The proof-of-work versus proof-of-stake battle is heating up.
Vitalik Buterin, the man behind Ethereum (ETH) and a leading light in the crypto world, has raised concerns about Bitcoin (BTC) and its ability to compete long term. Speaking to Noah Smith, an economic journalist and former Bloomberg columnist, Buterin said that Bitcoin may reach a point where it can't generate enough fees to keep itself secure.
Ethereum is just weeks away from making the leap from a proof-of-work mining model to a proof-of-stake system. Not only does proof-of-stake consume a fraction of the energy of proof-of-work, but Buterin also argues it will prove more sustainable in the long run. In contrast, crypto granddaddy Bitcoin is sticking with its proof-of-work system. This is a big factor in why Buterin is pessimistic about its future. Let's unpack his two biggest concerns.
1. Bitcoin isn't generating enough fees to secure its system
Increased security is one of the attractions of blockchain technology, particularly for bigger cryptos like Bitcoin. But Buterin says we shouldn't assume the Bitcoin network will always be secure. He explains that efficiency and security are closely connected issues. "The question is always: how much security can you buy for every dollar per year that you spend on paying for it?" he said.
There are different models that blockchains use to prevent bad actors from manipulating the chain. Chief among these are proof-of-work and proof-of-stake. One way that proof-of-work rewards the miners who validate blocks is by giving them new coins as they get produced. But Bitcoin will only produce a finite number of coins. Eventually, miners won't receive new coins, they'll only receive the fees paid on transactions.
Buterin's concern is that this won't be enough. "Bitcoin security is going to come entirely from fees, and Bitcoin is just not succeeding at getting the level of fee revenue required to secure what could be a multi-trillion-dollar system," says Buterin. "Bitcoin fees are about $300,000 per day and haven't really grown that much over the last five years," he added.
2. Sticking to proof-of-work could compromise Bitcoin's security
"What would a future look like when there's $5 trillion of Bitcoin, but it only takes $5 billion to attack the chain?" asks Buterin. Without getting too technical, Buterin believes that Bitcoin could grow so big that, with enough money, bad actors could subvert its network.
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Cryptocurrencies are very different from traditional currencies. The magic of the blockchain lets them cut out the middleman, so they don't need a third party like a bank or government to maintain them. But that could leave them vulnerable to different types of attacks too.
Buterin says proof-of-work miners have medium ongoing costs and medium entry costs. In contrast, proof-of-stake validators have low ongoing costs and high entry costs. "It turns out that how secure you are depends on just the entry costs, as that's what an attacker has to pay to attack," says Buterin.
He doesn't think there's the political will to move Bitcoin to a proof-of-stake system as Ethereum is doing. Though he also points out that an attack on Bitcoin would change people's minds pretty quickly.
What it means for investors
When a crypto legend like Buterin speaks, it's worth paying attention. The 28 year old has spent years immersed in everything blockchain-related and is the driving force behind much of Ethereum's success. If he thinks there are long-term security risks associated with Bitcoin's proof-of-work validation model, he almost certainly has a point.
However, it's also worth noting that this is the month where Ethereum transitions away from the very proof-of-work model he's criticizing. As such, it's a good time for Buterin to point out its weaknesses. Proof-of-stake has its share of critics and Buterin needs to win over the Ethereum community. For starters, it isn't yet as road tested -- up to now, the two biggest cryptos have both run on a proof-of-work model. Plus, some argue that it is more centralized, which creates different types of problems.
Long-term investors still have various hopes for Bitcoin -- some, like Jack Dorsey, believe it will be the currency of the internet. Ark Invest thinks it could take market share in several ways, including the international remittance industry, becoming a type of digital gold, and acting as a currency in emerging markets. Buterin's questions about its security could undermine those propositions, but there's still a lot to play for.
Bottom line
Do your own research and look at how the Bitcoin community might address this issue before it becomes a problem. See what other crypto experts have to say about proof-of-work versus proof-of-stake. Also pay attention to the way Ethereum's move to proof-of-stake evolves and what problems it encounters.
If you're considering selling your Bitcoin because Buterin's words have made you question your long-term view, take your time. We're not talking about a security risk that could undermine the system next week. Fewer and fewer new Bitcoins will be minted as time goes on, but it won't be until around 2140 that the last BTC gets created. Don't rush any investment decisions. Instead, bear Buterin's warning in mind as you consider the risks and opportunities associated with your crypto portfolio.
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