You may have heard of the heavy criticism against Bitcoin and its PoW (Proof-Of-Work) consensus mechanism. All of a sudden, you have so called "crypto-influencers" who probably just got into the cryptocurrency space call Bitcoin out for being slow and energy inefficient. At the same time, they shill for another cryptocurrency that they have become a die-hard supporter for. They say that Bitcoin "wastes a lot of energy" and that it is "slow and not able to process large transaction volumes". Well, I would be wrong to say that those statements are false. In fact, they are correct. Bitcoin, the first and therefore oldest blockchain in existence, has its limitations. It may be slow, but that doesn't mean it isn't accomplishing its purpose, which founder Satoshi Nakamoto made clear in the white paper back in October 2008. Bitcoin is a cryptographically secure P2P (Peer-to-Peer) payment system that runs on a decentralized network. If that is hard to believe, I will explain why that is the case.
Double Spend Problem
Prior to Bitcoin, one problem that digital electronic payment systems faced was what is called "double spending". In electronic systems, data can easily be copied since it is now in digital format. Computers can replicate information and transmit it across a distributed network. That is why we can easily make a copy of digital files, quickly and then save it anywhere we choose. The problem is that when you convert money electronically, you can also save it and use it more than once. This is the problem of "double spending", and it was an inherent flaw in electronic payment systems since digital money can be duplicated and falsified just like any other data file. If it is allowed to proliferate, it leads to inflationary pressure because of the amount of money in circulation that originally did not exist. This is like counterfeiting with fiat currency.
To give an example of this, let's say we have an electronic payment system called "ePayNow" that uses a token named "eP". Alice wants to give Bob 5 eP as a payment for some good he sold her. Alice then pays the amount according to the computer. Now Alice decides to also use the same 5 eP as payment to Carol to buy another item. In theory you are not supposed to be able to spend the same currency by paying two different people the same 5 eP. In electronic payment systems that is possible, unless you implement a system of checks against it. In this case what is absent from the system is cryptography to secure the transaction and a consensus mechanism to verify it using a decentralized network of trustless nodes. This is what you call a blockchain and it effectively resolves the problem with double-spends. Now it is still possible to launch a double-spend attack, but due to the blockchain, it makes it more difficult and costly to do so.
Blockchain Saves The Day
Satoshi Nakamoto made blockchain the hero when he implemented it for Bitcoin. He was able to address the double-spending issue through the use of cryptography and decentralization. Bitcoin uses game theory to achieve a general agreement on the validity of a transaction, which are put into blocks and verified by all the nodes participating in the network. In the PoW consensus mechanism, nodes called "miners" compete to validate a block by trying to solve difficult cryptographic puzzles. These nodes provide their compute resources which require expending large amounts of energy since it uses a lot of electricity in order to perform calculations to solve the puzzles. The miner who gets the correct answer, called the nonce, will validate the block and in return get an incentive for it. The process is rather long to explain, but to it is basically how transactions on a Bitcoin payment network are verified. A seller cannot cheat the buyer by pretending they did not receive a payment and vice versa. This is because the truth is recorded on the blockchain database, and made immutable and transparent for all to see. The blockchain acts as a public ledger that can corroborate Alice paid Bob, and Bob received his payment. There is a consensus among trustless nodes, who don't have to know each other. This helps to eliminate any sort of collusion which is more likely to occur in trusted systems, because it is centrally controlled. The blockchain was meant to be the opposite, so that is where it builds the trust. In other words, every party to a transaction must act in good faith or else there will be consequences. If a bad actor tries to double spend, they will realize that it costs more to attack the network so they would rather mine in good faith. The transparency discourages dishonesty since it is made available to the public and no one can tamper with the transaction once it has been added to the blockchain. Thus, Bob cannot say that Alice didn't pay him because if we use a block explorer it can track the transaction to show proof of payment.
The Scalability Trilemma
The blockchain sounded like the long awaited solution in financial technology. Not so fast, let me now explain why it is not so. Unfortunately, a blockchain faces what Ethereum founder and blockchain enthusiast Vitalik Buterin calls the "Scalability Trilemma". This is because there is a tradeoff that must be made in order to have a blockchain. Ideally a blockchain has 3 important components which are:
However, the problem here is that a blockchain can only have 2 out 3 of those features.
When you have more decentralization, you have greater security as well but you will have to sacrifice scalability.
When you have more centralization, you have scalability but at the cost of more security.
Decentralized systems bring a more distributed architecture to the network. There is no single point of failure, thus it is more secure. If any node goes down in the network, it does not affect the entire system. The system can continue to function as a whole. Think of the Internet as a decentralized network. When one server on the Internet is attacked, there are still other servers that keep the network up and running. In a blockchain, if a node that stores a transaction in a block is attacked, it does not matter. Other nodes store a copy of the block so it keeps the network secured because now all the other nodes have to be attacked as well. When you have thousands of nodes, it makes the task more difficult since it requires more computing resources to accomplish. That in effect is also costly and this can prove to be more expensive. Despite this, the system is slow. This is like having too many cooks in the kitchen having to agree on what to cook. In this case the more nodes you have, the more times you have to verify transactions and that slow your system down.
