The Monopoly Problem
Proof of Work depends on the computing resources available to a miner. If a miner can possess a huge amount of computational resources, then there is a possibility that the miner can control the entire network or gain control over the network. It may happen that a minor can gradually generate a lot of blocks in the current blockchain. If a huge number of blocks in the blockchain go from a particular miner, then that particular miner can control the entire flow of transactions in the blockchain. This particular problem is called the monopoly problem in the bitcoin network.
A statistical theory called the “Tragedy of the Commons” says that such a monopoly can increase over time from an economic perspective.
Consider the methodology of bitcoin generation and rewarding mechanism in the network. Whenever the miner mines a new block, they get a reward. But, there is a limit on the generation of bitcoins from the mining procedure in the system’s entire life span. Whenever there is a limit on the generation of bitcoins from the mining procedure with time, the amount of reward given to the miners will drop. The number of bitcoins that can be generated will also gradually drop to make it saturated. Moreover, if the minors get fewer rewards, they will get discouraged from participating or joining as miners. If they get discouraged from participating as miners, the system will be left with few miners with enormous computing resources, and they may control the entire network.
The above practical problem is not there in today’s bitcoin network. However, with time it is expected that this kind of problem may arise. This is the shortcoming of the “Proof of Work” based system such as Bitcoin Cryptocurrency.
PoW Power Consumption
The “Proof of Work” based system relies on the amount of power consumed. Whenever we deploy a huge amount of computational resources in the network, it is expected that those computational resources are actually consuming a huge amount of the power to generate those hash functions. So with time, there is an exponential growth in power consumption due to bitcoin mining.
Proposed Solutions
To reduce the monopoly problem, other consensus mechanisms came into practice. The most popular is the “Proof of Stake” (PoS) mechanism, and the bitcoin forum proposes it.
The idea was to make a general transition from a PoW to PoS based system when the bitcoins are getting widely distributed. It means the number of bitcoins is not under to control of one individual, and it is normally distributed amongst the bitcoin cryptocurrency users. The broad difference between these two are as follows:
- PoW: The probability of mining a block depends on the work done by the miner. So the amount of work to be done is totally depends on the computing resource possessed by the miner.
- PoS: The amount of bitcoin that the miner holds, instruct which miner can generate the next block. So if a miner holds one percent of the total bitcoins, then the miner can mine one percent of PoS blocks.
By putting this kind of restriction on the number of bitcoins that the miner holds and proportional to that, the miner will generate the Proof of Stake block. This reduces certain kinds of monopoly problems and makes the monopoly problem a difficult problem for a “Proof of Stake” based system. The inherent assumption is that the bitcoin is widely distributed by the “Proof of Work” based system. So every miner will participate in the mining procedure proportional to the amount of bitcoin the individual possesses.
Summary
We have seen the inherent problems of the “Proof of Work” based system, such as Monopoly Problem, High Power Consumption, and Proposed Solutions.
References
- NPTEL lecture series on Blockchains Architecture, Design and Use Cases by Prof. Sandip Chakraborty, IIT Kharagpur.
490 total views, 1 views today
