Alternatives To Proof-of-Work

The designers of peer-to-peer consensus protocols such as those underlying cryptocurrencies face three distinct problems. They need to prevent:

• Being swamped by a multitude of Sybil peers under the control of an attacker. This requires making peer participation expensive, such as by Proof-of-Work (PoW). PoW is problematic because it has a catastrophic carbon footprint.
• A rational majority of peers from conspiring to obtain inappropriate benefits. This is thought to be achieved by decentralization, that is a network of so many peers acting independently that a conspiracy among a majority of them is highly improbable. Decentralization is problematic because in practice all successful cryptocurrencies are effectively centralized.
• A rational minority of peers from conspiring to obtain inappropriate benefits. This requirement is called incentive compatibility. This is problematic because it requires very careful design of the protocol.

In the rather long post below the fold I focus on some potential alternatives to PoW, inspired by Jeremiah Wagstaff's Subspace: A Solution to the Farmer’s Dilemma, the white paper for a new blockchain technology.

Bitcoin's Death Spiral

More than two years ago in my first post on Bitcoin I wrote about the difficulty of maintaining its decentralized nature. Nearly a year later I wrote Economies of Scale in Peer-to-Peer Networks, a detailed explanation of why peer-to-peer currencies could not maintain decentralization for long. In a long and fascinating post Mike Hearn, one of the original developers of the Bitcoin software, has now announced that The resolution of the Bitcoin experiment is that it has failed.

The fundamental reasons for the failure are lack of decentralization at both the organizational and technical levels. You have to read Mike's post to understand the organizational issues, which would probably have doomed Bitcoin irrespective of the technical issues. They prevented Bitcoin responding to the need to increase the block size. But the block size is a minor technical issue compared to the fact that:

the block chain is controlled by Chinese miners, just two of whom control more than 50% of the hash power. At a recent conference over 95% of hashing power was controlled by a handful of guys sitting on a single stage.

As Mike says:

Even if a new team was built to replace Bitcoin Core, the problem of mining power being concentrated behind the Great Firewall would remain. Bitcoin has no future whilst it’s controlled by fewer than 10 people. And there’s no solution in sight for this problem: nobody even has any suggestions. For a community that has always worried about the block chain being taken over by an oppressive government, it is a rich irony.

Mike's post is a must-read. But reading it doesn't explain why "nobody even has any suggestions". For that you need to read Economies of Scale in Peer-to-Peer Networks.

Economies of Scale in Peer-to-Peer Networks

In a recent IEEE Spectrum article entitled Escape From the Data Center: The Promise of Peer-to-Peer Cloud Computing, Ozalp Babaoglu and Moreno Marzolla (BM) wax enthusiastic about the potential for Peer-to-Peer (P2P) technology to eliminate the need for massive data centers. Even more exuberance can be found in Natasha Lomas' Techcrunch piece The Server Needs To Die To Save The Internet (LM) about the MaidSafe P2P storage network. I've been working on P2P technology for more than 16 years, and although I believe it can be very useful in some specific cases, I'm far less enthusiastic about its potential to take over the Internet.

Below the fold I look at some of the fundamental problems standing in the way of a P2P revolution, and in particular at the issue of economies of scale. After all, I've just written a post about the huge economies that Facebook's cold storage technology achieves by operating at data center scale.