There is an emerging schism between Proof-of-Work cryptocurrencies such as Bitcoin, and Proof-of-Stake cryptocurrencies such as Cardano. Some of it is down to differences of opinion around security, some of it is around blockchain utility, but the most notable difference is around energy consumption.
In the past year I’ve seen Bitcoiner’s apply gravity bending logic to argue in favour of Bitcoin’s high energy usage.
In this post I examine their argument and explain why the Bitcoiners argument doesn’t hold up.
Bitcoin as digital energy
This idea was made famous by Michael Saylor and he is right in that it takes a while for people to fully grasp it. The best way to explain it is imagine that you have a wind-farm in a far away location, where the lack of nearby towns or cities means it isn’t worth-while to generate and transport the wind energy. So it goes to waste.
But instead that energy could be used to power a Bitcoin mining machine that would then use internet connectivity to transport the mined Bitcoin to another location and then either sold on the open market immediately, or held until a later point in time. This process has taken the value of that wind energy and converted it into Bitcoin. The Bitcoin is an encapsulation of that wind energy. Furthermore it has converted the energy from something that was perishable to something that is permanent and transportable. The value of that wind energy can now be transported across time and space.
This is a point worth ruminating on if you haven’t heard it before.
Now Bitcoin can definitely make a case for being innovative technology for storing energy. However does that mean all energy should be encapsulated into Bitcoin? If that wind energy was located near a town or city that could make use of it, shouldn’t it be used there instead of storing it in Bitcoin? And by encapsulating that wind energy as Bitcoin, you are taking that energy off the market, thereby increasing the price of energy generally.
Cheap energy is critical for the growth of economies and for civilization to flourish. The counter argument would be that the wind-energy is still conserved. If you use that Bitcoin to then pay your electricity bill, and that electricity was generated from another wind-farm, then you’ve effectively converted the Bitcoin back into wind energy. However this is a false equivalence.
The owner of the Bitcoin may not be the person that is in need of the energy. I have yet to hear about a Bitcoin mining operation offering to pay the electricity bills of residents of the state it’s located in. Instead Bitcoin mining takes cheap energy and puts it in the pocket of rich investors, while the supply-chain impact is felt by those who would benefit the most from cheaper energy.
But Bitcoin incentivizes the building of new green energy sources
This is the next argument in the Bitcoiners playbook. That Bitcoin makes energy so valuable that people are falling over themselves to build green energy plants. This is also a false argument. Governments around the world have signed up to ambitious carbon reduction targets. They don’t need Bitcoin to push them into switching to green energy. Global warming is a much bigger motivator.
And in any case Bitcoin incentivizes cheap energy not green energy. Bitcoin miners will only utilize green energy if regulation means it is cheaper than fossil fuels.
Bitcoin is designed to be an energy monster
The very nature of Bitcoin’s Proof-of-work consensus mechanism means it incentivizes energy consumption. The more energy a Bitcoin miner can throw at the proof-of-work computation, the more money the miner will make. But it gets worse. Bitcoins cryptographic puzzle is designed so that if the world is using more energy to mine it, it becomes harder to solve, and thereby requires more energy to maintain the same steady state.
If you don’t understand how that’s possible, know that the algorithm can tell if there has been a sustained increase in the rate at which Bitcoin is being mined based on the digital ID of the most recently mined Bitcoins, and based on that it changes the level of difficulty for mining new Bitcoin. The opposite happens if there is a sustained drop in the rate at which Bitcoin is mined.
Let that sink in. The more people that are mining Bitcoin, and the more energy that they are consuming to do so, the more energy is needed to mine Bitcoin. This is what I mean by Bitcoin is an energy monster that gets larger and larger the more it consumes. We can see this clearly in the chart below from Digiconomist.net.
This is a case of giving someone an inch and they take a mile. By allowing Bitcoin to have energy, it will go on to demand more energy. A Bitcoin-centric world would have the mantra “any energy that can be used for mining, will be used for mining”. It will mean that energy is always ready to be snapped up by miners in any way they can. It means the price of energy will be raised for all up to the point that people start to complain about high energy prices.
Now you’ll often hear the retort that Bitcoin mining uses less energy than the banking system or gold mining. This argument has a number of weaknesses:
- Based on market cap, the Bitcoin industry is ~6% the size of the gold industry, and around 0.16% of the the size of the banking industry. If Bitcoin is using this much energy while it is still tiny, how much will it use when it gets to that size?
- Comparing it to an old industry doesn’t negate the fact that it could be made much more energy efficient itself by moving to Proof-of-Stake. When the demand for green energy is going to outstrip supply, it falls on us to build new systems that are energy efficient rather than just pointing to pre-existing energy consuming industries.
- Furthermore an energy efficient finance industry, rebuilt to use energy efficient technologies, would provide great impetus to shift away from the reliance on banking and gold mining. If one was to build a house, one would make it as energy efficient as possible from the outset, not point to Victorian houses and say
“hey we’re better than them”.
Where Bitcoin can help
However this isn’t a totally one-sided anti-Bitcoin argument. There is some true innovative technology here. Bitcoin’s ability to encapsulate energy and transfer it across time and space is a marvel. But where should this innovative technology be applied? I would argue that Bitcoin can and should play a vital role in absorbing surplus energy in the energy grid. Whether that be green energy that would otherwise have perished through low demand, or natural gas that would otherwise had been flared, Bitcoin is the perfect technology for ensuring surplus energy does not go to waste.
In Texas for example where there have been power outages in the past due to unpredictability of energy demands, Bitcoin can be used to ensure more energy than required is generated, with the surplus being captured as Bitcoin, such that in times of higher energy demand, Bitcoin mining can be turned off to make additional energy available to the system. In this way you have made it profitable for energy companies to be on “stand-by” for those moments where there is a surge of demand for electricity.
This approach is what’s being pioneered in Texas and makes a lot of sense. However it does require a close co-operation between Bitcoin miners and electricity companies. To the point I would argue we should view Bitcoin as an innovative tool meant for electricity companies. Such companies should either acquire or build their own mining operations, and then automate the spinning up or winding down of miners in response to forecasted energy demand.
But where does that leave cryptocurrencies?
Proof-of-Work (POW) is really a proof-of-concept. Satoshi used it as a consensus mechanism to ensure distributed digital ledgers can be verified and trusted. However the years of research since then have shown it’s not the only solution. Other consensus mechanisms, such as Proof-of-stake (PoS) as used by Cardano and a raft of other newer coins, have demonstrated security can be maintained without needing to consume vast amounts of energy.
Bitcoiner’s may be antithetical to this idea and claim it is not as secure but Cardano has demonstrated both academically and in practice that this is not the case. The chain has a market value of $38bn, yet in all the years of its operation it has not been hacked despite how lucrative it would seem to potential hackers.
Horses for courses
Hopefully by now I’ve convinced you that there is a place for both types of cryptocurrency technologies in the world. PoW as an industrial use tool for capturing surplus energy, and PoS as low-energy tool for driving the decentralized economy. By having sensible policy around both, governments can ensure they have a stable energy supply, reduce carbon emissions, encourage innovation, and compete in the new decentralized digital economy.