I would initially say “zero economic value,” but figured that would be incredibly false.
Bitcoin mining expansion is, for a fact, economically valuable, however, it can be very short-lived.
For clarity, when I say “bitcoin mining expansion,” I'm referring to growth in the number of nodes validating transactions on the Bitcoin blockchain, which means public interest in securing and benefiting from the Bitcoin network is growing.
So how does that pose little to zero economic value?
My choice of words for this article’s topic may come off as questionable to some people - especially bitcoin maxis, and that's expected and, dare I say, the desired effect.
But if I were to put it in a manner that will be clarified in this post, the actual topic would be something like this: Bitcoin's biggest flaw is that mining expansion poses little to zero economic value as mining rewards shrink.
I don't exactly like long topics and expect that not a lot of others like it either.
That said, whilst mining rewards are not the biggest reason for Bitcoin mining’s limited economic effect, it is however a factor that might pose a great threat in coming years, if not in days as the halving approaches.
Learning From Proof Of Stake
I won't say that proof of stake is better than proof of work because it is not in itself. I am of the opinion that a lot of things boil down to the application.
How has proof of work been applied here and there, as well as proof of stake? What were the observed outcomes post-application?
Only events can be judged as bringing results of operations.
Proof of stake will always be more economical than proof of work as it is less exposed to things that can be largely controlled by external centralized factors.
With proof of work, we are dealing with hardware, an industry with centralized external control, but surely, this isn't the main argument here.
Proof of stake allows room for decentralized autonomous organizations that are suitable for governance unlike proof of work.
I must confess that Bitcoin isn't something you grasp in its entirety in one day. I am yet to fully understand how certain consensus mechanisms work on that network, aside from regular transactions validation, what's more to this network and how is consensus met?
Again, this is not the focus here.
So, moving on…
The biggest advantage proof of stake has over proof of work that frankly makes bitcoin seem to me every day as something that could be fully hijacked at some point in the future, is that everyone that enters that network brings maximum value just as they take away when they leave.
What do I mean?
If I invested $40 million in setting up mining rigs to join in validating blocks on Bitcoin, how much value do you think that would bring to bitcoin aside from “decentralizing the network's decision-making circle even more”?
I'll tell you, ZERO VALUE!
But what would be the case if I was to invest $40 million in becoming an Ethereum validator? What would be the value realized by the network?
I'll tell you as well.
By flat figures, the network earns $40 million in fresh value. However, if we consider how that might affect the market value of ETH, we could expect a significantly higher percentage increase in ETH’s market cap, which has broad industry value.
For example, it increases the loan-to-collateral value of several debt positions, increases miners' revenue, and lots more.
Another reality is that with bitcoin, I, as the investor, basically dumped $40 million in expectation of recovering it with profits from mining activities, whilst with ETH, I would practically still hold $40 million in assets bought.
Bitcoin miners are in trouble
I am really struggling to see bitcoin attain the needed interest to make mining broadly profitable as mining rewards decrease over time.
The reality of miners seems to be moving towards being dependent on government funding to stay afloat or simply shut down, leading to Bitcoin's network nearing centralization.
That said, it is expected that such an event would cause a drop in mining hardware costs, leading to new miners entering the market.
That's truly a possibility, however, there are still questions about if that would change anything as the end results will likely always be the same: unprofitability.
Bitcoin's survival at this point, from my assessment at least, will rely largely on the industry's ability to build products on Bitcoin that will bring in the needed value to keep investors and miners satisfied.
Otherwise, it just seems like bad business for miners, leading to less independent miners, and just like that, bitcoin is government-controlled.
I could be wrong, but blockchains that will escape government centralization will be based on proof of stake, delegated proof of stake, and literally anything stake-related!
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