The Problem with Proof of Work

Decentralisation is a fundamental objective of most modern cryptocurrencies. Decentralisation, open-source, and mathematical science form the basis of trust in the currency. The distribution of control prevents shady operators from manipulating transactions or controlling development to elevate their individual needs above the community it serves. Idealistically, distributed community control by vested interests should organically promote their common interest, the success of the currency. Of course, if we look at politics today, democracy doesn’t work perfectly but it’s far more difficult to take control of than centralized agencies.

The mechanism first applied to achieve this decentralisation task was introduced by bitcoin in the form of Proof of Work. The idea is that anyone who owned initially common computing hardware could participate in the transaction network and would hold a stake in validating network compliance. These miners were rewarded with blocks (existing currency locked inside the blockchain) and transaction fees to encourage participation and cover the operational costs. Mining is the practice of solving blocks, complex mathematical problems that took a somewhat predictable amount of time for a computer to solve.

As computer technology evolved and was able to solve the blocks faster the network would increase the difficulty of the blocks to maintain the pre-defined block release timeline written into the algorithm. Inadvertently and predictably, once the value of the currencies increased, this started a kind of arms race to build the fastest and most efficient machines capable of solving specific mathematical puzzles.

The potential profit involved in this process attracted microchip designers with the technical expertise to develop ASIC chips. ASIC chips are specialist chips designed to perform a single function, to solve cryptographic hash problems.

China soon started to produce the cheapest, fast and efficient ASIC cryptocurrency miners worldwide and eventually dominated manufacturing these devices. Bitmain was the manufacturer of the Antminer, a line of the most popular miners made to date. This provided Bitmain with significant control over mining most cryptocurrencies, they have used their power to game miners for many years to maximize their own profit, this is capitalism of course. They had so much control in fact that they would have been able to predict difficulty increases and effectively the profitability of the machines they were selling when they would be received. This was particularly apparent when they released the Antminer D3. This was their first high-performance ASIC miner designed to hash the X11 algorithm and its specifications offered very attractive returns at the difficulty level of the time. This was a very popular machine, batch after batch sold out within minutes if you were actually able to load the website at the time. Everyone knew the difficulty would increase but only Bitmain knew how many they were producing and how that would affect the profitability of this machine. As many of us found out it turned out to be a pump and dump multimillion-dollar scam. As soon as the machines hit the mining pools the difficulty increased exponentially and within a couple of months, they become expensive, noisy room heaters, not even covering the cost of their power usage.

Participating in proof of work mining algorithms is a competitive game that affects all of us. Profit is obtainable firstly to those who can produce competitive miners, then what’s remaining to those who have cheap power and this is the reason mining is concentrated in China. In fact, more than 65% of bitcoin mining occurs in China well beyond the required 51% required to take control over the currency should the communist government decide to.

The difficulty factor only serves to control the speed at which the blocks are mined making what would be comparatively simple electronic transactions into exponentially resource-hungry operations. The carbon output of bitcoin is comparable to the entire country of New Zealand, producing over 37 metatons of CO2 annually.

I am a strong proponent of a useful, dependable, and decentralised currency, especially when considering how world central banks continue to print vast qualities of money and the current political climate. Proof of work is a commendable concept designed to achieve decentralisation, however, in its current state, it has been exploited to the point of recentralisation and is far too inefficient and energy-intensive to find its place in a modern decarbonised economy.

Hello world!

Welcome to Gold Coast Pool, this site was just launched to support our stake pool, and ultimately the Cardano digital currency and blockchain. I have been using cryptocurrency since 2014 and have always been interested in its potential utility in the real world. Like many of us who have owned scores of bitcoins in the earlier days, its hard to conceive that holding only a fraction of that would have set us up for life. Unfortunately I didn’t.

I hope that one day, digital coins can offer a better, fairer, and more useful alternative to fiat currency and traditional banking through transparency and decentralisation. I am particularly interested in Cardano as an excellent contender in this race.

I am not a financial adviser, nor do I have any financial qualifications so please don’t take any information on this site as financial advice. The information provided here is purely based on the opinion of a technology professional and enthusiest.