The obstruction of digital currencies, which is in direct competition with retail central bank digital currency (CBDC) could be playing out.
Crypto order is coming as the European Parliament and Washington DC lawmakers pass a string of regulations governing the two trillion USD cryptocurrency market.
“Limiting Proof-of-Work crypto is back on the table as EU parliament prepares virtual currencies to vote today. A provision looking to force proof-of-work cryptocurrencies like bitcoin to switch to the more environmentally friendly proof-of-stake consensus mechanism is in a draft of MiCA up for a parliamentary vote on Monday,” tweeted Coindesk.
“Limiting Proof-of-Work crypto is back on the table”
What is Proof of Work (POW), and why limiting its use could lead to the obstruction of digital currencies?
PoW is a decentralized consensus mechanism for network members to expend effort solving arbitrary mathematical puzzles, known as encryption.
The advantage of a PoW consensus mechanism is that it makes it more difficult for bad attackers to hack the network and compromise the integrity of the blockchain.
Regarding the Proof of Stake POS consensus mechanism, there are no complex mathematical equations to solve using computer hardware and encryption software.
Instead, token holders participate in blockchain creation.
“the advantage of a PoW consensus mechanism is that it makes it more difficult for bad attackers to hack the network and compromise the integrity of the blockchain”
Token holders participate in the consensus by staking their tokens.
So, one of the main reasons bitcoin has value is that the Bitcoin tokens are held on an immutable blockchain network.
In other words, Bitcoin has value due to the immutability of the blockchain technology, which centers around a PoW consensus mechanism.
POW is a proven, robust way of maintaining a secure decentralized blockchain, but its downside is its energy consumption and scalability.
While POS is a leaner and more scalable consensus mechanism, it is 50% more prone to being hacked than proof-of-work.
“Solana uses a POS network, which is more prone to being hacked” – Win Investing
Crypto investors have already witnessed billions of dollars wiped off a cryptocurrency due to a security breach
For example, network hackers last month, February 2022, exploited a vulnerability with Solana cryptocurrency and created 120,000 so-called wrapped ethereum tokens for themselves.
The theft amounted to $325 million in crypto.
Solana uses a POS network, which is more prone to being hacked.
Any law which hinders the PoW mechanism based on environmental reasons is the obstruction of digital currencies through the back door
“The Greens and Socialists, as you can imagine, are criticizing the proof-of-work concept and criticizing the energy use, saying that bitcoin needs more energy than the Netherlands,” said Stefan Berger the EU’s spokesperson for Markets in Crypto Assets, or MiCA bill.
The debate on the energy issue has escalated in light of sanctions on Russian energy in retaliation to Putin’s Russian invasion of Ukraine.
Europe is experiencing an energy crisis and soon food crisis, bearing in mind that Ukraine is the breadbasket of Europe.
So the MiCA bill is a regulatory framework for governing cryptos that could limit the usefulness of the POW consensus mechanism across the EU trading bloc.
Proof-of-work is the energy-intensive consensus mechanism that underlies popular cryptocurrencies like bitcoin and ether.
One proposed provision is to ban crypto services that rely on environmentally unsustainable consensus mechanisms starting in January 2025. The provision refers to PoW, used to mint popular cryptocurrencies like bitcoin and ether.
Various lawmakers and regulators in the EU have been calling for a ban on cryptocurrency mining since at least November of last year.
EU lawmakers began focusing on energy concerns following an open letter from Swedish regulators in November 2021, which called for a bloc-wide ban on cryptocurrency mining. The call gained momentum, winning support from politicians in Germany, Spain, and Norway. Crypto advocates pushed back, saying regulators might be rushing into a ban when the regulation would suffice.
“low volume high-value smart contracts will be conducted using the most secure blockchain network and that is POW”
– Win Investing
While the MiCA bill is an obstruction of digital currencies it will not impact cryptocurrencies with blockchain applications that are not competing with CBDC
According to the proposed rule, an exception is likely to be made if these cryptocurrencies are operated at a small scale, in a manner that does not undermine the bloc’s ability to reach its renewable energy goals. It is unclear how lawmakers intend to distinguish between small and large-scale operations.
“What I want is that in the white paper, in the philosophy, we should make clear if it’s a validation process which needs more energy or not … I hope that we can make a compromise,” said Berger.
But the integrity of a blockchain depends on the consensus mechanism used, and POW has proved itself to be more secure.
It stands to reason that the more resources, whether software or hardware technology and energy used to create a secure blockchain network the more secure it will be. It’s akin to trying to secure the borders of a nation, which requires natural resources, energy, military hardware, and human capital. If you downscale for environmental reasons, then you compromise security.
Similarly, the blockchain which has a POW consensus mechanism requires brute computational power and software, energy to crack the encryption and gain access to private keys making the network immutable. The fact that POW uses a lot of energy isn’t an issue for lawmakers to regulate it is more a technology issue. So computers have become smaller, more powerful, and use less electricity due to hardware developments, namely advancements in microchips using nanotechnology.
The fact that the EU talks about allowing small scale applications for POW is a sign that legislators don’t want to stifle technology, so it is more about the obstruction of digital currencies
On 27 April 2021, The European Investment Bank (EIB) raised 100 million euros from a two-year digital bond priced for a yield of -0.601%. EIB used the Ethereum POW blockchain. Using the blockchain saved millions of euros in intermediary commission and other fixed costs.
Low volume high-value smart contracts will be conducted using the most secure blockchain network and that is POW.
The central banks will soon be launching a retail and wholesale CBDC and you can bet that the integrity of the blockchain will be a primary consideration, with environmental considerations coming second.