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The Impossible Trinity: Security, Environment Protection and Decentralization

Written by: Chang Jia

Translated by: James Choi

Edited by: Adam Hofman

The mining of Bitcoin consumes 1,000 mWh of electricity every day, the energy which could be provided to 30 thousand families in the United States. The idea that enormous energy will be used by the Bitcoin network to simply solve mathematical questions has always been severely criticized. Satoshi remained silent on this problem, or maybe never considered it a real one. This is indeed not a problem, or supercomputers designed merely for this sake would be a reckless misuse of the electrical power needed by an electronic currency payment system, whose transaction volume exceeds that of Western Union, and would be considered a waste. Mining is done because it is profitable. Users will turn off their mining machines if the market value of Bitcoin shrinks to that of PPcoin, just like diggers in Pilbara Australia who stand idle during the slack season. If Bitcoin were worthless, mining machines would be as energy-saving as fireflies.

That being said, fans of the perpetual motion machine are still trying to create some environmentally-friendly crypto-currencies, represented by PPcoin (Peercoin), which uses PoS (Proof-of-Stake) for minting and transaction processing. Sunny King, its inventor, believes that the path of crypto-currency has forked into two; one is energy intensive and the other energy efficient. In a distant future (more than five years from now), the latter will begin to challenge the former with its cost advantage. Sunny King claimed to create the concepts of PoS and Coindays1 on his own, as early as October 2011. But just like the concept of PoW was not invented by Satoshi, PoS was not invented by Sunny King. The concept was actually raised in the Bitcoin community by Quantum Mechanic on July 11, 2011: The voting right no longer comes from the calculation power of miners, but aggregates in trustable representatives. New Bitcoins and transaction fees are distributed to these representatives either randomly or periodically.2

Cunicula believes that the reason Satoshi didn’t use PoS for Bitcoin is that before 2009 there was no digital property that could safely interact with cryptographic protocols. Paypal and online credit card payments have a history of more than 10 years but these systems are centralized, and the PoS created for them would provide opportunities for the suppliers of Paypal and credit cards to cheat.3 Cunicula’s criticism actually struck home, as these digital property authentications that are both environment-friendly and secured, are provided by some reliable third-parties, which are unexceptionally centralized. PPcoin and Nextcoin (NXT), disguised in the form of P2P, cannot avoid the problem of centralization, as they depend on those who have the largest stake to verify transactions in the network.

The delusion of PoS is that it is a superficial decentralized system, in which everyone could mine and the payment you gain for maintaining the safety of the network is only related to your coindays, instead of the actual performance of your computer.

An ideal decentralized authentication system should allow users to verify transactions by opening the client willingly, otherwise it is not sustainable. A motivation mechanism is set in PoS, not by asking verifiers to accomplish a certain amount of calculation, but by requiring them to show the ownership of a certain amount of money. Sunny King even believes that PoS exhibits a philosophical sense of aesthetics, as money itself means a proof-of-work to the past. So logically speaking, PoS could replace PoW.

The mistake made by Sunny King here is that in the PoS system it is not sustainable for everyone to mine, which can create winner-take-all scenarios. Let’s say the cost of electricity is 3 coins. The 10,000 coindays of Big User gives him 100 coins for interest, while the 100 coindays of Small User gives him 1 coin for interest. Coins gained by Big User are much larger than Small User, and consequently Small User would be inclined to close the client, while Big User would be inclined to aggregate coindays and obtain more coins for interest, which is a fatal equilibrium. (Table 1)

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So this is PoB. If you don’t use these coins, they would be destroyed in some unusable transactions and after a while, would be used to create a new block. If you open the client to verify transactions, you would obtain new coins or transaction fees, the value of which is higher than that of the coins destroyed. Let’s still say that the cost of electricity is 3 coins. Big User loses 100 coins by holding 10,000 coins in a certain period, during which Small User loses 1 coin by holding 100 coins. Otherwise Big User receives 120 coins by mining while Small User receives 2 coins. So if you are Big User, you must always have the client open to mine, while Small User will be more than happy to take a lift. (Table 2)

