This is one article in a collection of 52 articles published weekly throughout 2023 on the basics of Bitcoin. The series is intended for people unfamiliar with Bitcoin or people wishing to enhance their understanding of the fundamentals that underpin the technology. Please contact us, if you have any questions or comments.
As we previously discussed in our series, the Bitcoin network uses proof-of-work (PoW) to validate transactions and determine who has the right to mine the next block. Under Bitcoin’s PoW system miners must input a blockheader that has a hash value that is less than or equal to the target hash. Miners attempting to mine the next Bitcoin block must expend computational resources and energy to be successful. In an effort to minimize the energy expended to validate transactions and maintain the integrity of the distributed ledger, other cryptocurrencies came up with a concept known as Proof of Stake (PoS).
The PoS is an alternative system in which network validators are chosen based on the number of coins they hold (their “stake”) and are willing to lock up as collateral. These network validators are then randomly selected to create new blocks and validate transactions on the public ledger. Advocates of the PoS will usually point to environmental concerns as the reason PoS is the preferred consensus mechanism. However, new research is contradicting this argument and stating that Bitcoin’s PoW system may be beneficial for renewable energy projects.
There are several reasons the PoW system used by Bitcoin is superior to a PoS system if the goal is a permissionless, decentralized network:
- Network Security – As a result of a PoW mining system being resource intensive, any attack would require a massive amount of computational power assuming the hash rate is high. As of the date of this publication, the Bitcoin network’s hash rate is 376,240,000 TH/s which is just off its all-time high. In other words, currently miners are inputting 376,240,000,000,000,000,000 nonces (or guesses for a layman) per second to attempt to mine the next Bitcoin block! Bitcoin’s high hash rate ensures the security of the Bitcoin network and allows users to confidently transact using bitcoin without the fear of a 51 percent attack.
- Fair Distribution - PoW mining allows for a more equitable distribution of coins, as participants must actively contribute resources and energy to earn rewards. This stands in contrast to PoS where those with larger stakes have a higher likelihood of earning rewards, potentially exacerbating wealth concentration and making the network more centralized.
- Permissionless and Censorship-Resistant: PoW mining is open to anyone with the necessary hardware and access to electricity, making it a truly permissionless system. This fosters decentralization and reduces the risk of censorship or control by a central authority.
- Track Record - Bitcoin, the first and most prominent PoW-based blockchain, has been operational since 2009 and has proven itself to be secure, resilient, and reliable. Bitcoin’s PoW system has never been hacked despite having no trusted third party.
Despite the downturn in Bitcoin's price since the 2022 bull run, the hash rate is near an all-time high. The continued climb of Bitcoin’s hash rate comes in spite of China “banning” mining in 2021. This caused many miners to move out of China to more Bitcoin friendly jurisdictions. Despite China’s notorious draconian enforcement of its laws, only the United States exceeded China as far as contributions to the Bitcoin mining network for the period of September 2021 to January 2022 after China banned Bitcoin mining!
While the PoW consensus mechanism used to secure Bitcoin’s public ledger is more energy intensive compared to the PoS consensus mechanism, this is by design. A PoW consensus mechanism is the best, and only way to date, to create a permissionless and censorship-resistant network without a trusted third party. The hash rate of the Bitcoin network is exponentially higher than any other cryptocurrency utilizing a PoW system. DOGE, the PoW cryptocurrency with the second highest market cap, $9.7 billion, had a hash rate of 710.91 TH/s while Litecoin, another PoW cryptocurrency that has been around since 2011, had a hash rate of 737.82 TH/s. As stated above, Bitcoin's hash rate is 376,240,000 TH/s. Bitcoin's PoW system and staggering hash rate compared to all other cryptocurrency projects that utilize a PoW system makes Bitcoin unique compared to all other projects.
