In this BIS working paper, Raphael Auer claims Bitcoin’s ($BTC) underlying Proof-of-Work (PoW) algorithm must be abandoned due to the future lack of mining profitability in the face of decreasing transaction fees. When mining becomes increasingly costly, such as in Q4 2018, the security of the Bitcoin blockchain comes under scrutiny as a final payment settler. Auer uses the concept of “economic payment finality,” wherein it is asked if a double spending attack is profitable or not, to analyze PoW. He finds that as mining rewards shrink per the halving schedule, transaction fees will not necessarily rise, leading to excess hashing power which could threaten a 51% double spend attack. Secondly, the “Tragedy of the Common Chain,” where transactions free ride on the lowest transaction fee provider, will become predominant as mining rewards shrink. PoW, with excess hashing power and low transaction fees, will fall apart as a secure final payment settler. This doomsday scenario, therefore, necessitates a switch to alternative methods such as Proof-of-Stake.
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