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how to destroy and fix bitcoin

How to Destroy and Fix Bitcoin

Giorgi Mushukidani

3dhelios@gmail.com

June 16, 2022

Abstract

In the aftermath of the 2008 economic crisis, mysterious figure known as Satoshi Nakamoto,

published white paper about peer-to-peer version of electronic cash, that can be sent from

person to person, without need for trusted third party. the name of the invention was known

as Bitcoin and for better or worse,the world would never be the same again. in the paper

We’ll discuss technology and economic theory behind the cryptocurrencies, explain what are

the hashfunction and how bitcoin and other cryptocurrencies use it to secure the network,

We’ll also compare POW vs POS and propose the solution to improve security and reduce

climate impact from cryptocurrencies.

1. What’s the Blockchain?

Like the name indicates, a Blockchain is a chain of blocks that contains information. This

technique was originally described in 1991 by a group of researchers and was originally intended

to timestamp digital documents so that it’s not possible to backdate them or to tamper with

them. However it went by mostly unused until it was adapted by Satoshi Nakamoto in 2009 to

create the digital cryptocurrency Bitcoin. A Blockchain is a distributed ledger that is completely

open to anyone. They have an interesting property: once some data has been recorded inside a

Blockchain, it becomes infeasible to change it.

Glossaries:

Decription The conversion of encrypted data into its original form

Encription The process of converting information or data into a code

SHA Secure Hash Algorithm

BTC Bitcoin

ETH Ethereum

LTC Litecoin

Miners Computer designed to hash crypto functions, also the individuals who own this machine

GPU Graphics processing unit

CPU Central processing unit

ASIC An application-specific integrated circuit

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POW Proof of work

POS Proof of stake

Validators Individuals who stack coins to secure POS blockchain

Node Middle man between miner and the user

2. Cryptocurrencies

We’ll discuss CryptoCurrency and Blockchain, and we are going to go through the basics of

what they are, then look at some of the pros and cons and criticism of Cryptocurrency.

Before we can get into any of that we do need to cover some basics about currency and

money in general and define some terms and concepts. Money begins replacing direct trade of

goods, or bartering, when you start having issues with what is called a ‘coincidence of wants’.

Which is to say if Zura the Fisher wants something he needs to find someone who wants fish.

If Zura wants bread, but Goga the Baker does not want fish, then Zura the Fisher has to find

someone who wants fish and has something Goga the Baker wants. In an increasingly specialized

society that can result in a much longer chain of exchanges and you probably will lose a little

bit on each step in the chain, even if just because you are spending time trading goods that

could be spent fishing.

You make money to have something everyone wants so you can just sell your fish to someone

who wants them. Ideally this should be something light, durable, easy to identify, and hard to

forge. There’s a couple ways you can do this. The first way is representative money, and this

is where some token is used in place of an item. Say a note that the person who has the note

is entitled to fifty sacks of grain. Certificates from gold smiths who kept gold securely locked

up for other people is another old example and one of the ways paper money came to be in

common use.

This often leads to fiat money, the one mostly in use nowadays, and a type of representative

money where it is a bit nebulous what is being represented.

Fiat currency is one where it isn’t representing any specific thing except maybe trust and

stability. Trust is a huge factor in any representative money, of course, you need to trust you

can redeem a grain token for the amount of grain it says it is worth. This is also where we get

floating currency, which is what Bitcoin is and why were are looking at this. Here the money

is not tied to any specific commodity like gold or grain but simply exists and floats around in

value. I make a million tokens and tell people they are the only legal tender anymore, good

for any transaction or debt. Now for these million tokens I made, nobody actually knows how

much it is worth at first and it will just float around in value until it finds a comfortable place

to more or less settle at. For the first couple days people might say one token will buy five sacks

of grain, then a few days later it might be three sacks instead and finally settle at four, though

it will always fluctuate at least a little. But there is no commodity backing this money.

The second type of money is the complete reverse. Commodity money, where the money

itself has value and is reasonably compact and durable. You wouldn’t want use bananas or

a haunch of meat. Obsidian arrowheads might have been used way back in prehistory, being

useful, but also light and durable. Precious metals are a common example but can often slowly

mutate into a representative fiat currency. You pretty much have to alloy gold or silver if you

want to use them as a coin for instance since they are soft, and your coins need to be hard to

make tampering with them harder. Silver coins usually included a fair amount of copper, and

often the amount slowly increased too, even though the coins were said to have the same value.

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At one point in the Roman Empire the silver coins being minted contained less than 2% silver.

So precious metal coins often take on a certain amount of trust value, though most commodity

money eventually does.

