Bitcoin’s reliance on Proof-of-Work (PoW) could lead to its downfall but a timely switch to Proof-of-Stake (PoS) could usher in a range of benefits for the leading cryptocurrency, according to Buterin.
- Ethereum’s founder has poked a hole in Bitcoin’s fee model and use of the Proof-of-Work (PoW) consensus mechanism.
- His lack of faith in Bitcoin stems from “high ongoing costs” and the fact that miners eventually won't have enough incentive to secure the network.
- Ethereum is inching toward a shift to a PoS model in the coming days, a move that could make the second-largest crypto much more efficient and scalable.
Ethereum co-founder Vitalik Buterin has expressed concern over Bitcoin’s future given its PoW consensus mechanism and fee model. In an interview with economist Noah Smith, the Ethereum mastermind claimed that Bitcoin miners eventually won't have enough incentive to secure the network once the BTC supply approaches the end.
He noted that at that time, the only incentive for miners will be the fee accumulated from BTC transactions. However, given that Bitcoin is considered a store of value, there won't be too many transactions, and thus enough fees won't be generated to keep the entire mining network functioning.
“First, in the long term, Bitcoin security is going to come entirely from fees, and Bitcoin is just not succeeding at getting the level of fee revenue required to secure what could be a multi-trillion-dollar system,” said Buterin.
Part of the reasons supporting his hypothesis lies in Bitcoin’s fees which stand at around the $300,000 mark and have not “increased over the last 5 years.” Buterin goes on to argue that PoW offers less security per dollar than PoS systems and foresees a grim future for the network.
“If Bitcoin actually gets attacked, I do expect that the political will to switch to at least hybrid proof of stake will quickly appear, but I expect that to be a painful transition,” he said.
Proof of Stake to the rescue
Instead of PoW, Buterin advocated for a PoS model for several reasons. He claimed that validators, who are responsible for creating new blocks in PoS, have “low ongoing costs and high entry cost” which may seem off-putting for miners but in the long term, offers higher security than PoW.
Buterin claimed that in the event of a security breach, which will become highly likely if the percentage of miners securing the network falls drastically, the response of a PoW network will be to change the algorithm, “which effectively burns all existing mining hardware.”
However, in PoS, “you can have the protocol burn the assets of only the attacker, so the attacker pays a lot but the ecosystem quickly recovers."
In the coming days, Ethereum is ditching PoW for PoS. According to Buterin, this will make Ethereum more sustainable as it will drastically reduce the costs of keeping the network secure while also lowering new token issuance. Ethereum developers have shared a tentative date of around September 15.
Buterin expected the crash earlier
When asked about the state of the crypto market, Buterin said that he expected the crash to have taken place months before it happened. The computer programmer noted that “people seemed to adjust into the mentality that the higher prices are normal,” contributing to the widespread bearish sentiments.
“Normally crypto bubbles last around 6-9 months after surpassing the previous top, after which the rapid drop comes pretty quickly,” Buterin said. He conceded that there is a silver lining in the dark cloud of a price drop as it reveals dire problems that need fixing.
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Ruholamin Haqshanas is contributing crypto writer for Milk Road and finance journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi) and the emerging market for non-fungible tokens (NFTs).