"With Bitcoin, we're paying $600 million a year on a 5-of-10 multisig."
In the latest episode of Epicenter Bitcoin, our guest was a man who needs little introduction in this community, Vitalik Buterin. We were very excited to finally have him on the show and go deep in some of Bitcoin's most crucial issues. Having covered Ethereum at great length in previous episodes with Stephan Tual and Gavin Wood, we wanted to talk to Vitalik about an area in which he holds much interest, consensus systems.
In the past year, Vitalik has written extensively about consensus systems, in particular, the advantages of proof-of-stake (PoS) over the more widely used proof-of-work (PoW) algorithm. My co-host, Brian Fabian Crain, recently wrote a fantastic article breaking down the debate between PoW and PoS, which I strongly recommend.
When we look closely at PoW, several big issues become apparent. Perhaps the most obvious is the overwhelming waste of energy and resources required to secure the Bitcoin blockchain through the process of mining. Clearly, running and cooling ASIC processors make up for the bulk of this energy. But one must also consider the costs of R&D, manufacturing, shipment and, ultimately, proper disposal of ASICs to judge the full impact of mining.
Second, increasing difficulty has made transaction processing a very centralized process. As Vitalik aptly puts it: "We're paying $600 million a year on a 5-of-10 multisig." Indeed, with fewer mining pools controlling large shares of the total mining power, Bitcoin is not getting any more decentralized. In sum, we are paying a huge amount for an incredibly energy-inefficient and increasingly centralized system, which spends the bulk of its energy performing worthless computations.
“If we move up to having 10,000 transactions per second and there is only one node processing everything, that one node is basically PayPal.”
PoS is fundamentally different. In this case, a miner's limiting power is not the amount of computing power he controls, but rather his stake in the coin. Simply put, every single account has a chance per second of being randomly selected to create a block. That chance is proportionate to the amount of coins held. The more coins someone holds, the more "hashing power" they possess. The primary advantage of PoS is immediately evident: no energy waste on computationally hungry mining.
There are some downsides, however, among which is the "nothing-to-stake" problem where coin holders could effectively mine on two separate forks of a blockchain, with equal probability of obtaining the block reward on both chains. This isn't a concern in PoW, as it is impossible for an ASIC to allocate 100% of its computing cycles to mining on two chains. In PoS, on the other hand, nothing would stop someone from using 100% of their coins to mine on two forks at once.
Vitalik has thought of a possible solution to this problem: an algorithm called Slasher. With this mining algorithm, a miner would only receive his block reward 3,000 blocks into the future (about 21 days). If someone were to catch an account mining on two chains at one, that person could create a special transaction that would nullify the miner's rewards and give the nullifier a third of that reward as a bounty. Therefore, there would be a strong disincentive for miners to cheat.
Even though there are still many challenges to be addressed with PoS, Vitalik goes a long way in offering potential solutions in his writings on the Ethereum blog.
Bitcoin as a Unit of Account
One question on our minds was whether a massively adopted, purely digital currency could one day be used as a unit of account. Vitalik's response was simple: "If that happens, it probably won't be Bitcoin."
In his view, the fixed supply of Bitcoin makes it too volatile for it to become a stable unit of account with which we could one day price goods and services. For this to happen, a cryptocurrency would require some form of monetary policy that would define the supply.
“If a cryptocoin were to become a stable unit of account, it would have to be artificially stabilized in some fashion.”
The thought of applying monetary policy to Bitcoin may outrage some. Let's be clear. No one is suggesting we should create a central body that would oversee the Bitcoin money supply. Monetary policy is a legitimate concept and Vitalik reminds us that in its simplest form, it is nothing but an algorithm that defines what the supply of a currency will be. Indeed, a cryptocurrency could have a decentralized and autonomous monetary policy. There are different ways to achieve this, all of which would require the currency to gain awareness of its own value by means of internal estimators, or by querying oracles.
Going from university “drop-up” to Bitcoin rockstar, Vitalik has spent most of the last year traveling the world. "I've basically spent a large chunk of my life on airplanes", he says, having just returned to his native Toronto. Visiting 11 countries, attending conferences and meeting different Bitcoin communities from around the World, he points out the different areas of interest from country to country. "Israel is probably the most technically advanced."
At only 21, it seems like this young man has already contributed so much to the space, but his journey is only beginning. When we asked him where he sees his role evolving in the future, Vitalik says he would like to focus more on research and perhaps write a book about crypto-economics.
“I'd like to see crypto-economics turn into a proper and mature academic discipline.”
Coming Up on Epicenter Bitcoin
We hope you will join us on our next episode as we wrap up a very exciting year. No guests, no scripts, just an intimate fireside chat between Brian and Sebastien, who will reflect on the last year in Bitcoin, and speculate on what to expect in 2015.
Join us for the discussion (and ask questions in the live chat room) on Sunday December 28 at 6 p.m. UTC (7 p.m. CET, 10 a.m. PST, and 1 p.m. EST).
About Epicenter Bitcoin
Epicenter Bitcoin is a show about the technologies, projects & startups driving decentralization and the global cryptocurrency revolution. Every week hosts Brian Fabian Crain and Sebastien Couture talk to some of the most influential people in the cryptocurrency space about their projects, and get their perspectives on recent events.
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