Commodity money might seem the same as barter at first, where people just exchange items

that have worth, but it differs from barter because one type of item ends up being what every-

thing else gets valued in, if you have twenty different items you no longer need to know how

much each is worth in terms of the others, just their value in that one key commodity. Barter

systems often mutate into commodity money, and while this is uncommon nowadays we still

see it pop up a lot. Barter is common after a disaster for instance, but we often see it develop

in prisons, and even in schools, where kids will trade lunch items or toys. Often you will see a

commodity currency arise, cigarettes being the classic example from prisons. And it is almost

inevitably a single item, this follows from something called “Gresham’s Law”.

Gresham’s Law

is a monetary principle stating that ”bad money drives out good” if there are two forms of

commodity money in circulation, which are accepted by law as having similar face value, the

more valuable commodity will gradually disappear from circulation.

For our coin example the good money will be coins with high percentage of precious metals in

them while “bad money” be coins with low percentage, for example as all the silver coins minted

last year with 90% silver will start disappearing from circulation as the new ones with only 80%

silver come in to circulation. People start removing the less debased and more valuable coins.

It can happen with more classic commodities too, the nicer obsidian arrowheads stop getting

traded in favor of cracked ones, or the cigarettes that are not as old and mangled don’t go into

circulation and you end up with almost empty crumbled tubes people have removed every fleck

of tobacco from. If people start trading cans of coffee around, pretty soon all that will be left

is the cans of decaffeinated coffee, which is entirely worthless.

If everybody is still fine using this as currency all is well though it is now not really a

commodity currency anymore. The negative context on this is that it gives people an incentive

to misbehave and act dishonestly, which is generally considered a bad thing. It becomes more

profitable to game the system then to actually do something productive, so you are not only

not doing something productive like growing wheat or mining metal but actually hurting other

people for your living. So we see a progression toward fiat currency in modern times and that

combined with technology tends to lead toward digital and electronic money. Physical money,

like paper money and coins, is representing smaller and smaller portions of the today’s total

money supply. [9]

Using USD($) as the denominator. If we gather all the coins and paper bills that physically

exist We’ll get $5.8 trillion this is what’s called – M0 money supply

M1 represents all the currency outside the U.S. Treasury, Federal Reserve banks and the

vaults of depository institutions. It also includes demand deposits at commercial banks (ex-

cluding those amounts held by depository institutions, the U.S. government, foreign banks and

official institutions), the Federal Reserve float and other liquid deposits. In March 2021, the

M1 money supply for U.S. dollars equaled about $18.7 trillion

M2 is the M1 supply, plus small-denomination time deposits (less than $100,000). In March

2021, the M2 money supply was about $19.9 trillion [14]

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Figure 1: As you can see the 2020 have been the phenomenal year when it comes to M2 money

supply as m2 has increased by 33% in the this time frame alone [13]

increased money supply often leads to increase in inflation and that’s the one of the reasons

bitcoin price has increased in 2020, as bitcoin has max money supply of 21 million bitcoins thus

it’s seen as inflation hedge.

Unsurprisingly transactions of money tend to be pretty heavy on encryption too, but

cryptocurrency is a sub-type of digital money, people often assume they are the same thing.

Technically you don’t even need digital money to have cryptocurrency but the logistics of doing

it without computers would be a bit mind boggling. Obviously encryption is a big part of

cryptocurrency, and to do that safely you need lots of computing power, and rapid transmission

of information is handy too.

let us examine the basic concept in a more primitive setup instead. Let us revisit Zura the

Fisher and Goga the Baker from earlier. Goga is open to taking fish this time but Zura says

he has none today, but he still needs bread. He will gladly pay Goga with a Fish on Tuesday

if Goga will give him some bread today. Goga does not particularly trust Zura. Zura offers to

write it down, an IOU or promissory note for one Fish, but they do not really trust each other

and want witnesses and records. So Zura writes down on ten slips of paper,

“Zura owes Goga one fish”

and Goga hands one to each of the villagers who wander into the bakery during this time,

and Goga now has 10 different people he can call on to witness this debt of one fish. So he

gives Zura a loaf of bread, and Zura says great, he is sure he will catch plenty of fish before

then and takes a bite of the bread. Zura says next week is the right time to catch catfish by the

ton. Goga is unhappy, he hates catfish and says so, but Zura has already taken bite out of the

bread. Now, Anna the Gardener, who had just come in at the tail end of this with a bushel of

tomatoes for trade, says she loves catfish. Okay says Goga, this one is easy. He takes back the

ten slips of paper, from the 10 people, that say Zura Owes Goga one fish and scratches out his

name and puts in Anna’s name,

”Zura owes ///////Goga Anna one fish”

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and gives her only 4 loaves of bread of bread for her bushel of tomatoes instead of the 5.

