Georg C. F. Greve

Bitcoin and the 2nd law of thermodynamics

The 2nd law of thermodynamics is about entropy, or disorder, which in an isolated system will only rise.

It is essential for energy efficiency as it describes why any transfer of one form of energy into another will always incur loss. Which means it is impossible to build a perpetual motion machine. Also, its practical application is quickly showing that scale increases efficiency. A bus is more efficient at translating fuel into motion of passengers than a car. Simplistically put, the 2nd law of thermodynamics favours scale.

Economies of scale go beyond pure thermodynamics, but the principles remain similar – hence the wide-spread expectation that smaller cloud service providers will go out of business because they won’t be able to compete with the largest ones which have all the economies of scale on their side.

So what does this mean for blockchain and in particular Proof of Work?

Bitcoin and other Proof of Work systems are built on the premise of radical decentralisation. Parties with no reason to trust one another do computational work in order to compare results. If other parties arrive at the same result as myself, I assume they invested the same amount of work. That work has a cost in terms of hardware and electricity which would see no reward if one were to accept a false result. So there is punishment in false testimony, and reward for good behaviour.

The motivation for this design was based in a preference of trust in technology over trust in social structures. It was a reaction to the issues with too much concentration of power in too few hands and companies. In particular the banks did not enjoy much trust after the 2008 financial crisis in which people ended up with mortgages they could no longer service.

So Bitcoin set out to create a global currency that would not be controlled by individual entities, but rather be independent, anonymous, vastly decentralised and thus provide for a more robust and fair currency. Etherium and others extended this idea with the thought of not only global currency, but financial infrastructure. Proof of Work seemed to provide the perfect answer to the question: How I can I trust someone I do not know, and about whose motives I have no idea?

Today, Bitcoin, Etherium and other systems are struggling with massive centralisation. Some of these parties whose motives we know almost nothing about and who are accountable to no-one now collectively control the consensus. We have replaced central banks by central miners.

What happened? The 2nd law of thermodynamics.

Scale dictates concentration. Any system based on Proof of Work will always naturally arrive at an oligopoly, sometimes even a monopoly. So this is not an anomaly, or a temporary phenomenon. It is the necessary outcome of the way the system was designed.

So I guess we found out that blockchain does not defy laws of nature.