero, as you could not use it for something other than bitcoin mining.
In my research, I looked at the first five years after the bitcoin value was above $5, from 2012 to 2016. In this period, the bitcoin price both had a rapid rise to around a $1000 and a crash back to below $200. During these early days of blockchain, the network hashrate increased by over 300,000 times and about $2 billion of bitcoin was mined (based on their value at the time the coins were mined). After the first big boom at the end of 2013, the increase in mining power clearly suggested, just like in 2018, that people still believed in the technology and kept competing to mine the coins. Doing this in a profitable way became harder and harder over the years, though.
Besides proof-of-work (PoW) blockchain projects like bitcoin, there other blockchains projects like proof-of-stake (PoS), delegated proof-of-stake (DPoS) and many more.
Unlike PoW, PoS is based on the participants’ coin stake. The more coins the staker has, the more likely he will add a new block of the transaction to the blockchain. The staker’s rewards are only the transaction fee. DPoS is a variation of PoS. With DPoS, coin holders can use their balance to elect a list of nodes to be allowed to add new blocks of transactions to the blockchain. PoS is more like wining a lottery, while DPoS gives all coin holders more influence in the network.
Among all the new DPoS blockchains there is Telos, which we are happy to have our reward mechanism for the gaming industry called QUDO, running on.
QUDO will not be driven by a mining arms race but instead it will get evenly spread among all the stakeholders (players, game developers, service providers, etc). This way all QUDO token holders have the chance of being included in the decision making and governance of the ecosystem.
This post is adapted from a longer version published on the official BlockBastards blog. For fuller detail on PoW, see the original version here.