So now Anna can redeem one fish from Zura any time even though she wasn’t part of the

original deal and Zura didn’t actually agree to it.The debt has been transferred. Now Zura

cannot easily erase his debt by sneaking into one of the other villagers homes and changing

what the paper said or destroying it or bribing people to lose them. He would have to do this

with 10 villagers, which would be way too difficult to be practical. if there was any discrepancy

in what the villagers’ papers said, the majority(at least 51% of the villagers) would overrule any

corrupted minority. In addition, it’s a fair sized village of a lot more than 10 people and he does

not remember most of the people Goga gave them to. So, by giving a lot of people information

about the debt, everyone is sure that it will be accurately recorded. Also, by spreading the

information to many people, none of whom have a stake in the transaction, nobody involved

has to be trustworthy. That means you can trade with anyone, even if you don’t like them,

trust them, or know them, such as people from a neighboring village. That makes for much

easier trade, which tends to be handy.

Though it would not be for our example because we would end up with huge ledgers crowding

people’s houses that people have to barge into in the middle of the night and spend time hunting

for each transaction and every copy of it. Obviously computers and the internet help with that,

and we can move on to Cryptocurrency. [9]

3. Bitcoin

Bitcoin, the best known of the Cryptocurrencies, is basically this village on a grand scale.

The strips of paper, the public ledger of the debt or transaction, is the Blockchain. Zura, the

original issuer of credit, is the Bitcoin miner, the person who physically creates the units of

currency.

The big difference between Bitcoin and our village is that the village uses a commodity-

backed currency, in our case fish, but Bitcoin is a floating currency. That means it is not

ultimately backed by any commodity. Its value only lies in the difficulty of creating Bitcoin

with computers. The other big difference of course is that all your awkward ledger keeping is now

being done on computer and by computer, not on paper by hand. This ledger of transactions

is called a Blockchain.

A Blockchain is a database of who transferred what to whom and when it happened. It

differs from just a plain old spreadsheet in that it is broken up into batches of transactions,

called blocks, and distributed all over the place, with chains leading to appropriate blocks.

Multiple copies of each block exist, but nobody has to have them all, which is nice if you are

not a village of a few hundred but several billion people all over the planet each conducting a

dozen transactions a day. Obviously our paper ledger system could not handle something like

that. Nor could it be easily encrypted and decrypted to allow privacy. This is where the money

is actually stored. There’s no physical form or location of it nor file for a specific bitcoin.

You often hear about “people losing their bitcoin”, or loosing “ the hard drive where bitcoin

was” what this really means is that this unfortunate sons had there private key or account

password written down on that hard drive and when they lost the hard drive they lost the

password needed to access there funds but bitcoin is still on the ledge and everybody can see

it’s just nobody can use it without password(private key) [9]

3.1 Supply

Now the next problem of this sort of currency is that you have to have some sort of control

over how much of it is around, and how much if any new coins get made. Bitcoin’s approach to

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this is to have miners, who are basically mining new coins by keeping the Blockchains up and

running.

Figure 2: chart shows relation between BTC supply and Block rewards(subsidy) [8]

There’s an elaborate and computation heavy process you have to go through to compete

for a new coin that relates to the process of maintaining the Blockchains themselves. So the

system keeps running because the only way to mine new coins is to keep those ledgers. It is a

nice setup since it ensures the people mining the new coins always have a motive to maintain

the system. But for practical purposes this amounts to huge computational race to get that

next coin, because maintaining those ledger does not take nearly as much computing power as

that computing power would be worth in actual dollars. but the reward is based basically on

who is doing the most mining.

In short mining is the infinite loop of solving cryptographic equation also known as hash

function that helps to keep bitcoin network secured. Many different crypto currencies use

different hashing algorithms. For example: Litecoin and Dogecoin uses “Scrypt”, Ethereum

- KECCAK-256 and is similar to 3rd generation of SHA algorithms, and bitcoin with SHA

256(2nd generation SHA algorithms). Each of them has unique advantages and disadvantages

such as ASIC Resistance or better Performance

4. Blocks and Blockchain

A Blockchain is a growing list of records, called blocks, that are linked together using cryp-

tographic hash function mentioned above. our focus will be on how such a function can prove

that a particular list of transactions is associated with a large amount of computational effort.

Imagine someone shows you a list of transactions, and they say “I found a special number so

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that when you put this number at the end of list of transactions, and apply SHA256 the entire

thing, the first 30 bits of the output are zeros”.

For a random message, the probability that the hash happens to start with 30 successive

zeros is 1 in 230, which is about 1 in a billion. Because SHA256 is a cryptographic hash function,

the only way to find a special number like this just guessing and checking. So this person almost

certainly had to go through about a billion different numbers before finding this special one.

