Bitcoin's Proof-of-Work Has 'Fundamental Flaws', Crypto Journalist Claims

  • Forbes contributor claims that Bitcoin's proof-of-work (PoW) consensus mechanism is fundamentally flawed. 
  • He presents proof-of-authority (PoA) as an "alternative", however, many people think PoA is more suited for private DLT networks.

Gerald Fenech, a Forbes contributor who frequently writes about topics covering world politics, economy, and blockchain technology, recently argued that Bitcoin’s (BTC) proof-of-work (PoW) based consensus algorithm contains “fundamental flaws.”

Problems, Challenges With Proof-of-Work

However, Fenech only states that PoW “has well-documented challenges that threaten to be fatal.” He does not mention, or explain, what these “fatal” flaws are. As most crypto enthusiasts would know, cryptocurrencies that use PoW protocols consume large amounts of energy because validating blocks on these networks is done via the resource-intensive mining process.

Other frequently cited problems with PoW-based cryptocurrency platforms is that purchasing and operating expensive hardware equipment can only be done those who are not only tech savvy, but can also afford to do so.

Because of the high operational costs associated with crypto mining, people throughout the world have “pooled” their resources to form mining pools and/or mining farms. Critics of this approach argue that it leads to centralization - as a study led by Princeton University showed that three-quarters of bitcoin mining is carried out by a small number of entities in China.

"Geographic Centralization" Of Bitcoin Mining

This, the study concluded could pose serious risks due to the “geographic centralization” of the bitcoin mining process. While Fenech does not mention any of these potential problems with PoW, he does note that the proof-of-authority (PoA) consensus protocol “could become more commonplace in the blockchain space.”

As explained by Fenech, proof-of-authority involves “users [‘staking’ their] identity … A validator has to be personally identified and verified on the platform, making them a trusted node. Users who confirm their identity earn the right to validate blocks on the chain. The crypto rewards they receive are public, as are malicious actions undertaken; this means that individuals have their personal reputation at stake when acting to secure the network.”

As CryptoGlobe reported in August, Microsoft is using the PoW consensus algorithm for its Ethereum-based cloud computing service, Azure. Per the announcement, Azure is a Blockchain-as-a-Service (BaaS) product that can be used to “deploy and configure an Ethereum blockchain network in minutes.”

Proof-of-Authority Is Not An "Alternative"

Notably, PoA does not require computational power as it does not mine cryptocurrency, and it is mostly used in situations where all participants are already considered reputable. Therefore, it is trivial, or a lot easier, to achieve consensus on these networks.

But PoA cannot always be considered an alternative to PoW because its implementation is more suited for permissioned (or private) blockchains. While there are some public PoA deployments such as the Kovan network, critics argue that security on PoA-based distributed ledger technology (DLT) based platforms is centralized.

They note that there is a single, or a few, authority nodes that make decisions on PoA-based blockchain. Moreover, there’s really no need to use a blockchains in this case, and a simple database would suffice.