Bitcoin has come under fire as of late due its mining algorithm — Proof of Work (PoW)– and its consumptions of large amounts of energy. Mainstream media has published several articles on this topic, warning that continuing to use bitcoin as the world’s primary cryptocurrency could cause a global energy crisis due to this perceived “flaw.” In reality though, that couldn’t be further from the truth. Bitcoin is doing exactly what it’s supposed to, and it is one of the most effective and innovative monetary advancements in human history. Here’s why.
Also see: BIS Says Central Bank Digital Currencies Could Disrupt the Financial Ecosystem
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Believe it or not, we at Bitsonline have debunked the claim that Bitcoin Mining is ruining the world. Really, there are countless industries and technologies that use just as much, if not more, energy than mining.
But just in case that’s not enough, here’s an economic explanation of why this energy consumption is worth it, and why it makes Bitcoin great:
Why Bitcoin Mining is Expensive — and Why it’s Supposed to Be That Way
Bitcoin’s mining algorithm is called “Proof of Work” for a reason: miners that get create new blocks and gain their rewards have proven that they’ve done the work necessary to sustain the network.
And that work put in by miners — which sustains the entire system — is a feat of technological and economic cooperation that deserves the designation of “genius.”
PoW regulates the bitcoin supply growth so it doesn’t outpace demand and create inflation. It also serves to keep mining profitable, ensuring people always have an incentive to keep the network running.
When demand for bitcoin goes up — along with its value — mining difficulty increases and requires more resources to produce blocks. This prevents a massive influx of new miners chasing the high valued bitcoin, and stops the growth in supply from exploding.
Also, when demand goes down — as well as its value — difficulty drops and makes mining cheaper, which incentivizes miners to stay on the network. However, some miners will still turn to more profitable coins during such a price drop, so the lower total hashing power will prevent miners enjoying lower costs from rapidly increasing the supply.
As a result of both kinds of difficulty changes, the growth in supply is dynamic, ensuring a deflationary Bitcoin — barring large demand shocks that break the equilibrium with supply.
Bitcoin Mining Won’t Always Be So Costly
Sure, bitcoin mining costs a lot of money, and uses a ton of electricity. But just because the process is so expensive doesn’t make it automatically bad.
Just like with any other economic process, if people are willing to pay the price — and even more so if they’re still turning profits — then the cost and resource consumption is worth it. It’s providing a net benefit to society.
Beyond theoretical terms, just think about what Bitcoin has done for the world so far, and what it has the potential to do in the future. In the last ten years, Bitcoin has created jobs, made people millionaires, and has become a cheaper remittance solution for many in developing countries.
In the future, the cryptocurrency has the potential to take over the world, fostering sustainable economic growth for all. It can encourage the return of saving — removing us from our unhealthy debt economy. Bitcoin remittances can become even more widespread, and countries without access to the global economy can use the currency to become economic powerhouses.
If Bitcoin can and will change the world — and if it already has in many ways — the financial cost and energy consumption from mining pays off.
Why Other, More Efficient Coins Can Never Beat Bitcoin
Yes, there are alternative mining algorithms that offer a more energy efficient coin production process, Proof of Stake (PoS) being the most popular one. But there’s a reason why they haven’t been able to replace PoW, and why they won’t be able to create a better money that Bitcoin.
These energy efficient algorithms, namely PoS, do not have a symbiotic techno-economic relationship like PoW. Therefore, coins running on these algorithms cannot dynamically control the growth in money supply to prevent shocks that throw purchasing power out of balance.
Under these systems, currencies become more volatile, less reliable, and will fail to foster growth in a cryptocurrency-centric economy.
They can save energy and production costs, but they can’t change the world. That is why Proof of Work is, and always will be, the king of cryptocurrency.
What’s your opinion? Are you a proponent of PoW, or do you think a new consensus algorithm will be the future? Sound off in the comments below.
Images via TechMagnet, MLSDev