It is not necessary to waste energy for the sake of scarcity
It is often said that scarcity is the most important part of the economic model of cryptocurrencies. Is it really necessary to consume so much energy due to scarcity?
Is it necessary to waste energy for the sake of scarcity?
Gold is a rare commodity on its own due to its limited quantity. Furthermore, there are associated costs with its mining. Therefore, gold is expensive and has been keeping its function as a store of value for decades.
Conversely, the price of a product reflects production costs, with an added profit margin. Thus, there is a question — is the scarcity of Bitcoin caused by the fact that PoW consumes a large amount of energy, consequently increasing the price? We do not think so for a variety of reasons:
- If somebody created a new crypto-project that would use up twice as much energy as Bitcoin, would such crypto-project be more valuable? The answer is, by all means, that it would not work because no one would be purchasing such coins unless there is general trust in the project and accordingly, associated liquidity.
- Secondly, it is physically demanding to craft a hand-woven Persian carpet. However, how difficult it is to purchase an ASIC miner and plug it into an electric outlet? Almost anyone can handle such a task. Thus, it can be asserted that there is no manpower needed to produce PoW coins. On the contrary, mining coins requires both energy and human work effort. Consequently, should we consider the notion that Bitcoin is but an expensive product?
- Subsequently, if Bitcoin actually represents a ‘voucher’ for already consumed energy, is there any real utility to it? Wouldn’t it be far greater to own a ‘voucher’ for energy, that could be used in the future?
- We may as well soon see the real-world implementation of Tokamaks, power plants that utilize thermonuclear fusion to create energy. This, in turn, is likely to decrease electricity costs. And, if we decrease costs generate electricity … would it influence the price of PoW coins?
- Accordingly, we do have 3 Bitcoin related coins in the top 10 cryptocurrencies in terms of market capitalization. Is there a direct correlation with the consumption of electricity? The undisputable benefit of gold is that it cannot be cloned, copied or reproduced. Conversely, any crypto project could be … over and over again, thus dissolving the importance of the original project. So, we can argue that no digital project can over compete with commodities such as gold since it is virtually impossible to regulate digital competition and so, such projects will always take advantage of the demand-curve principles in almost perfect competition conditions, much to the detriment of the original project, such as feature Bitcoin before its forks.
For all these reasons, it can be deemed impossible to surprise the capitalization of gold by using up large amounts of expensive, yet easily accessible energy, harvested to produce coins. Such a process is entirely unnatural and artificial. Fundamentally, there are other values, those of practical utility, that should be sought after, rather than energy devoured in the process.
However, in contemporary society, it is extremely laborious to emulate ‘scarcity’ in the digital world, mainly thanks to modern cryptography, without adding the ‘necessity’ to utilize a great amount of energy to be able to harvest such digital assets.
Therefore, what else could amount to coin value? Firstly, it could be its fundamental scarcity, that is, an artificially set number of coins in the source code, within these coins being gradually emitted to the circulation. Such a quantitative release of coins will once stop and thus, demand is expected to soar. This has already happened with Bitcoin, so it can be argued that the value of the coins is represented by the demand for them, with the demand increasing hand in hand with a larger degree of mainstream adoption. Nonetheless, at this point, an important question arises. What is Bitcoin actually good for and how likely it is that its mainstream adoption will keep going up? Well, it turns out that the answer is quite complex and complicated.
Bitcoin was originally meant to be a novel digital currency. This attempt has, however, been failing due to its high volatility as well as subsequent problems with scaling. In the bear market, no one was willing to pay with the coins, while in a bull market, the price per transaction went up to tens of dollars. And, since the Bitcoin price since its start kept going up, it started to be seen as the modern store of value. Arguably, not much else could have been that because of the emergence of other crypto projects that did not suffer from the same problems as Bitcoin did. Thus, currently, almost no one uses bitcoin as a currency, with the holder community being the most prominent one with the Bitcoin users.
