Central Bank of Central Banks BIS Says PoW Crypto Needs New Tech
The Bank of International Settlements (BIS) has published a new report saying proof-of-work (PoW) cryptocurrencies will need to evolve in order to secure payments as block rewards shrink. “The only fundamental remedy would be to depart from proof-of-work,” the bank said.
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BIS: Pow Needs to Evolve Long-Term to Secure Payments
In a paper published Jan. 21st titled “Beyond the Doomsday Economics of ‘Proof-of-work’ in Cryptocurrencies,’ the BIS, the so-called central bank of central banks, said PoW cryptocurrencies with shrinking block rewards like bitcoin could have insecure payments in the future unless “new technologies are deployed.”
How secure are payments made in #Bitcoin and related cryptocurrencies and how efficient is such decentralised exchange? An examination of the economics behind proof-of-work in #cryptocurrencies https://t.co/oczBtfY46n
— Bank for International Settlements (@BIS_org) January 21, 2019
The report’s author, BIS Principal Economist Raphael Auer, said that payments finality in bitcoin-like cryptocurrencies would become vulnerable as block rewards neared zero unless mitigating tech was deployed:
“The conclusions are, first, that Bitcoin counterfeiting via “double-spending” attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ‘mining’ income via fees as users free-ride on the fees of other transactions in a block and in the subsequent blockchain. Instead, newly minted bitcoins, known as block rewards, have made up the bulk of mining income to date. Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality.”
Of course, the final bitcoin is expected to be mined around 2140 A.D., so there’s more than century left before the reality of block rewards reaching zero is an immediate issue.
Even still, per the BIS report, the banking institution is pessimistic that PoW blockchains, namely Bitcoin, can weather the ending of block rewards without major technical changes being implemented.
The BIS said second-layer scaling solutions like the Lightning Network could mitigate the problem but warned that a total shift from PoW was likely needed to completely secure payments circa 2140.
Will Fees Rise Enough to Counter Declining Block Rewards? Some Say Yes
The BIS anticipates fees not rising enough to sustain payments finality when block rewards hit zero. Not everyone agrees, though.
For one there’s IOTA founder David Sønstebø, who said in 2016 that bitcoin fees will rise as mining rewards dwindle.
“Fees will grow in accordance with a decrease of mining rewards, as the amount of bitcoin blocks being found goes down the fees paid to the miners will, as the rule of thumb, go up and act as an incentive to the miners, Assuming no radical changes in architecture occurs,” Sønstebø said at the time.
There’s certainly a sizeable faction within the cryptoverse who would side with Sønstebø here. Yet it remains to be seen what Bitcoin will look like one century from now; chances are it will be considerably different in structure long before block rewards go extinct.
With that said, the cryptocurrency community will have decades to mitigate the BIS’s concerns.
What’s your take? Does the BIS have a point, or do proof-of-work cryptocurrencies have more longevity beyond the end of block rewards? Let us know in the comments section below.
Images via Pixabay