Proof-of-Work: The Indispensable Backbone of The Hardest Money Created in Human History: Bitcoin
The Bank for International Settlements (BIS) did it again by publishing an extremely onesided, illogical, distractive, and undifferentiated article in January 2019, titled: “Beyond the doomsday economics of ‘proof-of-work’ in cryptocurrencies”.
The paper focused on double-spend attacks within cryptocurrency blockchains, as well as the long-term future of Bitcoin mining profitability and blockchain stability.
The author of the paper spreads fear, uncertainty, and doubt by making unproven claims, such as: “…The underlying intuition is simple: double-spending is very profitable. In fact, attackers stand to gain a much higher bitcoin income than does an honest miner…”. Without demonstrating a comprehension of Bitcoin´s fundamentally indispensable and underlying technologies, the author continues his illogical and simply false deductions: “In order to prevent liquidity from ebbing away, Bitcoin and other cryptocurrencies would need to depart from using proof-of-work — a system that is not sustainable without block rewards — and embrace other methods for achieving consensus on blockchain updates. Among many proposed developments, the most prominent one is ‘proof-of-stake’, a system in which coordination on blockchain updates is enforced by ensuring that transaction verifiers pledge their coin holdings as guarantees that their payment confirmations are accurate. Yet, because such a system 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.” The author´s implied message by the last word “institution” is very clear: preservation of centralization by relying again on third parties and (centralized-institutional) intermediaries.
The BIS-friendly author of the above mentioned “working paper” formulates and articulates the obvious obsession with the status quo of the literally untouchable monetary centralization, bundled together by the most powerful owners and controllers of the politically and juridically uncontrollable central banks within the Central Bank of all central banks: [1]
The Bank for International Settlements (BIS). In his final conclusion, the author emphasizes his message, by cuddling with the current powerful centralized institutions (i.e.: central banks, BIS):
“The overall conclusion from this paper is that, at least judging based on current technologies, in the digital age too, good money is likely to remain a social construct rather than a purely technological one: the efficiency of decentralised exchange via proof-of-work exclusively is much lower than would appear at first sight, and alternative technologies still need to demonstrate that they can function without institutional backing. But claiming that technology alone cannot do the trick is not to say that it is useless. It simply means that the focus could shift away from the issue of whether the technology can replace traditional sovereign money and financial institutions.”
This BIS-backed working paper with a total of 31 pages has failed again to provide the (targeted) reader with an understanding of one key question: why is proof-of-work the indispensable backbone of Bitcoin?
In order to understand the non-existing logical deductions in modern academic scholarship and typical of advocates of centrally controlled monetary policies and inflationary “Keynesianism”, here a quote from Saifedean Ammous in his book “The Bitcoin Standard”[2] — in connection with Milton Friedman´s and Anna Schwartz´s work “The Monetary History of the United States”:
“…A giant tome of 888 pages, the book is astounding in its ability to marshal endless facts, details, statistics, and analytical tools without once providing the unfortunate reader with an understanding of one key issue: the causes of financial crises and recessions. The fundamental flaw…it is elaborate exercise in substituting rigor for logic.
The book systematically and methodically avoids ever questioning the causes of the financial crises that have affected the U.S. economy over a century, and instead inundates the reader with impressively researched data, facts, trivia, and minutiae”.
The authors of the BIS have not understood the essence, operation, and unique features of Bitcoin and their line of illogical argumentation has not changed since the publication of its report in 2018: “Cryptocurrencies, looking beyond the Hype”. [3]
The author of the BIS-working paper, published in January 2019, integrates pages of sophisticated mathematical formulas and equations, but fails to comprehend — let alone explain to the reader- why the trustless network-consensus accepts the admittedly “inefficient” nature and operation of proof-of-work, in order to create and secure the hardest money ever created in human history. The vast pool of experts within the BIS either lack the intelligence and logical thinking (which is highly impossible) or they intentionally ignore the reality of the truth, when it comes to understanding the urgent necessity for a truly decentralized, immutable, censorship-resistant, and hardest money with an absolute scarcity of 21 million coins to be mined in totality until the year 2140: Bitcoin. The author of the BIS-published paper fails to understand (one of) the key innovations of Satoshi Nakomoto using a distributed computation system — “Proof-of-Work” algorithm — to conduct a global “election” every 10 minutes, allowing the decentralized network to arrive at consensus about the state of transactions. This elegantly solves the issue of double-spend where a single currency unit can be spent twice.
Previously, the double-spend problem was a weakness of digital currency and was addressed by clearing all transactions through a central (!) clearinghouse.[4] The proof-of-work system guarantees that only with a correct solution can a block be committed and verified by all network members. These mathematical problems are indispensable to the operation of the system as they force the verifying nodes to expend processing power which would be wasted if they included fraudulent transactions.[5]
The author of the BIS-working paper has clearly misunderstood the essence of proof-of-work, which Nic Carter succinctly points out on his twitter-account (January 22nd, 2019):
The BIS-white paper deserves no further analysis and discussion, since the content and conclusions are fundamentally flawed, biased, and lack logical thinking.
The author of “The Bitcoin Standard”, Saifedean Ammous, tweeted the same day the BIS published its paper:
Apparently, the chief heads of BIS´s research are reluctant to debate Bitcoin´s “flaws” with the author of “The Bitcoin Standard”.
The author, Auer, continues, when block rewards ultimately become zero, there will be insufficient momentum on the Bitcoin blockchain and it could take “months” to confirm a transaction.
Unfortunately, the author dismisses and doubts the exponentially evolving Lightning Network-technology, by ignoring the uptrends in fees, as well as the combined effect of off-chain scaling technologies such as the Lightning Network, which already permits considerable expansion of Bitcoin’s transaction processing capabilities.[6] The abstract of the author´s “working paper” concludes: “…Looking ahead, these two limitations imply that liquidity is set to fall dramatically as these block rewards are phased out. Simple calculations suggest that once block rewards are zero, it could take months before a Bitcoin payment is final, unless new technologies are deployed to speed up payment finality. Second-layer solutions such as the Lightning Network might help, but the only fundamental remedy would be to depart from proof-of-work, which would probably require some form of social coordination or institutionalisation.”[7]
The fact that the BIS is still not willing to debate their perceived “flaws” of Bitcoin with Bitcoin-experts and Austrian Economists, is an implied admission of fear:
The Central Bank of all central banks becoming obsolete and collapsing like a house of cards is just a matter of time, until humanity awakens, imagines, and understands their own power and control with the hardest money ever created in human and monetary history: Bitcoin.
Literature and sources of knowledge:
[1] In connection with my published articles in this context: https://medium.com/@keyvandavani
[2] Saifedean Ammous, The Bitcoin Standard — The Decentralized Alternative to Central Banking (2018), page 121.
[3] Chapter V of the BIS Annual Economic Report 2018: https://www.bis.org/publ/arpdf/ar2018e5.pdf; Read my article in this context: https://medium.com/@keyvandavani/https-medium-com-keyvandavani-bitcoin-pandoras-goldbox-opened-human-right-to-hardest-money-2ffdadf13ff4.
[4] See details in: Andreas M. Antonopoulos, Mastering Bitcoin — Programming the Open Blockchain (2017).
[5] Read in for detailed understanding: Saifedean Ammous, The Bitcoin Standard (2018), pp. 171–172; pp. 218–219; Andreas M. Antonopoulos, Mastering Bitcoin (2017) & other experts.
[6] See short article on this discussion: https://bitcoinist.com/bis-bitcoin-depart-proof-of-work .
