Vitalik Buterin says he is worried about Bitcoin long term. Here’s why
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The battle over proof of work versus proof of effort is heating up.
Important points
- Crypto legend Vitalik Buterin foresees future problems for Bitcoin if it sticks to the proof-of-work model.
- Ethereum will make the long-awaited transition to a proof-of-stake system in a few weeks.
- Buterin says there will come a point where Bitcoin doesn’t generate enough fees to secure itself.
Vitalik Buterin, the man behind Ethereum (ETH) and a leading light in the crypto world, has raised concerns about Bitcoin (BTC) and its ability to compete in the long term. Speaking to Noah Smith, a financial journalist and former Bloomberg columnist, Buterin said that Bitcoin may reach a point where it cannot generate enough fees to keep itself safe.
Ethereum is just weeks away from making the leap from a proof-of-work mining model to a proof-of-stake system. Not only does proof-of-stake use a fraction of the energy of proof-of-work, but Buterin also claims that it will prove more sustainable in the long run. In contrast, crypto granddaddy Bitcoin sticks to its proof-of-work system. This is a big factor in why Buterin is pessimistic about the future. Let’s unpack his two biggest concerns.
1. Bitcoin does not generate enough fees to secure its system
Increased security is one of the attractions of blockchain technology, especially for larger cryptos like Bitcoin. But Buterin says we shouldn’t assume the Bitcoin network will always be secure. He explains that efficiency and safety are closely linked. “The question is always: how much security can you buy for every dollar per year you spend paying for it?” he said.
There are different models that blockchains use to prevent bad actors from manipulating the chain. The most important of these are proof-of-work and proof-of-stake. One way that proof-of-work rewards the miners who validate blocks is by giving them new coins as they are produced. But Bitcoin will only produce a limited number of coins. In the end, miners will not receive new coins, they will only receive the fees paid on transactions.
Buterin’s concern is that this will not be enough. “Bitcoin security comes entirely from fees, and Bitcoin just isn’t succeeding in getting the level of fee revenue required to secure what could be a multi-billion-dollar system,” says Buterin. “Bitcoin fees are around $300,000 per day and haven’t really grown that much in the last five years,” he added.
2. Sticking to proof-of-work could compromise Bitcoin’s security
“What will a future look like when there is $5 trillion of Bitcoin but it only takes $5 billion to attack the chain?” Buterin asks. Without getting too technical, Buterin believes Bitcoin could grow so large that bad actors with enough money could undermine the network.
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Cryptocurrencies are very different from traditional currencies. The magic of blockchain allows them to cut out the middleman, so they don’t need a third party like a bank or government to maintain them. But it can also make them vulnerable to different types of attacks.
Buterin says miners have medium ongoing costs and medium entry costs. In contrast, proof-of-stake validators have low ongoing costs and high entry costs. “It turns out that how secure you are depends only on the cost of entry, since that’s what an attacker has to pay to attack,” says Buterin.
He doesn’t think there is political will to move Bitcoin to a proof-of-stake system like Ethereum does. Although he also points out that an attack on Bitcoin would change people’s minds pretty quickly.
What it means for investors
When a crypto legend like Buterin speaks, it’s worth paying attention. The 28-year-old has spent years immersed in all things blockchain-related and is the driving force behind much of Ethereum’s success. If he believes there are long-term security risks associated with Bitcoin’s proof-of-work validation model, he almost certainly has a point.
However, it is also worth noting that this is the month where Ethereum moves away from the very proof-of-work model he criticizes. As such, it is a good time for Buterin to point out his weaknesses. Proof-of-stake has its share of critics and Buterin needs to win over the Ethereum community. First, it is not yet as tested – until now, the two biggest cryptos have both run on a proof-of-work model. In addition, some argue that it is more centralized, which creates different kinds of problems.
Long-term investors still have mixed hopes for Bitcoin — some, like Jack Dorsey, believe it will be the currency of the internet. Ark Invest believes it can gain market share in several ways, including the international money transfer industry, becoming a type of digital gold and acting as a currency in emerging markets. Buterin’s questions about security may undermine these proposals, but there is still a lot to play for.
The bottom line
Do your own research and see how the Bitcoin community can address this issue before it becomes a problem. See what other crypto experts have to say about Proof-of-Work vs. Proof-of-Stake. Also, pay attention to how Ethereum’s move to proof-of-stake is developing and what problems it is encountering.
If you’re considering selling your Bitcoin because Buterin’s words have made you question your long-term view, take your time. We are not talking about a security risk that could undermine the system next week. Fewer and fewer new Bitcoins will be minted as time goes on, but it won’t be until around 2140 that the last BTC is created. Don’t rush investment decisions. Instead, keep Buterin’s warning in mind when considering the risks and opportunities associated with your crypto portfolio.
