Bitcoin will never be a viable option for payments due to the “inefficiency and high environmental costs” linked to its blockchain, a leading figure from the crypto world said today. Sam Bankman-Fried, CEO of the FTX exchange, said the proof of work (PoW) system used to generate and validate Bitcoin makes it incapable of scaling to levels needed to manage the transactions of millions of users.
Bankman-Fried, who founded FTX in 2019 and made his reported $24bn fortune in cryptocurrency, told the FT in an interview that “the Bitcoin network is not a payments network and it is not a scaling network,” adding that the currency is simply an “asset, a commodity and a store of value”.
His comments come amid a so-called ‘crypto crash’ that today saw the value of Bitcoin drop again, down another 5% to $29,700, more than half its record high of $61,374 in October 2021. The collapse of ‘stablecoin’ TerraUSD last week – going from being pegged to the dollar to a worth of just 14 cents – was the trigger of the latest crypto crash. The company behind the currency, the Luna Foundation, has suspended trading in the TerraUSD and has said it would use its remaining assets to compensate users.
The suggestion that Bitcoin is not a viable solution for payments runs counter to the bet some countries are placing on Bitcoin as an alternative to a national currency. El Salvador and the Central African Republic have already made Bitcoin legal tender, but despite this studies have shown it is rarely used for payments. Other experts believe it can also play a part in the future of payments for businesses and consumers.
Is Bitcoin an investment or a payment method?
Mauricio Magaldi, global strategy director for crypto at fintech consultancy 11:FS, told Tech Monitor that Bitcoin is evolving to support investment rather than provide payments, and disputed claims of inefficiency, saying “inefficiency is only perceived when trying to use it for purposes it is not built to satisfy”. Layer 2 solutions, systems built on top of the existing Bitcoin blockchain, such as the Lightning Network, allow for faster and cheaper payments, further adding to its evolution, Magaldi says.
He also believes the environmental impact will resolve itself as “miners are incentivised to use the cheapest source of power available. As green sources become cheaper, be it by increasing external incentives or reducing internal incentives, more miners will look to source from green energy directly".
But Bitcoin's carbon footprint is currently hefty. The currency is set to consume 147.67 TWh of electricity this year, according to the Cambridge Bitcoin Electricity Consumption Index, produced by the University of Cambridge’s Centre for Alternative Finance (CCAF). This means its power consumption is likely to be greater than many countries around the world.
Bankman-Fried said that an alternative system is required for an effective payment solution, one that runs on ‘Proof-of-Stake’ (PoS), a consensus mechanism that uses a validator and a stake in the native currency of the blockchain to confirm ownership, rather than a mining machine like the ones currently used for Bitcoin. Both require computing power, but Proof-of-Stake is less intensive. PoW involves distributed nodes around the world that compete against each other to carry out calculations and mint a new block in exchange for Bitcoin rewards.
“Things that you’re doing millions of transactions a second with have to be extremely efficient and lightweight and lower energy cost. Proof of stake networks are,” Bankman-Fried said. Adding: “It has to be the case that we don’t scale this up to the point where we’re spending 100 times as much eventually as we are today on energy costs for mining."
Magaldi said Bitcoin has not served as a widespread payments infrastructure because it is perceived as slow to process payments and also because it has been seen as a longer term store of value, and people tend to hold on to it rather than use it as means of payment. “The 'inefficiency' or reduced scalability are there by design, to be a secure form of transferring value due to its PoW consensus algorithm,” Magaldi says.
Should Bitcoin switch to Proof-of-Stake?
Phil Harvey, CEO of Sabre56, digital asset management consultancy, told Tech Monitor that switching to a new system would be inefficient in itself, adding: “The same computers would still be needed to operate the alternative. It is better to understand how to make Proof of Work the most efficient protocol."
Professor Ed Atkins, senior lecturer in the School of Geographical Sciences at the University of Bristol, disagrees, and says a move to a PoS algorithm would go some way in reducing the perceived inefficiencies and environmental costs of Bitcoin, adding that Bitcoin risks becoming insular if it doesn’t move away from PoW.
PoS has already been adopted as a consensus mechanism on the Ethereum blockchain, and it is estimated this will lead to a 99% drop in energy demands, as it involves certain users validating a new transaction, rather than many users competing across the network, Professor Atkins says.
“There have been benefits of the PoW system – like how it has incentivised miners to join the network, which further increases the security of the blockchain," he says. "However, these benefits have always been primarily for the Bitcoin network itself. In incentivising Bitcoin ‘miners’ to compete against one another to validate transactions, Bitcoin has created an extensive competition and arms race between these users. The reason this is called ‘proof of work’ is that it uses a huge amount of processing power to do all of this."
He adds: “The primary resource required by this competition is electricity. The cheaper, more plentiful, and more secure, the better. Bitcoin’s very system incentivises using as much electricity as possible."
Indeed, while there has been some moves to use renewable energy for Bitcoin mining, the majority of energy used is still derived from fossil fuels. “There are numerous examples of coal power stations being re-opened to power electricity to Bitcoin – and only Bitcoin," Professor Atkins says.
What is the future of Bitcoin?
Josh Sandhu, co-founder of Europe’s first NFT gallery and advisory service Quantus Gallery, said Bitcoin will evolve to meet the needs of the market, and crypto has crashed multiple times and rebounded, adding it is being implemented in a host of ways beyond just as a "currency".
“What the cryptocurrency landscape looks like in another decade or so remains to be seen, but as with all investments, the hardest part is timing," he says. "Everyday savers and investors should always be cautions whenever they invest in any asset and a good way to reduce risk is to hedge and diversify into markets that aren't affected by rising inflation or ones that aren't correlated to the stock market.”
As interest in digital assets increases, Professor Atkins believes Bitcoin's relevance will dwindle. "A continued PoW system risks making Bitcoin quite insular," he says. "It sets a high barrier to entry and increases costs, restricting who can get involved. It will remain an asset, much like gold. A few people will continue to get rich from it – but it’s not going to be a key tool for payments and decentralised finance in the future. It’s a long way away from fulfilling its original promise of democratising and decentralising finance."