Comment of the day: Mining Rewards

Yesterday Ray Dillinger from this thread messaged me on Bitcoin Talk and said:

I think the economics of “mining” reveal a design flaw in proof-of-work cryptocurrencies.

The idea that people can ‘farm’ the money supply by buying and powering hashing hardware guarantees that the difference between the amount of value produced and the amount of resources expended will approach zero.

It’s something like a tautology, where people are spending money in an auction for the right to print money.  Such an auction is more or less guaranteed to bring the costs of printing money right up to its value, which is an unnecessary (and unwanted) feature.

Aside from externalities and subsidies in the markets for electrical power and waste heat making the auction unfair from the beginning, that simply is not a necessary feature of a currency.  Certainly no government-issued fiat currency is so resource-intensive to supply.  But that comes about mostly because the government can impose additional costs (such as jail time) on unauthorized printing which are not borne by those doing authorized printing.

And that distinction between “authorized” and “unauthorized” is something that peer-to-peer and distributed systems don’t have access to.

For more information on this issue I recommend interested readers visit a great post by Robert Sams, “The Marginal Cost of Cryptocurrency.”  Earlier this month I wrote a detailed follow-up post that Sams also helped contribute to (especially the concluding remarks) which discusses some of the the issues that Bob mentioned in the above comment.

I think in the long-run both Ray and Robert will likely be proven correct though there may be some interim solutions such as sidechains that delay or mitigate some of these problems.

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