Cryptocurrency mining requires a lot of computing power and electricity. This has been seen as a major issue with currencies like Bitcoin. Blockchain now has many models, as I have written previously, and it is especially the proof-of-work model that requires heavy computation. Every now and then there are discussions if this computation could have value outside the cryptocurrency process – basically by using those computers to make useful calculations elsewhere. Could this be a path for broader adoption and acceptance for cryptocurrencies?
Many governments now want to impose limits on cryptocurrency activities and mining, including China, that has been the real hub of activity. At the same time governments are planning their own cryptocurrency models, and finance institutions want to utilize blockchain. Naturally the question is whether those calculations in the proof-of-work model could be valuable elsewhere. If so, then a party, including a government, could actually operate (or regulate, or license) an infrastructure that offers computing capacity and – at the same time – maintains a crypto finance system. Miners could also earn cryptocurrencies, which could also allow a government to collect taxes in this process. Or is this too theoretical?
Proof-of-work is the main model for cryptocurrency mining and blockchain, especially for Bitcoin. Basically, the way to guarantee the order of transactions is to slow down the system and make it computationally onerous to add a new block – i.e. it takes time and computing capacity. If two blocks are added simultaneously, then it is basically a competition to see who can perform the calculation tasks faster and add more to the chain, because the longer fork wins. The reward for adding a block is to receive some tokens (e.g. Bitcoins). SHA-256 (Secure Hash Algorithm), which came with Bitcoin, is a commonly used model, and there are targets for the hash algorithm value that basically forces it to perform a lot of calculations for each transaction to achieve the targeted value.
The benefit of the current algorithm is that the results are easy to check and see whose block is added to the chain. It would probably need quite a lot work to develop models in which miners make some otherwise useful computation for proof of work. It is not only about performing the computation, but also checking the results and deciding whose work warrants the right to add a block. But probably there will be smart innovations in this area – if there is a motivation to do it. There are some cryptocurrencies that work something like this, but none of them have managed a big breakthrough as of yet.
People also have different opinions as to whether cryptocurrency mining is useful overall. Some people see it is a total waste of electricity, and the whole concept doesn’t make sense and cannot be a long-term solution. Others say it is useful, and that it is the model to both handle transactions and maintain the new finance backbone. With the latter argument, the questions revolve around opportunity costs – i.e. if there would be better ways to use that energy and get more value – or if there are more cost-effective solutions to manage the blockchain.
Then we have to question whether the proof-of-work model makes sense or if other solutions will eventually replace it. We see voting and stake methods becoming more important. They make sense for many solutions and applications. But the proof-of-work model has one important benefit: the mining motivates the community to handle transactions and, in that way, build and keep the public system for cryptocurrency infrastructure up and running.
This whole discussion proves that FinTech nowadays isn’t just about finance instruments – it also definitely includes complex technical questions. Blockchain algorithms are quite complex, but the math gets even more complex if we want to offer utility computing services in the process. But when we think of the whole cryptocurrency ecosystem or tokenomics, we must also consider how systems are a part of the economy. Right now, blockchain requires a heavy computational capacity just to handle the transactions and maintain cryptocurrency ownerships. We will need solutions that are “lighter”, or where the computation part could also offer value outside of pure transaction processing.