In a centralized system you achieve scalability faster because you don't require trustless nodes that duplicate the same data. You have trusted nodes in which one server can quickly perform a task. You process transactions faster and at scale because since you have only one decision maker that is a trusted system. Centralization means there is more control and cohesion. When verifying transactions, a trusted system can do it right away because it doesn't need to come to a consensus with other nodes. Each node is aware of what it has to process without any objection. There is a single point of failure however, so if the system is compromised then everyone who is a part of the system will be affected as well. This is what happens with traditional financial systems that are heavily centralized. Banks and other financial institutions are fine examples of this. They can also block transactions at anytime and ban users from their system because they control it.
It is nice to have all three components in a blockchain, but it just seems to be impossible to do. There are proposed scaling solutions but perhaps that is more on innovation. Going back to the purpose of a blockchain, it seems that Bitcoin has been accomplishing things all along. Since its genesis block in 2009, Bitcoin has been proving it is an example of a mature blockchain that has withstood time and proven its value. So why is it slow, like the critics say?
Slowly But Surely
There is a story about the tortoise and the hare. The tortoise was slower compared to the hare, so if the two were to race the result would be predictable. However, the tortoise was also patient and no matter what the hare did the tortoise kept moving along. The hare became overconfident and thought a nap would be all right given that the tortoise was just slow and unlikely to win. That is what critics think about Bitcoin, slow and unlikely to scale. Bitcoin has proven that slowly but surely is better than quickly but vaguely. The reason I say that is because you can have a faster Bitcoin by redesigning the protocols and changing the underlying foundations of the technology. Once you do that though, you are also changing its purpose of being a cryptographically secure payment system. This is because the whole process of mining and confirmations appear to be slow and cumbersome, but it has kept transactions secured in their blocks. Modifying it just so it becomes faster is not based on best practices because you don't have any way of knowing whether it will be more secure when it comes to the network. When the outcome is vague, you are better off with what already works. It is slow, but it surely achieves its purpose. The scaling issue is also being addressed by core developers working in the Bitcoin community. What makes decentralization so great is that anyone who wants to contribute is welcomed. You have a community that comes together through their common interest to find ways of solving problems.
The scaling issue has proposed solutions like SegWit and the Lightning Network. SegWit has already been implemented and the Lightning Network has been undergoing many tests. While Bitcoin itself will remain the same, the scaling solutions are meant to be be implemented "off-chain" as "sidechains" so as not to require any major changes to the fundamentals of the original Bitcoin protocol. Sidechains will still have a Merkle root for provability that they are a part of the same blockchain. Perhaps it is Bitcoin's own built-in protocols that help it from getting overwhelmed. Bitcoin uses a difficulty target that determines how quickly the nonce can be solved based on total hash power in the network. The difficulty increases with the total amount of hash power available on the network. That means the more miners there are, the greater the hash power in the network, the more difficult it becomes to solve the nonce. This was by design in order to achieve a fair way to accomodate all miners in the network and keep the average block propagation at an average of 1 block every 10 minutes. If there was no difficulty target, too many blocks will be mined and thus quickly depleting the supply of BItcoin.
Renewable Energy Driven
On a separate note, Bitcoin has been called energy inefficient or a power hog that "wastes" electricity. This can further be explained in another story, but to keep things short it is actually not the case. Most of the world's energy consumption come from activities other than Bitcoin for a fact. According to research Bitcoin consumes 0.5% of global energy consumption. That is significant but it still falls behind other activities like manufacturing and mineral mining. Many Bitcoin mining activities also occur in countries where the electricity generated is from renewables like geothermal in Iceland and hydro-electric in China. According to Coinshares, Bitcoin mining runs from 74.1% renewable sources, "making it more renewables-driven than almost every other large-scale industry in the world." This study at least takes into consideration that the bulk of Bitcoin mining does not involve fossil fuels. It surely has an impact with the carbon footprint still, and that cannot be denied.
It is actually not a waste of energy like some critics would say. In economic terms, expending electricity is a requirement of the PoW consensus mechanism in order to process blocks. That activity has value because it verifies transactions and secures it on the network. It is therefore not wasting energy in the sense that it is required in order to perform a function. It just so happens to be an inefficient method, but nonetheless it has been working properly and will continue to do so until the last Bitcoin has been mined. More can always be done to address the inefficiencies, but it does make economic sense why so much electricity is needed when it comes to mining.
Preserving The Foundations
The developers want to preserve what is already tried, tested and true. There have already been disagreements within the Bitcoin community in the past that have lead to schisms called "forks". The most significant one was the in 2017, when Bitcoin Cash (BCH) forked from Bitcoin. These differences in ideas do affect the project, most definitely their prices. The original Bitocin protocols remain solid. Though it maybe slow, it is still your best protection against hacking and network attacks.