Every new Bitcoin block is mined after ten minutes, but the transaction can be considered final only after an hour. In the world of the internet, where the users are used to speed and response time in a matter of a few seconds and, where, almost anything can be found ‘for free’, this is painstakingly ineffective. The public distribution network, however, cannot offer transactions for free. PoW transactions are simply way too expensive and to make matters worse, the reward for the mined block represented by the newly issued coins is getting decreased over the course of time because of the halving principle. Only a limited number of transactions can be put into a block and these transactions have to bear the costs for undertaken security measures. The Lightning Network makes the whole concept even more complicated as it is a standalone network with its own economy. However, the very first layer shall not be a bottleneck, if other protocol layers are planned to be created.
As a result, because of Pow, Bitcoin suffers from serious problems with scaling and moreover, as mentioned before, the transactions are awfully slow and expensive. These issues render Bitcoin a rather cumbersome digital asset, contributing to its low rate of adoption. To sum up, Bitcoin presents real-world value. The only advantage over other crypto-projects can be seen in speculations over its expected price growth. However, the long-term question is — to how many people will Bitcoin keep being rare? If it is seen as such by a mere five percent of the population, Bitcoin will have never become digital gold, as such a moment can only occur with a far greater rate of adoption. However, this simply will not happen unless the protocol itself offers a specific real-world application or utility, a feature that is considered vital as protocols do exist in the digital world and accordingly unless the protocol is fast, inexpensive, easy to use, unless it offers a large degree of privacy unless it has a clear vision and set goals, it will forever be far-cry from the premise of massive adoption. In terms of distributed networks, a high degree of decentralization on both transactional and project management levels is essential. And we see Cardano as the best solution to achieve this.
That being so, what features can make ADA rare? In the digital world, a mere transfer of value aspect will hardly do as we’ve always had the ability to transfer information since the very inception of the Internet. Additionally, thanks to internet banking, we also transfer value rather easily.
Having said that, what we do seek is to transfer value on the peer-to-peer basis, without intermediaries such as banks. And we aim to do this in a swift, inexpensive, reliable and secure way. And, not only that. There is also a premise of adding context to the transferred value. Thanks to the smart-contract feature, one can easily add a condition to the transaction, or even, new, decentralized banks can be created. Try to stop for a while and consider whether a quick and inexpensive transaction or a slow and expensive transaction would be considered more valuable in the digital world of distributed networks. ADA will be valuable as it is the backbone of the whole Cardano ecosystem, allowing for the emergence of novel services as well as brand new communities, which would be able to define their coins and rules. Accordingly, the coin price will rise with the increasing number of users.
A PoW is often wrongly claimed to be the only algorithm of consensus that could be safe, the reason being that no one is capable to harness more than 51 % of hash rate. Indeed, the whole security of PoW is solely based on the price of the coins. With the price decreasing, so does their security. An attack via hash rate is merely a question of an amount of fiat for which ASIC miners and energy can be purchased. Such attacks have already been observed within the Verge and Vertcoin projects.
On the other hand, an attack is only possible if the attacker possesses more than 50 percent of all emitted coins, making it increasingly more and more difficult as the coins will become more expensive, with far larger quantity being distributed within people. The attacker would not simply purchase such a massive amount of coins, only to commence an attack that would consequently decrease the coin value, as he would suffer the ultimate detriment. Furthermore, from a certain scope onwards, an attack would not be possible, even hypothetically. This is because, from the moment when more than 50 percent of coins will be, roughly equally, distributed among e.g. 10 million independent users, the attacker has no practical ability to commence an attack as those people are unlikely to sell their coins. These users will be staking their coins, so their motivation to sell will not be high, which is even truer if the price is going up.
Cardano PoS can be equally safe, if not safer than PoW, without the issues of scalability. Users will be more motivated to hold their coins as by holding them, they will have become project stakeholders, getting their share from the transaction costs, thus securing a nice passive income. Likewise, holding coins is important from the standpoint of network security. Thanks to the real-world utility, the adoption rate will grow, in turn, generation far larger number of transactions. To top it off, by holding ADA, users will take part in voting regarding the future direction of the project.
Therefore, everything is intertwined, like the mythical Ouroboros, eating up its own tail. From the long-term perspective, PoW is likely an unsustainable concept and if we are able to do the same without wasting energy, it is reasonable to do so. The history of mankind shows us, that everything can be improved, upgraded or updated and thus, there is little sense to stick to the obsolete concepts of the past. By all means, PoS, with Cardano and its forefront, is the future of cryptocurrencies.