The inherent volatility in the value of cryptocurrencies such as bitcoin, which last week surged 14 percent in an hour after falling nearly 70 percent in under a month at the start of the year, has led some to worry that the financial risks of “mining,” the process by which it is minted and verified, could exceed the reward. Bitcoin miners, who contribute to the cryptocoin mining process by securely verifying transactions and placing blocks of data into a decentralized public ledger, require expensive custom equipment and high electricity consumption, and concern is building that they will soon lose incentive to mine.
This worry is misplaced: Bitcoin is specifically designed to maintain an even keel in the face of such external disturbances. When the value of bitcoin drops, this can indeed lead to a drop in cryptocoin mining activity, but in response, its blockchain will swiftly reduce the required difficulty of mining (and its associated cost in electricity). Soon after such a reduction, blocks will again begin to be added to the blockchain at the usual rate—about once every 10 minutes. In fact, this type of adjustment is perfectly routine.
However, the related complaint that proof-of-work-based cryptocurrencies like bitcoin consume excessive electricity is still as valid as ever. Currently, global bitcoin mining consumption totals over 36 terawatt hours, an energy expenditure that could power approximately 3.3 million homes. Profit-seeking miners are presented with an irresistible incentive to seek out places where electricity is cheapest. Some miners have moved their rigs to areas with cheap hydropower, while others have obtained electricity in questionable ways, in China and elsewhere. Since a lot of electricity generation is subsidized, utility companies (specifically in the US, Canada, Europe, and China) have recently been scrambling to accommodate escalating demands for crypto-mining power in a way that is deemed fair to all of their customers. These utility companies shouldn’t grow too complacent about the problem they face: If there’s a sustained rise in price, we could see a massive rise in mining-based demand for electricity that will cause even greater disruption.
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Even if the consumption of electricity for cryptocoin mining doesn’t rise indefinitely, it still constitutes a hugely wasteful and ecologically destructive activity. Worse still, the need for expensive computing resources has caused an extreme centralization of power, with the top five mining pools now possessing enough market share to exclusively control the content of the Bitcoin ledger. Considering that cryptocurrency has been billed as the solution to the excessive concentration of financial power, this centralization is far from ideal.
One way to secure a cryptocurrency network without expensive mining and its associated centralization is to use an algorithm that is efficient and is not dependent on competition for computational resources. For example, Kowala has implemented a version of the Practical Byzantine Fault Tolerance (PBFT) algorithm that satisfies these requirements. PBFT was originally invented almost 20 years ago, is well understood, and according to experts, is exceptionally secure. It involves building up subsequent blocks in the blockchain by repeatedly electing a single mining node — the “proposer" — to do the work of assembling the next block. The other cryptocoin mining nodes in the network must validate the block suggested by the proposer in order to advance the blockchain.
The PBFT approach to mining has major advantages compared to proof-of-work mining. It’s significantly faster, runs at a much lower cost, and does not entail a bitcoin-like competition for resources. It consequently eliminates the need for expensive hardware: You could run a cryptocoin mining node on your laptop or even on your cell phone. The low cost of the equipment used for mining cryptocurrencies also means that miners do not need to expend as much managerial effort ensuring that their mining rigs are always being put to optimal use.
Security remains paramount, of course, and PBFT on a public blockchain does require some way to keep a large number of malicious nodes from overwhelming the system with fraudulent votes. The Kowala Protocol ensures the security of the blockchain by adding a proof-of-stake layer to the election of proposers. To be eligible to be a proposer and receive the associated rewards, a node requires special mining tokens that enable it to mine: The more cryptocoin mining tokens associated with a node, the more often that node will be chosen as a proposer. Mining is thereby restricted to the owners of mining tokens, parties with an economic stake, and long-term interest in the security and trustworthiness of the system.
The best approach to responsible mining would be to replace a competition for computational resources with a competition for mining tokens. This leads to a system that is secure, trustworthy, and ecologically responsible.
Article by By Eiland Glover, Co-Founder and CEO of Kowala