The Bank of International Settlements (BIS) is suggesting, through a recently released working paper, that the Bitcoin community should abandon its highly glorified (and deservedly so) Proof of Work consensus mechanism on the account of its resource intensiveness and environmental challenges.
The paper, written by BIS chief economist Raphael Auer, specifically outlines two points that portend a bleak future for the Proof of Work mechanism. First is the cost of running machines that perform the Proof of Work. These machines are extremely expensive and they consume a lot of electricity which adds up to running costs.
The second is the fact that according to the paper, future transactions fees charged by these machines will not be able to be economically feasible compared to the costs of running them. The Bitcoin system is coded to regularly halve the mining rewards which means that in the future, the miners will have to rely on the transaction fees to substitute their earnings, and according to the paper, these aren’t going to be enough to justify participation in the mining activities.
A counter-argument that can be found in the Bitcoin Whitepaper released by its pseudonymous founder Satoshi Nakamoto follows the following logic: it’s well-known that the Bitcoin system can only emit a certain finite number of coins to the miners. As time goes by the block rewards keep getting halved and according to Satoshi, miners will be alternatively compensated by charging transaction processing fees.
As the supply reduces, the value of the coins is poised to rise which even though the miners will be earning fewer coins, those coins will be worth more. The same can be said about transaction fees. As Bitcoin gains more adoption, the network will be processing more transactions whose fees would be able to compliment and finally supplement the mining rewards as the rewards fall.
The BIS report also suggests that Bitcoin’s latest scaling solution, the Lightning Network is not a worthy solution but rather says that the PoW system should be done away with entirely and substituted with another form of consensus mechanism. According to the report, the new mechanism will “probably require some form of social coordination or institutionalization.”