Introduction to Komodo KMD. Part 4

Problems with proof-of-work, Latency, Absence of commitment and forks.

Another big problem with proof-of-work algorithms is latency. It takes time for miners to create blocks of the blockchain and if a cryptocurrency were to become a common payment method with millions of users, adding transactions to the blockchain in the way that proof-of-work networks do it would simply not be realistic. Transactional capacity of the Bitcoin network is between 3 and 7 transactions per second while Visa Payment Network can process tens of thousands of transactions per second.

Another issue with proof-of-work is that miners do not have a commitment to a network. They are always looking for better, more profitable opportunities to make money. For example, for a period of time in November 2017 the majority of the Bitcoin miners have switched to mining Bitcoin Cash. This happened because the developers behind Bitcoin Cash recognized the fact that the miners would switch to a different network if it were more profitable and for a period of time it was more than 65% more profitable to mine coins on the Bitcoin Cash network than it was on the Bitcoin network.

When something like this happens and a network doesn’t have enough miners, the transactions would start taking a lot of time to confirm. The longer they take, the more likely it is that users will start using another cryptocurrency. This is also known as a “death spiral.” The death spiral is the complete opposite of the network effect. When a death spiral begins, a network starts to experience problems, causing users to leave, which increases the number of problems, causing more users and miners to leave and so on.

Bitcoin Cash was only able to surpass Bitcoin in terms of the power of miners for a short time, but the incident proves an important point that the miners are not tied to Bitcoin and could switch whenever they wanted. The miners are free to use their hardware to process transactions and create blocks on any network they choose.

Finally, proof-of-work networks are prone to forks. A fork is when a number of users decide to modify the software of the network in a way that changes how the network works.

Some of the most famous forks in the history of blockchain technology are Bitcoin Cash and Ethereum Classic.

The main difference between Bitcoin Cash and Bitcoin is the size of the block of the network blockchain. Bitcoin has a block size of 1 megabyte, which is one of the reasons why Bitcoin’s transactional capacity is only between 3 and 7 transactions per second. Bitcoin Cash is a modified version of the Bitcoin software, with the block size being equal to 8 megabytes. Bigger blocks mean that the network can process more transactions quicker, between 24 and 60 transactions per second.

The last block of the Bitcoin blockchain that Bitcoin and Bitcoin Cash had in common was block 478558. Starting with the next block, block 478559, Bitcoin would reject the blocks created by Bitcoin Cash and vice versa.

The second famous fork is Ethereum Classic that occurred as a result of the hack of “The DAO” (not to be confused with a dao, which is an abbreviation for decentralized autonomous organization). The DAO was a name of a project on the Ethereum platform. The goal of the project was to provide businesses and non-profits with a way to create decentralized stateless organizations with rules specified by smart contacts on blockchain. The DAO ran a crowd sale beginning on April 30 of 2016 and has quickly become the largest crowd sale on the Ethereum platform to date. By May 10, the creators of The DAO have raised more than USD$34 million worth of Ethereum network’s currency Ether. By May 12, this number has surpassed USD$50 million and by May 21 it was over USD$150 million. The users of the Ether have essentially given the creators of THE DAO around 14% of all Ether in circulation at the time.

The attack started in June of 2016. By June 18, the hacker (or the hackers) was able to move about 3.6 million Ethers into a “child DAO” that the hacker had control over. The “child DAO” had the same structure as The DAO. The difference was that the hackers were in control of the “child DAO.” This event caused the price of Ether to go down from about $20 to under $13.

Because the “child DAO” was identical to the main “The DAO”, it also had a restriction that prohibited anyone from withdrawing funds for 28 days. The founders of “The DAO” have included this condition because they wanted the initial funding period to be about collection of funds only.

On June 17, Vitalik Buterin, the creator of Ethereum Network, has issued a critical update which introduced a change to “The DAO” and prevented hackers from accessing the funds that they channeled into the child DAO. However, there was a percentage of users on the network that disagreed with the decision to issue the update.

They said that the fact that a central authority issued an update was going against the decentralized nature of the Ethereum network. The network that didn’t accept the update became known as Ethereum Classic.

Two facts about the Ethereum Classic fork are worth mentioning. The first one is that it is very likely that the attackers have made a lot of money by shorting the price of ether because if someone was to know about the attack, it would not be hard to predict the significant drop in the price of ether. The second one is that someone who posed as a hacker wrote an open letter to the Ethereum community. The person (or group of people) claimed that they didn’t do anything illegal and didn’t violate any laws. From their perspective, they found a vulnerability issue on a stateless, decentralized network and used the vulnerability to gain profit, which is not something that is described by any laws as a crime. They viewed the funds they have channeled into the child DAO as a reward for discovering the issue, not as a crime or as a theft.