And once you know the number, you can quickly verify that this hash really does start with

30 zeros. In other words, you can verify they they went through a large amount of work

without having to go through that same effort yourself. This is called a “proof of work”. And

importantly, all this work is intrinsically tied to that list of transactions. If you change one

of the transactions, even slightly, it would completely change the hash, so you’d have to go

through another billion guesses to find a new proof of work, a new number that makes it so

that the hash of the altered list together with this new number starts with 30 zeros.

So now think back to our distributed ledger situation. Everyone is broadcasting transactions,

and we want a way for everyone to agree on what the correct ledger really is. The core idea

behind the original bitcoin paper is to have everybody trust whichever ledger has the most

work put into it. The this works is to first organize a given ledger into blocks, where each block

consists of a list of transactions, together with a proof of work. That is, a special number so

that the hash of the whole block starts with a bunch of zeros. For the moment let’s say it has

to start with 60 zeros, but in practice this amount changes every 2 weeks(2016 x10minutes)

so that average time network takes to find new block stays 10 minutes this 2016 period is also

know as bitcoin difficulty cycle.

In the same way that a transaction is only considered valid if it is signed by the sender, a

block is only considered valid if it has a proof of work. Also, to make sure there is a standard

way to order of these blocks, we’ll make it so that a block has to contain the hash of the previous

block.

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That way, if you change any block, or try to swap the order of two blocks, it would change

the block after it, which changes that block’s hash, which changes the next block, and so on.

That would require redoing all the work, finding a new special number for each of these

blocks that makes their hashes start with 60 zeros. Because blocks are chained together like

this, instead of calling it a ledger, this is commonly called a “Blockchain”. [7]

As part of our updated protocol, we’ll now allow anyone in the world to be a “block creator”.

What this means is that they’ll listen for the transactions being broadcast, collect them into a

block, then do a whole bunch of work to find the special number that makes the hash of this

block start with 60 zeros, and broadcast out the block they found. To reward a block creator

for all this work, when she puts together a block, we’ll allow her to include a special transaction

at the top in which she gets, say, 10 coins out of thin air. This is called the block reward. It’s

an exception to our usual rules about whether or not to accept transactions; it doesn’t come

from anyone, so it doesn’t have to be signed.this also means that the total number of Coins in

our economy increases with each new block.

Creating blocks is called “mining”, since it requires a lot of work, and it introduces new bits

of currency into the economy. But when you hear or read about miners, keep in mind that what

they’re really doing is creating blocks, broadcasting those blocks, and getting rewarded with

new money for doing so. From the miners perspective, each block is like a miniature lottery,

where everyone is guessing numbers as fast as they can until one lucky individual finds one that

makes the hash of the block start with many zeros, and gets rewarded for doing so.

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5. Smart contracts

The term “smart contract” was first used by Nick Szabo in 1997, long before Bitcoin was created.

in simple terms: he wanted to use a distributed ledger to store contracts. Smart contracts are

just like contracts in the real world.

Figure 3: Example of the smart Contract (soliditylang.org) [12]

The difference between real regular and smart contract is that smart contracts are completely

digital and doesn’t require trusted middle man.

You probably are familiar with Kickstarter, the large fundraising platform. Product teams

can go to Kickstarter, create a project, set a funding goal and start collecting money from others

who believe in the idea. Kickstarter is essentially a third party that sits between product teams

and supporters. This means that both of them need to trust Kickstarter to handle their money

correctly. If the project gets successfully funded, the project team expects Kickstarter to give

them the money. On the other hand, supporters want their money to go to the project if it

was funded or to get a refund when it hasn’t reached its goals. Both the product team and

its supports have to trust Kickstarter. But with smart contracts we can build a similar system

that doesn’t require a middle man like Kickstarter. How would a smart contract work for this!

We can program the smart contract so that it holds all the received funds until a certain

goal is reached. The supporters of a project can now transfer their money to the smart contract.

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If the project gets fully funded, the contract automatically passes the money to the creator of

the project. And if the project fails to meet the goal, the money automatically goes back to the

supporters. And because smart contracts are stored on a Blockchain, everything is completely

distributed. With this technique, no one is in control of the money.

Why should we trust a smart contract? Well because smart contracts are stored on a

Blockchain, they inherit some interesting properties.

• Immutable

• Distributed

Being immutable means that once a smart contract is created, it can never be changed again.

So no one can go behind your back and tamper with the code of your contract. And being

distributed means that the output of your contract is validated by everyone on the network. So

a single person cannot force the contract to release the funds because other people/miners on

the network will spot this attempt and mark it as invalid. This makes so that tampering with

smart contracts becomes almost impossible.

Smart contracts can be applied to many different things, not just on crowdfunding.

• Banks could use it to issue loans or to offer automatic payments.

• Insurance companies could use it to process certain claims.

