DAC Gardeners Need Bees to Grow a Garden
Cross-pollination, mechanisms, and metamorphoses for a wild growth of DAC economy
Before we talk about bees, let’s talk about miners.
The most distinctive characteristics of the Bitcoin mechanism is the explicit incorporation of economic incentives – a fungible token reward (called, yes, bitcoin) – for producing the building blocks of the Bitcoin blockchain. By issuing this algorithmic token reward to people providing the necessary computing work (solving a crypto-hashing puzzle), the Bitcoin blockchain is kept alive. Those people who provide computing power and compete to solve the crypto puzzle are collectively called miners. What do they mine? They mine consensus blocks on the Bitcoin blockchain. This reciprocal economic incentive closed loop acts very much like a traditional engine – the mining process consumes electricity, a.k.a. energy, in exchange for work done – producing consensus blocks. Trading electricity for consensus, this kind of mining is usually called Proof-of-Work (POW). POW was adopted by many first-gen blockchain systems, including Ethereum.
We pointed out in Part I of this discussion[3] that Bitcoin mining by POW is a zero-sum game. The consequence of such zero-sum mining game is a computing power arms race that amounts to exorbitant electricity usage that dwarfs many countries⁵³. Many see Bitcoin mining as blatant waste of precious resources and a negative impact toward global warming. Such critique prompted another category of consensus mining algorithms called Proof-of-Stake (POS), which utilizes gaming ownership of tokens – stakes – as the economic incentive mechanism to secure the blockchain and keep it alive. Ethereum 2.0 will be shifting from POW to POS.
How do we generalize the mechanism of mining in blockchains? With POW miners get work done – forging consensus, providing security against malicious attacks – by consuming energy. POW seems to be working in the same manner as a traditional engine. What about POS then? It looks like there is no considerable electricity or energy waste in POS to get the same work done – forging consensus and providing security for the POS blockchain. So what gives? Well, in place of energy loss for POW, the counterpart for POS is information. On the POS blockchain certain information – such as stakes – could be utilized by POS consensus miners to produce consensus blocks. The parallel between energy loss and information is not new and had been studied quite extensively⁵⁴ before. If we compare POW to building a wall, then POS is like building a virtual wall in people’s minds.
Mechanism design is tricky because there exist many factors affecting human behaviors, some are obvious like that of energy loss, some are not so obvious, such as certain information – nonetheless a pattern emerges. Blockchain mining is the first mechanism design pattern we can easily recognize and it became an industry (also called crypto-mining) starting with Bitcoin mining. Its economic dynamics is not unlike mineral ore mining in the traditional economy.
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⁵³ Bitcoin Devours More Electricity Than Many Countries.
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