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We could tell from the analysis above that neither PoS, PoB or PoD are a real decentralized currency, as fatal equilibrium could be found in all of them, namely the centralized big-user mining mode. These are all variants of the Boxed Pig Game. Assume that a big pig and a piglet are put in a box. A lever is set at one end of the box to dispense food into a trough at the other end, so that the pig that presses the lever must run to the other end to eat. Let’s say that whenever the lever is pressed 10 units of food fall into the trough, and the one who presses the lever first pays 2 units of food. If big pig arrives at the trough first, the ratio of food gained by the big pig and the piglet is 9:1. If they arrive at the same time, the ratio is 7:3. If the piglet arrives first, the ratio is 6:4. Given that both are wise, the best result would be if the piglet chose to wait. (Table 3) No matter if the big pig chose to move or wait, the piglet’s best choice is to wait. In environmentally-friendly crypto-currencies, the payment of verifying transactions is positively correlated to the amount of coins (or coindays) owned by users, and not related the cost of electricity. So no matter if the Big User chooses to open or close the client, the best strategy for Small User is to close the client.

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A good friend questioned that the amount of coins owned by Big User are indeed increasing, but their proportion to the total amount of coins remains unchanged, as everyone’s coins are increasing proportionally. I must make additional remarks that people’s demand is not a linear function curve, but a convex one. The increased rate of utility is diminishing with the increase of revenue. (Graph 1) For example, let’s say someone dispersed money proportionally. The rich could receive 10,000 coins while the poor could receive 1 coin, as long as they open the client. Obviously, the poor do not have enough desire to receive the money but the rich would be happy to, which would also lead to centralization. For someone who owns only hundreds of PPcoins, it makes little difference to open the client or not. But for those owning hundreds of thousands of PPcoins, it makes a huge difference.graph1.PNG

Gavin Andresen, the chief scientist at the Bitcoin Foundation, made a concise comment, as he wrote on Twitter: “I think proof-of-stake is hard coded, ‘the rich get richer’ and is deeply unfair. The supporters of PoS argue that [with Bitcoin,] the rich could invest more on mining equipment and gain more bitcoins by mining, which is the same ‘the rich get richer’ system.”4

The answer is that in Bitcoin mining there is an economic question related to the cost of electricity and hardware. Miners cannot increase mining power endlessly,  and the soaring difficulty only leads to increasing costs. The gains from mining would be far less than paying for the machines. There is no eternal winner in the mining competition. ASICMINER, which previously controlled 20% of the market share, now controls less than 1%.

Here I propose a ternary paradox, that the natures of decentralization, security and environment protection constitute an impossible trinity. (Graph 2) A crypto-currency which is both environmentally-friendly and secured would definitely need to be centralized, like PPcoin, Nextcoin and Ripple. These coins either contain aspects of centralized structure, or their decentralized structure is not sustainable, with a Paypal-like centralized verification mechanism. A crypto-currency which is both environmentally-friendly and decentralized would be unsecured, like P2P currencies of ‘one-IP-address-one-vote,’ which are already excluded by Satoshi. He believed that if the majority were based on ‘one-IP-address-one-vote,’ it could be subverted by anyone able to allocate many IPs.5 If one designs a secured decentralized currency, it must come with the cost of consuming energy and calculation power. PoW is the first solution to construct a verification system in the form of decentralization, and will probably be the only one.

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  1. PPCoin: Peer-to-Peer Crypto-currency with Proof-of-Stake

  2. https://bitcointalk.org/index.php?topic=27787.0

  3. proof_of_stake_and_peercoins_historic_significance

  4. Could Peercoin and “Proof-of-Stake” Turn Bitcoin Into The Myspace of Cryptocurrency?

  5. Satoshi Nakamoto: Bitcoin: A Peer-to-Peer Electronic Cash System

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  • BitcoinsForBreakfast

    You are the man. Thanks for that awesome read

  • farl4bit

    Hi,

    I am very enthusiastic about Nxt. I believe it will be a great thing in the future, even greater than Bitcoin. Nxt is trying to fix the problem of centralization with a new feature: Transparant Forging. In advance it’s made public, which computer/account will get the opportunity to forge a block (and receive the transaction fees). With that solution, even the smallest accounts will unlock their accounts on that moment and get the fee. Also in Nxt, the transaction fee is always the same for the big or small accounts. Everybody just get all the fee that where in that block. Maybe you can put Nxt in the center of your nicely drawn graph?