• Postal companies could use it for payment on delivery

• Atomic swaps, automatically exchanging one currency for another

you might wonder where and how you can use smart contracts. Right now there are a

handful of Blockchains who support smart contracts, but the biggest one is Ethereum. It was

launched in 2015 and for since then it’s second-largest cryptocurrency by market capitaliza-

tion after bitcoin, Ethereum network was specifically created and designed to support smart

contracts.

They can be programmed in a special programming language called Solidity. This language

was specifically created for Ethereum and uses a syntax that resembles Javascript the Ethereum

token(also called ETH) is used to pay for network and transaction fees for this contracts, another

interesting fact about Ethereum is that it’s planning to change it’s algorithms from proof of

work to proof of stake more on that later.

Its worth noting that Bitcoin also has support for smart contracts although it’s a lot more

limited compared to Ethereum, however there is plans to expand it with upcoming taproot

update to bitcoin network.

6. Problems with proof of work

As I have mentioned when talking about bitcoin and hash functions, bitcoin uses computing

power to make sure network is secured, problem with this is there is no limit how much com-

puting power can be used so as long as rewards from bitcoin blocks 6.5B+fees is more than

cost for electricity and hardware, so in theory if bitcoin price keeps incising electricity usage

from miners will increase as well and because only job this miners do is provide security for the

bitcoin network and downsides being clime change increased electricity bills at what point we

say cost outweigh the benefits.

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It’s needs to be stated that printing traditional paper money and coins also cost money,

in fact cost of 1 cent(penny) costs 1.76 cent[15] and that doesn’t include cost of transportation,

same but for smaller extent is true for paper money, and even electronic money. Overall it cost

money to create, store, account and transfer money so bitcoin isn’t unique in that way.

To objectify measure benefits and costs of bitcoin proof of work algorithm first we need to

calculate how much energy bitcoin and some other cryptocurrency use

Bitcoin was originally design to run on CPU power in everyday computers, but later on it

was found that GPU was better at solving hash function, and finally the application-specific

integrated circuit(ASIC) have being developed, as the name suggest ASIC are really good at

doing the specific work but completely useless for ruing operating system or other type of

algorithms. For example, best GPU could run bitcoin hash at 20-100 Mega hashes per second,

with modern 7nm ASICs Hashrates reaches 110Tera hash so about million times better, this is

development has pros and cons:

• Pros include that bitcoin miners don’t buy up consumer GPU and other hardware, thus

mining bitcoin doesn’t increase use of valuable GPU hardware that can be used for gaming,

video editing and other productive jobs,

• Downside being the ASICs production is centralized, raising fears of centralization and

single point of failure events, also when new generation of ASIC’s come out old ones can’t

be efficiently mine and are broken down for scraps needless to say this is the big recycling

issue.

it should be noted Ethereum uses ASIC resisting algorithm so Ethereum is still mined with

GPU and all the pros and cons that come with it.

Biggest ASIC manufacturer is the China based company Bitmain Technologies Ltd, They

develop and produced series of bitcoin, litcoin/doge, Dash, Sia, zcahs and other cryptocurrency

miners called Antminers.

Miner model Hashrate Release Year Chip size Power consumption Efficiency

Antminer S5 1.15Th 2014 28nm 590Wh 0.511j/Gh

Antminer S7 4.73Th 2015 28nm 1293Wh 0.273j/Gh

Antminer T9 12.5Th 2017 16nm 1576Wh 0.126j/Gh

Antminer S9 14Th 2017 16nm 1372Wh 0.098j/Ghh

Antminer S15 28Th 2018 7nm 1596Wh 0.057j/Gh

Antminer S17e 64Th 2019 7nm 2880Wh 0.045j/Gh

Antminer S19Pro 110Th 2020 7nm 2880Wh 0.03j/Gh

Antminer S19Pro+Hyd 198Th 2022 7nm 5445Wh 0.028j/Gh

As we can see improvements in size and architecture of the individual chips caused dramatic

increase in mining efficiency.[5]

Despite that both hashing power and energy usage are on the rise.

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[2]

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As we can see hash rate is quite volatile as miner will turn on or off there machines depending

on electricity rate which changes between day and night and seasons. And increase and decrease

of the bitcoin price and as you might know the bitcoin price is quite volatile as well.

6.1 Calculating bitcoin power consumption

To calculate how much power bitcoin uses we need to find which model of miners are in use

right now minimum efficiency required to be profitable and divide total amount of hash rate by

that.

The current hashrate is 160 milion tera hash(TH) [2] With minimum efficiency for being

profitable is 0.06j/Gh assuming 5-6 cents per kilowatt hour electricity rate. [5] Assuming sig-

nificant majority of the miners aren’t mining at loosing rate miners that are active right now

are miners with efficiency between 0.06j/Gh and 0.028j/Gh. Or 17TH per KWh and 36TH per

KWh electricity usage respectfully.

