BIS study says Bitcoin must depart from proof-of-work to survive

21 Jan, 2019 | Updated: 21 Jan, 2019
by David Robb
Analysis
BIS study says Bitcoin must depart from proof-of-work to survive

Major international banking institution BIS (Bank for International Settlement) has released a report on Bitcoin's proof-of-work system. It suggests that the network must shift to different alternatives if it is to survive.

According to the report, authored by BIS chief economist Raphael Auer, "two economic limitations affect the outlook of cryptocurrencies modelled on proof-of-work. The first lies in the extreme costs of ensuring payment finality in a reasonable space of time. The second is that these systems will not be able to generate transaction fees that are adequate to guarantee payment security in future". 

Read more: Its probably already time to start preparing for 2020's halving

Mining rewards for BTC are scheduled to halve again in 2020. The paper suggests that, as rewards decrease, the Bitcoin network will either become much less secure or much slower, to the point that it will eventually become unusable. In order to continue, "the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation."

Proof-of-stake is mentioned as a viable alternative to PoW, but the paper claims that "because such a system (PoS) lacks the solid grounding offered by proof-of-work (which proves actual offline activity), its success may rest on additional overarching coordination mechanisms, ie some degree of implicit or explicit coordination by an institution." 

It may not come as a surprise that the BIS would suggest some degree of centralized institutional oversight as the only future for Bitcoin. The Switzerland-based BIS, which is made up of 60 central banks and accounts for around 95 percent of global GDP, has been critical of crypto in the past. However, the Ethereum network is one decentralization-focused project that has also recognized the limitations inherent in PoW, and its upcoming pivot towards a PoS system may function as a bellweather for the future of the crypto space.

Read more: Cryptocurrency is 'Fake Money', says BIS General Manager Carstens; Vitalik Buterin responds point by point to Ethereum criticism

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Read more about: Bitcoin (BTC)

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