Proof of Work is coming under increasing attack as a model for cryptocurrencies. Climate change activists are calling the whole paradigm into question. The state of New York is close to banning Proof of Work cryptocurrency mining. The existing system is not going to go away. More and more obstacles will be put in the way of countries with IMF membership. The Central African Republic is already seeing some pushback for its adoption of Bitcoin. Large and powerful forces are now in conflict. HODL may take on a whole new meaning.
How did we get here? Why did Bitcoin get created in the first place? The meltdown of the global financial systems in 2008–09 prompted “Satoshi Nakomoto” to create a 21st-century version of the old Proof of Work model. A model not based on humans’ favorite yellow metal, gold. Instead, Satoshi created digital gold and called it Bitcoin.
Gold has been the Proof of Work model for millennia. A currency backed by gold was only possible if the work was done in the mines to dig it out of the ground. Gold was the ultimate Proof of Work. Obtaining gold has never been easy, so if a nation or kingdom had it in great quantities, some work had to be done. A currency backed by gold was not subject to devaluation the way a fiat currency devalues.
Let us look at gold as a Proof of Work model for backing a nation’s currency. Why has gold held this place in the human economic world for millennia? Gold truly has a limited supply. There is only so much gold in the world. Gold has been a traditional store of value in human economies literally for thousands of years.
Gold is hard to get out of the ground. Though it does not degrade or tarnish, the effort to get it out of the ground has limited its supply. Even though humans have been digging it out of the ground as fast as we can for millennia, there is a limited amount.
It is this physical limitation that makes gold’s supply cap REAL. It is estimated there are about two hundred thousand tons of gold above the ground and under human control. This situation appears to be about the same going into the future.
Unless Elon Musk finds an asteroid with a gold core or starts mining the stuff on the moon, the gold supply appears to be pretty static. Gold is just really really hard to get, simple, period. Every single year persistent and hard-working humans scratch out another few thousand tons. That means the gold supply grows by 1–2% every year.
Gold forces some transparency because it is obviously hard to get. Humans cannot be trusted. Humans are rarely honest especially when it comes to money. Gold’s store of value is based upon a physical limitation that everyone agrees is real. It is hard to get gold out of the ground.
The Proof of Work mechanism in cryptocurrencies is meant to make obtaining the digital asset a more difficult hill to climb, or mine to dig. It is actual work on many different levels to get traction in a Proof of Work ecosystem. Proof of Work is not just about obtaining the graphics cards or burning a coal furnace to power the mining rig as some believe.
There is a lot of expertise that goes into operating a successful mining operation in the Proof of Work model. There is a lot more work being done to produce a hash rate than just plugging in a computer. Cryptocurrency ecosystems are kept alive by mining activities. These activities in general involve the miners maintaining nodes on the network and processing transactions for the cryptocurrency rewards of solving complex equations meant to verify network viability.
Proof of Work requires nodes on a network to provide evidence that they have expended computational work to achieve consensus in a decentralized manner. This prevents ne’er-do-wells from overtaking the network. Because the winning miner is randomly chosen proportional to the work done, it incentivizes everybody on the network to act honestly and record only true transactions.
This makes the Proof of Work network decentralized and peer-to-peer at its foundation. This makes it harder to manipulate because there are so many nodes on the network. As long as there is a healthy and diverse mining network, this system is essentially self-sustaining. It is possible the current monetary regime could really be replaced, if there are enough miners and enough countries adopt Bitcoin as legal tender.
This new Proof of Work model completely dependent on a decentralized network of miners is not perfect, but it offers a more egalitarian alternative to what has been. The current monetary system, which seems largely based on petro-dollars and war, is actually responsible for putting the planet at peril. Cryptocurrencies did not put the planet at peril. Old, moneyed power from the twentieth century brought that “gift” to this century.