Ethereum: Why Bitcoin’s Proof-of-Work Algorithm Is Inadequate
Over the years, Bitcoin’s Proof-of-Work (PoW) algorithm has been widely used and considered secure by many industry experts. However, a closer look reveals that this algorithm may not be as efficient as previously thought, especially when it comes to maintaining a relatively even block time distribution.
Current PoW Algorithm
Bitcoin’s current PoW algorithm is based on the SHA-256 hash function, which takes a block header and generates a unique 256-bit digital fingerprint. The resulting hash is then used as a “difficulty target” for miners to attempt to solve. This process requires significant computational power, energy consumption, and resource usage.
The output of this algorithm is a sparse block time distribution. With an average block time of 10 minutes on the Bitcoin network, it is not uncommon for blocks to be hours or even days apart. This uneven distribution can lead to frustration among users who rely on fast transaction processing and high-frequency trading.
Why lower-difficulty hashes may be a better approach
The current PoW algorithm has been criticized for its lack of adaptability, leading to inefficient use of computing resources. However, some experts have proposed alternative algorithms that offer better performance while maintaining a more even block time distribution.
One possible solution is the Proof-of-Stake (PoS) algorithm, also known as DeFi (Decentralized Finance). This approach uses a different type of hash function that requires miners to stake a portion of their cryptocurrency holdings instead of using computing power. The resulting “difficulty target” is determined by the number of coins at stake, which would result in a more even block time distribution.
Lower Difficulty Hash Chain
If we imagine an Ethereum-based system where PoW is replaced by PoS, we can consider the following alternative approach:
Instead of using a single hash function with difficulty level 12, what if we designed a lower difficulty hash chain? For example, we could use a set of six hashes, each corresponding to a different difficulty level (for example, 0.2, 0.4, 0.6, 1.0, 1.2, and 1.4). These hashes would be used as “difficulty targets” for miners.
To ensure consistent block times, we could implement a mechanism that ensures that each miner’s hash is randomly selected from a pool of lower difficulty hashes. This approach would ensure a more even distribution of blocks over time, reducing the likelihood of overconcentration of mining power, and promoting healthy competition among miners.
Implementation Considerations
Implementing such an algorithm on Ethereum would require significant changes to the network architecture, including:
- Hash Function Design: The design of the hash function used in PoS would play a key role in determining the effectiveness of this approach.
- Target Difficulty Level Management: A mechanism would need to be established to manage and adjust the target difficulty levels as performance increases or decreases.
- Mining Pool Requirements: Miners should be incentivized to participate in the new system, which could involve modifying the network consensus rules or providing additional rewards for successful block times.
Application
While Bitcoin’s current PoW algorithm is effective at maintaining a relatively even block time distribution, it may not be sufficient for the long-term stability and growth of the network. Exploring alternative approaches, such as lower difficulty shortcuts or proof-of-stake, could help to make more efficient use of computational resources and potentially create a more flexible and scalable system.