Swedish central bank concludes proof of work blockchains are unacceptable

Riksbank, the Swedish central bank, recently released a paper on the potential climate impact of retail central bank digital currency (CBDC) models.

It concluded three things: that the energy usage of an e-krona would be similar to that of card payments, that after a certain point, more nodes lead to diminishing returns, and that proof-of-stake (PoS) blockchains and any kind with Byzantine Fault Tolerance (BFT) are likely palatable, whereas proof-of-work (PoW) blockchains are out of the question.

Semi-centralized is Riksbank’s preference

The Swedish central bank tested three models: fully centralized, semi-centralized, and fully decentralized or permissionless.

It found that semi-centralized is the optimal model. It didn’t like a fully decentralized model because non-central bank actors would have full access to the data and could participate fully in the e-krona network. Likewise, it found that after a sufficient level of decentralization had been reached, more nodes were a waste of energy.

However, Riksbank didn’t like the fully centralized model, either, due to it having a single point of failure. Therefore, the ‘semi-centralized’ model with multiple copies of the ledger on participating nodes was the best option, it said. With this model, Riksbank would still operate the core system and a limited number of payment companies would have network access.

Opinion: proof-of-work is the best model, despite what Riksbank says

While the Riksbank paper focuses on energy usage and climate impact, it’s incorrect to conclude that PoW blockchains are unacceptable because of their energy usage.

The BSV blockchain, which follows the original Bitcoin protocol laid out by Satoshi Nakamoto in his 2008 white paper, scales to millions of transactions per second (TPS) and is capable of all sorts of complex transactions, including data, payments and more. When the same amount of energy currently used to power the BTC blockchain at seven TPS is used to power millions, the energy usage seems much more justifiable, and the blockchain is objectively more efficient. When extra care is taken to use renewable energy sources and responsibly dispose of electronic waste from mining rigs, the BSV blockchain looks more attractive from an ESG perspective.

Yet, a further point must be made: energy efficiency is just one element in the blockchain equation. The need for environmentally-friendly solutions must be balanced with the need for network security and scalability. The BSV blockchain is unrivaled in these two areas, even though it uses the PoW consensus mechanism Riksbank has written off.

While the findings of the Swedish central bank are informative, they do focus on energy efficiency to the exclusion of other important considerations. Central banks have ultimate authority over the ledgers they use, and deciding who can join the network is hardly different from using a private Oracle database and keeping multiple copies. Likewise, the security flaws in PoS blockchains are well understood, and choosing them to run a national digital currency is irresponsible and dangerous.

It’s time for central banks to ask themselves a deeper question: what is the point of blockchain technology? Thinking about this question and finding the answers will show why terms like ‘semi-centralization’ are misleading and why any single party having ultimate control over the ledger is self-defeating.

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