Blockchain experts help, please! These are serious drawbacks of public ledgers like Bitcoin - #2

ispira (53)in #blockchain • 7 years ago

Hi steemit friends! A professor from Chicago (Evans, 2014 – Economic aspects of bitcoin and other decentralized public ledgers) underlined some limits of public blockchains such as Bitcoin. Below you can find a list of these criticalities.

Is there anybody reading that is able to answer these claims? How is the blockchain community going to address these criticalities? Are you aware of any solutions? Thanks for helping!!!

(Note: this is the second article about the issue of public blockchain limits. Here the link to the first part https://steemit.com/blockchain/@ispira/blockchain-experts-help-please-these-are-serious-drawbacks-of-public-ledgers-like-bitcoin-1)

-3) The real efficiency of using a public ledger instead of normal intermediaries

Proponents of public ledger platforms often claim that they provide a peer-to-peer system for transferring financial assets that eliminates the need for intermediaries. That isn’t quite right. The platform is the intermediary and uses an incentive scheme to hire resources to perform the functions of the intermediary.

The fact that the public ledger is decentralized—so there is not a bank or a government acting as the intermediary—may have interesting political or social value. But from the standpoint of considering economic efficiency there is still an intermediary, just a very different sort of one.

Nothing in the organization of public ledger platforms necessarily guarantees that these new intermediaries are more efficient at conducting financial services transactions than other alternative intermediaries. This superiority is likely to depend on the type of industry the public blockchain operates.

Here an example in which the superiority of a blockchain needs a deeper cost-benefit analysis to be assert with certainty. For the purposes of operating a P2P money transfer network it is not obvious that the public ledger platforms are more efficient than traditional platforms. Traditional platforms such as Visa, ACH/Giro systems, PayPal, and similar national and global digital money systems are extremely efficient at transferring funds. They operate large, global, computerized networks with built-in redundancy. The actual cost of transferring funds from A to B is trivial. The prices that individuals and merchants pay are largely the result of other services that these platforms provide including security and fraud protection.

It is ultimately an empirical question whether the public ledger platform is more efficient than other alternatives, including existing platforms or new ones that do not rely on the public ledger. Do we have any data available on this issue? Any estimates of the relative efficiency of the public ledger platforms would need to address the operation of incentive and governance systems for these platforms, as these affect the cost and efficiency of these platforms.

-4) Collusion among miner pools

The Bitcoin experience provides some insights into the evolution of the processing market. Bitcoin transactions were initially processed by individuals using personal computers. As the price of bitcoins increased, and the computational difficulty of processing increased, two things major developments occurred.

First, an equipment market emerged to provide more powerful computational capacity to miners. More precisely, at the moment there is more or less only one hardware supplier for mining: Bitmain.

Second, mining pools emerged to diversify the risks of engaging in mining in which new bitcoins were awarded randomly. In fact, by pooling resources with others, the miner can reduce that idiosyncratic risk of losing the contest for new bitcoins. In the limit, if all miners participate in one pool, there is no idiosyncratic risk of losing the contest. This pooling of risk creates an incentive for miners to combine together in the largest pool. While not suggestive that mining eventually will be dominated by one mining pool, it is a tendency contrary to mining being competitive.

For instance, the mining hardwer supplier Bitmain incentivizes those who use its mining pool, Antpool, an added 3-8 percent per mined block for their hashing power. The company does the same thing with pools they’ve set up to serve specific countries, such as a 5 percent kicker on their Israeli service, ‘Connect BTC’.

The mining pool GHASH.io in July 2014 directed over 50% of the Bitcoin network’s hashpower, theoretically giving it monopoly control over the Bitcoin network.

Thus, monopolistic risks but also collusion among biggest mining pools is something to be expected, at least given the actual Bitcoin protocol setup.

These are the main criticalities of a public ledger I am aware of. It would be interesting to now if the blockchain community has already found solutions to them, since in my opinion these are actually the main drawbacks that can undermine the future of public ledger technologies.

Thanks for reading and getting inspired by @ispira