Giving us total electricity usage for entire bitcoin network 4,444,000KWh in best case(if

Antminer s19pro+hydr and simmilar efficency miners being used) and and 9,411,000KWh in

worst case scenario(for only Antminer s15 and similar efficiency). Let’s assume average of those

two datapoints we’ll get approximately 6.9 million KWh (6900 MWh) for reference that’s about

2/3 of average yearly output of the world biggest hydroelectric power plant Three Gorges Dam

Do to the nature of mining machines running at 24/7 schedule, even though an average

miner doesn’t consume more electricity than toaster or microwave, over the long period of the

time, continues power usage adds up.

So how much electricity does bitcoin use per year?

6900x24x365 = 60,444,000MW

That translates to approximately 60 Tera Watt hours of electricity per year approximately

5 times Georgia’s yearly electricity consumption. [3] or 0.26% of worlds consumption.

Perhaps that’s not apocalyptic number but it’s still large amount that could be used to

substitute coal power generation thus improving environment or to lower electricity prices for

poor households.

But 44 TWh doesn’t tell us the full story, recently as may 2021, do to the Bitcoins High

price and high conjunction(caused increase in fees), has increased miner rewards(6.5bitcoin+fees)

bitcoin mining hash rate has hit 200 million Thera hash or twice as much a current number.

This was combination of new generation of antminers s19 production being kicked in the high

gear but also old but more readily available antminer s9 becoming profitable to mine, we can

assume as the price fell this miners were shut down. thus in conclusion there are 2 and 3 year

old miners that are profitably working right now and then there are 4-5 year old s9 family of

miners that can be profitable if the price increased substantially.

Do to the antimer s9 efficiency being subprime we can say about 20TWh worth of electricity

would have been additionally consumed next few years if the high prices have been maintained.

So high electricity usage is the downside of POW but it must be worth it as it provides

security, right? Well there is the security issue that undermines all the POW currencies including

bitcoin, Ethereum, Litecoin and dogecoin(it also effects POS currencies but with lesser extent*)

and it’s know as 51% attack.

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7. 51% attack

In Proof of Work (POW) cryptocurrencies, nodes typically are set up to recognize the

Blockchain with the most blocks (and therefore the most hashing power) as the correct version

of history. Miners with > 50% of the network hashing power can take advantage of this by

disrupting or censoring the confirmation of new transactions or most importantly performing

what’s called double spend, this mean by sending funds to one address on the main chain, while

sending the same funds to another address on a forked copy of the Blockchain that they are

silently mining with more hashing power than the main chain.

Since other nodes only know about the main chain, they will see the first transaction as

valid, and exchanges, will accept this transaction as valid. This malicious node can later release

these silently mined blocks, and other nodes will accept this as the new ’correct chain’ since

it is longer. This will cause the original transaction to effectively disappear, and nodes will

recognize the funds as being sent to the address from the new chain instead. This is known as

a ’double spend’ attack.

[1]

Usually this won’t be the huge problem as you can only double spend what coin you’ll

already have. But with the use of leverage and financial instruments like shorting and synthetic

stocks, you can effectively bet against the price and with high leverage even get 20-50 times

the invested money by performing attack, so real question is what’s the cost of attack compare

to payout. 51% has being performed couple of times on smaller cryptocurrencies like ETC and

BTG but to break bitcoin it requires truly monumental effort, however if attacker can manage

it will destroy entire markets and shake more fundamental believes about trustworthiness of

crypto currencies.

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7.1 Cost of attacking the network

As we saw current bitcoin network is about 160milion tera hashes, assuming you are able to

buy mining equipment from other miners potential attacker needs to gather at least 80 million

tera hashes to attack the network assuming yearly manufacturing of new equipment, gathering

of 100 tera hashes worth of equipment seems necessary for successfully attack the papers

you’ll find this tactic assume attacker would buy best, most efficient equipment to perform

attack thus calculating attack cost to be more than $5 billion [10]. However, I would like to

argue the trick to perform successful 51% is to buy up cheap and obsolete equipment as you

only need to maintain them during the attack that would lasts 100 minutes for bitcoin(5 to 10

confirmation for bitcoin is required for most exchanges with 10 minutes per confirmation giving

us 100 minutes).

Potential attacker would go for two and three generation old miners(S9 & S15) at discounted

prices as they are non profitable, if we assume todays market prices it is about 150$ per miner

and attack would require 7 million of them(s9). Giving us cost of successful attack at 1 billion$.

