In this section, we're going to talk about a technique called proof-of-stake mining puzzles. In a variety of related techniques which all together I'll call virtual mining because they don't involve any computational work at all. Now, the motivation for this is that Bitcoin mining seems to have an unnecessary step. If you look at the ecosystem of Bitcoin mining economics, the coin miners earn monetary rewards in the form of Bitcoins. They have to spend money buying power and equipment in order to operate their mining rigs. Then they use those mining rigs to find puzzle solutions, which in turn give them reward. So what would happen if we removed this step of spending money on power and equipment? In this case, you would have something that looks like the following, which is what I mean by virtual mining. Instead of mining with computational hardware like Bitcoin mining rigs, you could mine just by using the money that you would have spent on mining rigs directly within the system. Think of this as using your money and sending it to a special address. And then a winner is chosen in order to have a mining reward based on the amount of money that miners have contributed by sending it to this special address. Now it would be possible in a virtual mining scheme like this to essentially recreate the same dynamics and reward structure as in current Bitcoin mining. The only thing that's removed is the external step of having to use real power and real hardware. Now there are a bunch of potential benefits to a virtual mining system like this. One is that it definitely would lower the overall cost of the Bitcoin mining system. Virtual mining since it doesn't involve using any power or manufacturing any special hardware, would have no impact on the environment. Now you can think of the savings that would result from this as being distributed to all of the holders of coins in this system. There's another argument which is that holders of the Bitcoin currency are stakeholders in the currency. They have an incentive to do things that would benefit the Bitcoin currency system as a whole, because it increases the value of the coins that they hold. So this argument is that the very people who are stakeholders in the currency have incentives aligned to be good stewards of the system. Now because there's no ASICs involved, there would be no concern about an ASIC advantage. So any virtual mining puzzle is also an ASIC resistant puzzle. And there's finally an argument that this approach would reduce the hazard of 51% attacks, whereby the network is dominated by very large miners with extremely powerful equipment. Now let me describe this argument in a little more detail. The way the argument works is basically that the Bitcoin economy is smaller than the overall world economy. It's possible for an attacker who has a lot of wealth outside the Bitcoin network to be able to acquire very large mining rigs that they might not be able to acquire if they could only use their wealth that's inside the Bitcoin network. So to illustrate this, imagine that there's a wealthy attacker like a nation state or just some very wealthy attacker on the network who's able to purchase very large mining equipment that's very powerful. Now all of their wealth is outside the system. And they're able to acquire those mining resources, and then they can use it to attack the Bitcoin economy. Now if mining were based on the coins that were inside the network, then a wealthy attacker wouldn't be able to go outside the network and find more mining power. The only way they could acquire the amount of virtual mining power they would need to attack the network would be to buy up 51% of all of the coins in existence. This would require them to go to Bitcoin exchanges and exchange whatever form of wealth they already had for wealth measured in the tokens inside the system. This would likely raise the price of the coins within the system while they were doing so. It's arguably much more expensive to acquire half of the value of the Bitcoins than it would be to acquire mining power that's larger than half the existing Bitcoin network. This provides an extra disincentive against conducting such a large scale attack. Now there are a bunch of variations of virtual mining, and I'll describe some of these. The original one was called proof-of-stake which assigns to each coin in the system a stake value. And the idea is that the stake value grows over time for every coin as long as the coin isn't used. Every time you spend a coin or make a transaction including a coin, or enter a coin in a mining puzzle by using the coin to mine, the stake value for that coin gets reset. Another alternative is called proof-of-burn. And in this scenario when you decide to mine using a coin, you actually have to send it to an unspendable address, and the coin, essentially, is deleted or gone forever. On the other hand, you do have a chance of winning a mining reward, and then that would replace the coins that you put in. Another variation is called proof-of-deposit. And this involves mining with your coins by depositing them in something like a time-locked account, where they aren't burned forever. You'll be able to get them back eventually, but only after some amount of time has passed. Effectively by choosing to mine with your coin in this scheme, you're losing the opportunity cost of whatever else you could've done with your coin instead at that time. The last variation is proof-of-activity. In this variation, everyone with a coin is automatically entered into the mining lottery. If one of your coins is chosen, then you're responsible for choosing the next block. And you have to respond by creating a signed message about the block that you choose within a certain amount of time. Now virtual mining puzzles like these are an active area of ongoing research. And there's a large open problem, which we don't know the answer to yet, which goes like this, is there any form of security that you can only get by having a proof of work system that involves really burning real resources? Requiring real computational hardware and expending real electrical power in order to find puzzle solutions. If so, if there is some kind of security that you can only get by having a proof-of-work puzzle and not with virtual mining, then the apparent waste of the proof-of-work system is actually just the cost of the security that you get. On the other hand, if it does turn out that virtual mining can provide exactly the same security or more that you can get by having a proof-of-work system. Then it seems likely that eventually proof-of-work systems because they're so much more expensive will eventually give way in favor of cheaper alternatives based on virtual mining. But this question is, as of yet, unanswered. Let's conclude this lecture by summarizing some of the things we've just talked about. We've discussed a variety of approaches towards designing alternate Bitcoin mining puzzles that achieve a variety of different goals. These include preventing ASIC miners from becoming a consolidated source of power in the Bitcoin ecosystem. We've discussed puzzles that prevent large mining pools from becoming consolidations of power. We've also discussed puzzles that have some intrinsic usefulness that can help society and reduce waste. And we've looked at the option of a mining puzzle that doesn't require any computational hardware at all. For now, the best trade-off between these puzzles is unclear. And our speculation about the future is that for the near future there will be many alternatives coexisting, and it will continue to be unclear exactly which alternative is the best. Now in the next lecture, we're going to talk about Bitcoin as a platform. This is going to include applications beyond just the currency that we've seen so far. This includes applications like lotteries, prediction markets, smart contracts, financial derivatives, and many more.
