Seed - Literature Review - Misalignment of Interests (Part 2)

This literature review will focus on the flaws surrounding proof-of-work, how it causes a misalignment of interests in users, the inefficiencies of the mechanism, and explored alternative mechanisms.

The Seed Project

Part 1: Introduction

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Misalignment of Interests

​The first consequence of proof-of-work to address is the misalignment of interests between general users and miners. A user in a cryptocurrency network has a variety of interests, including the security of their assets, security of transactions, cost of transacting, ease of transacting and transaction confirmation times. The interest of miners, however, is one of profit. Miners are in competition with one other to be the first miner to mine a block. Miners pick and choose which transactions make it into their blocks, allowing them the freedom to prioritize transactions based on which would pay them the greatest in fees. Miners prefer less competition to gain a higher portion of the total hashing power, despite this desire conflicting with the desire of a secured decentralized system [3]. Miners may also resist future changes that benefit users, if those same changes do not benefit the miners. This phenomenon has occurred multiple times on the Bitcoin network, with the most noteworthy example in recent history occurring on August 1st of 2017. A fork occurred, which is a split in a blockchains network, where one part of the Bitcoin ecosystem chose to move forward with changes to Bitcoin which would solely benefit users while hurting miners, and the rest stayed back, refusing to upgrade.

This upgrade caused a change in the mining algorithm which would break certain existing mining hardware, however heavily benefit users in terms of transaction speeds, transaction fees, confirmation times and would also heavily benefit the decentralization of the network. These speed benefits would not be immediately seen, however would be enabled by the protocol upgrade through second layer solutions. The current miners, having sunk costs into such hardware and desiring to keep the system centralized to just those who have such hardware, refused to upgrade. On the other side of the debate, the clear majority of users accepted the upgrade.

This conflict resulted in a split of the Bitcoin network, creating a new coin known as Bitcoin Cash, which is effectively the legacy Bitcoin version from the miners who refused the upgrade. Human nature has shown to be the cause of virtually every cryptocurrency split, with proof-of-work being one of the frequent mechanisms causing the lack of unity in these cryptocurrency ecosystems. Creating an alternative where different users do not have separate roles in the system is crucial in aligning these interests to better avoid these issues in the future.

As with any community or group, if the interests of all members are in harmony, the group will function smoothly. It's when people become at odds with each other, desiring different outcomes, that humans begin tripping each other up. Although this misalignment of interests may not be a issue from a technical standpoint, it has been one of Bitcoins biggest flaws from a socioeconomic standpoint.

[3] King, S., & Nadal, S. (2012). Ppcoin: Peer-to-peer crypto-currency with proof-of-stake. self-published paper, August, 19.