Today we are happy to announce our second guest post: Osman Kuzucu aka Nithronium will tell us about the current state of cryptocurrency mining. As mentioned in a previous article he is working on a CryptoNote improvement that will allow decentralized mining pools in an unprecedented way. In this first part he focuses on what’s wrong with today’s mining.
The first true decentralized cryptocurrency was Bitcoin. When Bitcoin first came out, it was intended to be decentralized, peer-to-peer, digital cash. Even though the idea was good and the first adopters of the currency kept the main idea alive, today Bitcoin is different than what it was supposed to be. Think about it, it was intended to be digital cash, yet, more than 90% of the Bitcoin (or other crypto currencies in general) transfers are not payments for goods or services, but transfers between exchanges, or conversion from Bitcoin to other altcoins. It was intended to be peer-to-peer, so that no centralized authority would be able to stop transactions or have a saying on the Bitcoins an individual owns. Yet, many people right now are using mobile wallets, or custodial wallets. As for decentralization, well it was intended to be decentralized but right now we are not actually that “decentralized”.
The first two parts are clear: we see many people using centralized wallets (usually exchanges), we see people investing and trading Bitcoin, instead of using it as it was supposed to be used. I really like the following analogy that explains this situation better: imagine you have a currency -paper money- in your wallet and you walk into this new town. And you see there are 95 currency exchange offices, for converting your paper money to many other different types of paper money. When you want to spend the paper money you have, however, there are only 5 stores that accept it. In this case, is your currency actually a currency or is it mostly used for speculative purposes and barely anyone cares about buying things with it? So, that is a big problem for not only Bitcoin, but for many other cryptocurrencies as well. Furthermore, I believe there is another major problem that many people not aware of: centralization. First and foremost, cryptocurrencies were intended to be decentralized, so the creator of Bitcoin, Satoshi Nakamoto, defined a way of verifying the work and allowed his blockchain protocol to be decentralized. It was a good solution back then; early adopters of Bitcoin liked this approach. However, the main purpose there was not “let’s hash a lot, invent better hashing devices and increase the network hashrate so we have a more secure network”. The main purpose was to define a way to decide who gets to record the transactions and gets the reward for the next block.
The common misconception is people think that the more hashrate a network has, the more secure the network is. This is just not true. Assume Alice has a device that can hash 10 times per second. Bob has another device that can also hash 10 times per second. In a blockchain where only Alice and Bob are hashing, 50% of the blocks will be mined by Alice, and 50% of the blocks will be mined by Bob (ideally). Now, assume that the best device can do 10 H/s; a malicious actor that wants to attack this network would need 2 devices (+1 hash). Any malicious actor with 3 devices could take over the network, perform double spends and so on. It is clear that such a system needs more individuals joining the network, each person hashing 10 times per second, so the potential attacker needs 10, 100, maybe 1000 devices to attack the network. But now, if some company designs a device which can hash 15,000 times per second, then even if there are 1000 people supporting the network with their devices, that one company can take over the entire network with just one device.
In the above scenario, which approach do you think would be better?
- Try to find a way to limit the hash rate per device or remove that kilo-hashing device from network
- Force everyone to buy that kilo-hashing device. Since everyone would be hashing at 10 kH/s, that company would need to have thousand of these devices to attack the network.
Well, we all know what happened back then. Instead of people trying to find a solution to the “better hashing devices” problem, they went on a path where “if a company designs a better device, you better buy one to secure the network”. Bitcoin was intended to be decentralized and publicly securable by an average person; everyone could join. Now, however, only the people with ASIC devices are mining Bitcoin. Even the purpose of mining has changed from “securing the network” to “making money by mining cryptocurrencies”. Even though I keep saying Bitcoin, most other PoW altcoins followed a similar path and while some of them (try to) restrict ASICs, they usually allow GPU farms which is not viable for an average user.
At the moment, Bitcoin and its altcoin children are far away from being mined by individuals. They are mined by dedicated miners such as ASIC owners, GPU farm owners etc. So if you think about it, first we wanted to secure the network by individuals’ support, but it evolved in such a way that only the people with dedicated devices are securing the network. Another analogy could be made here: assume you are going to have an election in your country and the important thing is the amount of signed statements, not the percentage of citizens who voted for whom. A normal human can write e.g. 100 signed statements a day. So everyone does that to determine the next president. Then someone comes up with a better printer and says “I can vote for anyone I want with my PrintUltra99K device, so you better buy one to support your candidate faster”. But there are people who can not afford to buy that device, so they stop writing signed statements, simply because their one day of working would have no meaning against a rich person’s very powerful PrintUltra99K device that can print 99K statements a day. Now, by allowing such way of determining the president, we actually filtered out the people who can’t afford the new printer. The president is now elected by a select group of people who were rich enough to make an impact on the elections by buying an application specific device.
There is hope, however, that some upcoming projects will solve that problem and include the average person in the block generation process again. One of these projects is Pond Mining: a blockchain agnostic protocol on top of the current PoW applications that may solve some of the problems mentioned. What Pond Mining is and how it solves these problems will be the topic of second part of this article!