1$ billion is the number with todays market prices and hashrate but this can be reduced

further:

• By renting hashpower from the pools like Nicehash that offer cloud mining

• Sabotaging infrastructure: mining farms are usually concentrated in few countries, and

in few regions, for example Xinjiang in china(coal mine collapse in the region caused

30%of the total hashrate drop [4]), Washington state in USA, Tbilisi free economic zone

in Georgia, sabotaging power lines in a such key location can put out large mining farms

out of operation for hours our even days giving honest miners less hashrate to defend the

network,

• Creating new bitcoin fork with same mining algorithm but higher mining rewards or spam

transaction with high fees on BCH(bitcoin cash already uses bitcoin mining algorithm)

network, do to the popularity in smart pools, many miners will automatically leave BTC

network to mine more profitable BCH or other currencies giving attacker more power

proportionally.

• Purchases miners for cheap after bitcoin halving, bitcoin halving is the process when

bitcoin block reward get’s halved in every 4 year (next halving is expected in 2023),

assuming price staying the same this should cause up to 50% drop in the hashrate and

even cheaper mining hardware.[8]

• In the preparation of attack create mining pool, offer new miners low fees and other

benefits do to the miner tendencies to gather around larger pools you can accumulate

“support” of honest miners and use there hardware for attack without them even realizing

it.

• Computer viruses, so that miners start working for you when attack starts. Miners often

use 3rd party software to increase hash rate they get from given machine. You can create

the software that shows inflated hashing value in Mainers UI but that alone won’t work

as mining pool would count right hashing power to circumvent that Given miner would

be connecting to the mining pool via attackers proxy were attacker would add hashing

values that he got from privately hashing, this would loose money for the attacker but in

exchange the malware mining software would gain recognition and spread like wildfire.

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• Timing attack with the bad news, this could be new government regulation or just the

made up rumor about upcoming crackdown something that reduces prices thus the hashing

power.

• Timing the attack hours, normally hashing rate varies up to 20% during the day. do to

the miners turning off hardware during daylight hours and turn it on for the midnight

cheaper rates

Needless to say all of this tricks require time and money investments but potential reward far

outweigh the cost.

Attacker could use all of this tricks to dramatically reduce 51% attack cost, from our 1$

billion original estimate. For the industry that’s valued at 1.5 trillion dollars that’s unacceptable

risk.

8. The proposed solutions?

Proof Of Stake (POS)

In 2011 a Bitcointalk forum user called QuantumMechanic proposed a technique that he

called “proof-of-stake”. The basic idea is that letting everyone compete against each other

with mining is wasteful. So instead proof-of-stake uses an election process in which 1 node is

randomly chosen to validate the next block.

Small difference in terminology: Proof-of-stake has no miners but instead has “validators”

and it doesn’t let people “mine” blocks but instead “mint” or “forge” blocks.

Validators aren’t chosen completely randomly. To become a validator, a node has to deposit

a certain amount of coins into the network as stake. You can think of this as a security deposit.

The size of the stake determines the chances of a validator to be chosen to forge the next block.

It’s a linear correlation. Let’s say Goga deposits $100 dollars into the network while Mari

deposits $1000. Mari now has a 10 times higher chance of being chosen to forge the next block.

This has it’s own problem because a big money makes more money thus it favors the rich. If a

node is chosen to validate the next block, he’ll check if all the transactions within it are indeed

valid, If everything checks out, the node signs off on the block and adds it to the Blockchain.

As a reward the node receives the fees that are associated with each transaction.

but how can we trust other validators on the network? Well that’s where the stake comes

in. Validators will lose a part of their stake if they approve fraudulent transactions. As long as

the stake is higher then what the validator gets from the transaction fees, we can trust them

to correctly do their job. Because if not, they lose more money then they gain. It’s a financial

motivator and holds up as long as the stake is higher then the sum of all the transaction fees. If

a node stops being a validator, his stake plus all the transaction fees that he got will be released

after a certain period of time. There is the delay in time because the network still needs to be

able to punish you, should they discover that some of your blocks where fraudulent.

So the differences between Proof-of-work and Proof-of-stake are quite significant. important

advantage is that setting up a node for a proof-of-stake based Blockchain is a lot less expensive

compared to a proof-of-work based one. You don’t need expensive mining equipment and thus

proof-of-stake encourages more people to set up a node, making the network more decentralized

and also more secure. But even proof-of-stake isn’t perfect and it also has some flaws. You

might think: If I buy a majority stake in the network, I can effectively control it and approve

fake transactions” and you would be correct.This is called the 51% attack and as we discussed

it’s the weak point of the proof-of-work Algorithm as well[16].

If a single miner/validators or group of miners/validators can obtain 51% of the hashing

power/staked coins, they can effectively control the Blockchain. Proof-of-stake on the other

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hand makes this attack very impractical, depending on the value of a cryptocurrency being

staked. If Bitcoin would be converted to proof-of-stake, acquiring 51% of all the coins would

set you back a whopping 300 billion dollars. So the 51% attack is actually less likely to happen

with proof-of-stake.