  • J D

    It appears you have a very superficial understanding of the mining centralization problem facing Bitcoin. The economies of scale that are required for profitable mining have ALREADY resulted in centralization, and will only get worse (hardware centralization, geographic centralization, etc.). So while you argue about hypothetical centralization in PoS (which is refuted by REAL current distribution of NXT and PPC), PoW is ALREADY CENTRALIZED. You claim that the incentive for PoS in NXT is insufficient for small shareholders to mine. As evidence, you present your “utility function” (Graph 1) which is founded in nothing but some laughably flawed assumptions – entirely divorced from game theory or an objective economic analysis. With regard to NXT, you take no position on whether it is currently decentralized (it is), but argue that it will inevitably become centralized due to the redistribution of wealth via mining reward (ridiculous). Both your assumption (“the poor do not have enough desire to receive the money”) and the “inevitable” result are refuted by reality. Two months in and NXT is ALREADY better distributed than Bitcoin: http://www.nxtcrypto.org/nxtcoin/nxt-distribution-infographic. Lastly, I will add that, in addition to being environmentally friendly: (1) NXT’s transparent forging algorithm provides protection against even 90% attacks and (2) NXT solves Bitcoin’s scalability problem (7TPS limit). What happens when the Bitcoin block reward is gone and the miners are left with only transaction fees? When this equilibrium occurs it will become even more obvious why Proof of Stake is far more decentralized AND secure than Proof of Work.

  • binaryphile

    Your casual use of ad hominem undercuts your points.

  • Quantum

    “This (energy consumption) is indeed not a problem (…) If Bitcoin
    were worthless, mining machines would be as energy-saving as fireflies.”

    First of all, there is NO coin that is energy-saving. Some coins don´t need a lot of energy if fully streched and others do. Bitcoin is beyond the latter.

    Second, it is irrelevant that Bitcoin COULD waste less energy. The point is that Bitcoin´s structure uses power (in its abstract sense but also in terms of electricity) as a measure to regulate mining. You can argue all day that that the price of electricity will regulate the martket, but this diverts from the problem, that it doesn´t need to eat up so many watts. Not everything that you can afford is effectively unproblematic.

    Third, you obviously forgot that the price of energy does not neccesarily reflect the actual cost from a sustainable perspective. Most power sources are incredibly cheap because long-term costs are externalized (coal, nuclear power). But yeah, who cares, after us the deluge, as long as I can make a fortune, right?

    So, yes, energy is a huge problem for many cryptocurrencies, Bitcoin included, but there will always be people who waste it away because they can afford it without thinking about consequences. I don´t want to convince you that it should care about wasting enegery, but please stop pretending that the use of power to regulate Bitcoin is not an inherent waste of energy.

  • oldnbold

    NXT will in time eclipse Bitcoin not least because NXT will be
    much more than just a currency – it’s being designed as an economic
    platform. The implications for how this will transform the real world economy are huge. This is the next generation.

  • http://fizzingbanana.com/ Pace Reel Grin

    I found your post very interesting.

    I would like to raise a few questions regarding PoS.

    First I am not sure that actors will be so rational about closing the client.

    Though bigger player have more incentive, smaller are still curious, intrigued, eager to earn even a tiny share. Since they benefit from the system they are also interested in preserving it.

    Electricity costs are not so well assessed so it would be difficult to build a whole system like your piggy comparison. Besides if I take the lottery example, although it is rationnaly crazy to bet, millions of peolple play everyweek and support this system.

    Obviously PoS favours those who own the greatest share of coins. Yet it is in their interests to develop this ecosystem. Maybe I am mistaken but it seems to me that most of the early adopters are less driven by personnal gain than by popularizing the potential of cryptocurrencies. Considering the risk taken, the time and the energy involved why should they not benefit from the system? Instead of seeing this as the rich greedily capturing money, why not considering it in the frame of the community graciously thanking the founders and gate-keepers of the system? There are also high chances that the coins given will eventually be spent in the interest of the system, since the biggest coin owners final interest is to keep on increasing the value of their assets.

    Besides; I don’t see why PoS are less decentralized than PoW. If you look beyond the bitcoin technical system, are not most transactions captured by a few mining pools?

    You take Peercoin as your leading coin for PoS but it seems to me that Blackcoin is much more stable and has much more potential. I would be very interested to read your opinion on this cryptocurrency in the light of these remarks.

    Best regards,

    Pace R. Grin

  • Jed

    Bitcoinplus will be the proof of stake cryptocurrency of the future.It is a master POS

    coin.Sunny King should amalgamate both PPC and XBC to create bitcoin 2.0

    • Kim

      If anything the bitcoin foundation should take over the running of XBC as a proof of stake alternative.They could easily take over it now and use it to add value to bitcoin POW as either an alternative or some form of envoirmentally friendly alternative.