Cornell University Economist: Bitcoin’s Three Big Flaws

In an interview with CNBC, Eswar Prasad, a professor of economics at Cornell University, noted that Bitcoin has some flaws that could allow other digital currencies to open up more possibilities.

Cornell University Economist: Bitcoin's Three Big Flaws

In an interview with CNBC, Eswar Prasad, a professor of economics at Cornell University, pointed out that Bitcoin has some flaws that could open up more possibilities for other digital currencies. It’s not as anonymous as people think, and “mining” bitcoin is bad for the environment. Most importantly, it also doesn’t work well as a currency. The interesting aspect is that other cryptocurrencies have figured out ways to address these pain points. Eswar Prasad was the head of the IMF’s China desk.

  1. Bitcoin’s mining process is harmful to the environment

The bitcoin mining process is the energy-intensive process needed to produce new coins and secure and verify the payment network. the electricity used when bitcoin transactions are verified on the bitcoin blockchain, as well as the electricity consumed by the mining process, is clearly not good for the environment, Prasad said.

Tesla CEO Elon Musk said last month that his electric car company would stop accepting bitcoin as a form of payment because of environmental concerns, causing the price of bitcoin to drop 5 percent in just a few minutes. He has since made the change and said in a tweet Sunday that Tesla would accept bitcoin for transactions if it could confirm “reasonable” and “clean energy use by miners.”

Cryptocurrency miners use specially designed mining computing equipment to solve complex mathematical equations that allow bitcoin transactions to go through. The miners are rewarded for their efforts with cryptocurrency.

According to the Cambridge Bitcoin Electricity Consumption Index, the amount of energy used to maintain the Bitcoin system is so large that it could consume more electricity than an entire country consumes, such as Finland and Switzerland. Ether, on the other hand, the world’s second largest cryptocurrency, is coming up with a different mining method that requires less energy compared to Bitcoin. Called “Proof of Stake (PoS),” it is the mechanism underlying Ether that allows users to activate so-called “verifiers” on the network if they can prove they hold Ether, or “equity.”

Ultimately, it should eliminate the massive amount of computing power needed to verify transactions, which the Ether Foundation claims will consume 99.95 % less energy than before.

Prasad said this would greatly reduce energy consumption, and it could provide many of the benefits that Bitcoin is supposed to provide. It could also make transactions cheaper and faster.

  1. bitcoin is not anonymous

Earlier this month, U.S. law enforcement officials said they seized $2.3 million in bitcoin from a criminal network group involved in a ransomware attack on Colonial Pipeline in May.

The FBI said its agents were able to identify the virtual currency wallet the hackers used to collect payments from Colonial Pipeline.

The main idea of Bitcoin …… was to provide anonymity,” Prasad said. But it turns out that if you use bitcoin a lot, especially if you use it to get some real goods and services, then it’s possible to end up linking your address or your physical identity to your digital identity.”

He also mentioned that, interestingly, there are also cryptocurrencies that try to solve this problem by providing users with better anonymity. He highlights Monero and Zcash as examples. So Bitcoin has really kicked off the cottage industry, with people struggling to find a medium of exchange that doesn’t require going through trusted institutions like governments or commercial banks, even though it hasn’t really been around.

  1. Not really suitable as a currency

In theory, Bitcoin is supposed to provide an anonymous and efficient medium of exchange for value, but Prasad says it doesn’t work in that regard; instead, using Bitcoin to pay for goods and services is a slow and cumbersome process, and the volatility of the market can make the transaction process even more uncontrollable. Bitcoin is prone to big swings, as evidenced by the 30 % plunge in one day last month.

Prasad gives an example, “So you can go to a store with a bitcoin and one day, only get a cup of coffee, and another day, with the same bitcoin, you can treat yourself to a lavish dinner. So as far as a currency, it’s not practical. Bitcoin is more of a speculative asset for people who want it to appreciate in value, not because they want to use it as a mode of payment.”

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