At least that’s how it works in theory, in reality, it’s unlikely the large share of total coins

supply to be stacked to provide proof of stacked as 2% to 5% of the yearly gains from staking

not justifies risk of having all the coins lost do to attack or some technical mistake. And that’s

what we see in second biggest cryptocurrency Ethereum which has about 8.4M million ETH

stacked [17], out of 116mil of total supply or about 6.9%. but it still makes cost to attack on

Ethereum network (8 400 000x1000$) 8.4$ billion dollars, way higher than bitcoin, one might

assume the other 91.6% of ETH holders seeing the Network is under attack would move to

quickly stake there coins to counter the attacker, however countering POS 51% attack is not

possible (POW can recover) [11], as soon as attackers gets 51% of the staking power they can

block/refuse to process all the transaction Especially, ones that are designated to the staking

Contracts.

The one problem that effects Dogecoin but not the bitcoin for example is that dogecoins supply

is really concentrated less than 1% of the address own 80% of the total supply with one address

holding 27% of the total supply alone [6], this makes it very easy for few characters to have

total control over the system.

Another point is that bitcoin, Litecoin, Dogecoin and other POW currencies were build

and marketed as POW systems, a lot of miners spend a lot of money to build the rigs and

infrastructure that might not pay back itself for 5 years, if you tell them that you want to

change to POS they are gonna be understandably upset and might get together and do 51%

before you can implement POS.

So we need find the way to change bitcoin from POW to POS without angering the miners.

For that I propose Modified POS or MPOS for short

9. Solution

So main idea behind MPOS is to convert miners hasrate to the governance token that will

become staking coin for bitcoin network.

For this we take period of 1 difficulty adjustment(210 blocks) or about 2 weeks and we say,

every new bitcoin that’s mined during this period will get equal amount of Governance BTC

(GBTC), this new coin will be base of the MPOS system and it’s owner will get BTC from block

rewards and transactions fees, with the added benefit of not needing to pay for the electricity

bill and hardware maintenance. Only use for GBTC being to maintain the network security

and voting for update proposals, vast majority of the GBTC will be staked at the any given

time.

MPOS would let bitcoin reduce it’s impact on climate change down to zero, built the long

term bases for security and room to add the features like advanced smart contracts and higher

transactions per second.

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References

[1] Bitcoin price today, btc live marketcap, chart, and info

https://coinmarketcap.com/currencies/bitcoin/.

[2] Blockchain.com - the most trusted crypto company

https://www.blockchain.com/charts/hash-rate.

[3] Energy consumption in georgia

https://www.worlddata.info/asia/georgia/energy-consumption.php.

[4] How much bitcoin comes from dirty coal? a flooded mine in china just spotlighted ...

https://fortune.com/2021/04/20/bitcoin-mining-coal-china-environment-

pollution/.

[5] Realtime mining hardware profitability — asic miner value

https://www.asicminervalue.com/.

[6] Top 100 richest dogecoin

https://bitinfocharts.com/top-100-richest-dogecoin-addresses.html .

[7] 3Blue1Brown. But how does bitcoin actually work?

https://www.youtube.com/watch?v=bBC-nXj3Ng4&t=1196s&ab_channel=3Blue1Brown.

[8] Hertig Alyssa. What is bitcoin halving? here’s everything you need to know

https://www.coindesk.com/bitcoin-halving-explainer .

[9] Isaac Arthur. Cryptocurrency & blockchain

https://www.youtube.com/watch?v=3r3zMWE9ur4&t=781s&ab_channel=IsaacArthur .

[10] Braiins. How much would it cost to 51% attack bitcoin?

https://braiins.com/blog/how-much-would-it-cost-to-51-attack-bitcoin .

[11] Charles Hoskinson. Video for jack: Pow versus pos

https://www.youtube.com/watch?v=lMZ1xQzWtl4&t=472s.

[12] Ethereum foundation. Introduction to smart contracts — solidity 0.4.24 documentation

https://docs.soliditylang.org/en/v0.4.24/introduction-to-smart-contracts.

html .

[13] FRED . Fred economic data

https://fred.stlouisfed.org/series/M2 .

[14] K.W.&.F. How much actual money is there in the world?

https://fred.stlouisfed.org/series/M2SL# .

[15] Unser Mike. Penny costs 1.76 cents to make in 2020

shorturl.at/agkpB .

[16] Simply Explained. Proof-of-stake (vs proof-of-work)

https://www.youtube.com/watch?v=M3EFi_POhps&t=193s&ab_channel=

SimplyExplained .

[17] Simran Jagdev, Nicole Adarme, Kuhan Tharmananthar. Institutional staking on ethereum

https://consensys.net/blog/codefi/institutional-staking-on-ethereum-one-

year-after-the-launch-of-the-beacon-chain/.

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