Earth Day Special
By Josef Tětek, contributor to Trezor blog
Tired of your nocoiner friends & family shaming you for hodling bitcoin, by playing the ecology trump card? No worries, we’ve got you covered. Below you will find a distillation of the strongest counterarguments to this common Bitcoin critique.
It’s always good to reference those who’ve really put in the legwork . And when it comes to the Bitcoin energy debate, few have gone further than Castle Island’s Nic Carter. In the past couple of weeks alone, Carter published three major texts on the topic of the ecological impact of Bitcoin mining:
- The Frustrating, Maddening, All-Consuming Bitcoin Energy Debate
- Noahbjectivity on Bitcoin Mining
- On Bitcoin, the Gray Lady Embraces Climate Lysenkoism
The following list of arguments is heavily inspired by Carter’s writing on the topic, but shouldn’t be taken as a word-for-word representation of his opinions. All quotes are from the above cited articles.
The normative take: what’s the point anyway?
Should we expend any resources at all on the global, permissionless non-state monetary system? This question is normative, as the answer depends on who’s asking. For governments, central banks, politicians, bureaucrats and the various other Cantillon insiders, the answer will be a resounding no. The livelihood and legitimacy of these actors rely in large part on the monetary monopoly.
For everyone else, the answer should be affirmative. The fiat monetary regime has been on a destructive trajectory for the past several decades. Interest rates have gradually fallen to zero, causing previously unimaginable levels of debt across governments, households and companies. The result is a pervasive addiction to cheap credit and its ally consumption, shifting the focus away from future investment. Fiat is a decivilizing tool, as it destroys the incentive to be optimistic about the future.
Bitcoin, on the other hand, offers an opt-out. Bitcoin’s monetary policy is fair, transparent and absolutely stable. There are no privileges in Bitcoin — miners, if anything, carry greater risks than simple hodlers.
“Because mining is a radically free market, miner margins are usually slim. This means that even though they are literally creating new units of money, that status doesn’t actually give them a huge advantage.”
Understanding Bitcoin’s value proposition is one of the strongest arguments for expending resources on Bitcoin mining. The economic destruction caused by fiat regimes worldwide is a threat to both human life and the planet’s ecosystem. Fixing the money may prove to be the most ecological step mankind can take.
But let’s move on from the philosophical takes to the actual facts.
Understand what you’re extrapolating
A lot of ecology-driven critique of Bitcoin mining is based on an uninformed extrapolation. What the critics usually do is calculate the per-transaction energy cost from the current mining dynamics, and extrapolate this to a transaction volume that is several orders of magnitudes higher.
Such extrapolation completely ignores how Bitcoin actually works. Bitcoin’s core feature is the decentralized ledger of transactions (blockchain), which works as an append-only database. Miners append a block of new transactions to this ledger every 10 minutes on average. But the catch is that the block has a limited space: only around 2,000 transactions fit into individual blocks (around 300,000 transactions per day), and there’s not much we can do to increase this number. So to extrapolate the current energy consumption to multitudes is simply wrong; it’s impossible to fit that many transactions inside Bitcoin’s blocks. Layers on top of Bitcoin such as the Lightning network are the scaling solution; not the base layer itself.
“Bitcoin is a settlement, not a payments network.”
Moreover, the correct extrapolation would take into account the gradually falling issuance. Every four years (or 210,000 blocks to be precise), the issuance portion of the mining reward gets cut in half by the Bitcoin protocol. This is very important to take into consideration when attempting any extrapolation, since the issuance portion is around 80–90% of the total mining reward. This portion is sure to fall in the future and with it the energy consumption, as the bitcoin price probably won’t double every four years for the decades to come, and the fees won’t conceivably be so high as to completely replace the issuance.
“There’s no per-transaction energy cost in Bitcoin. Individual transactions do not carry energy payloads. Miners produce blockspace and mainly collect revenue deriving from subsidies deriving from new issuance, not per-transaction fees.”
In fact, we can attempt to calculate the total future spend on on-chain transactions. As stated, Bitcoin can settle around 300,000 transactions daily. How much on average will users be willing to pay for a confirmation on a global permissionless settlement network? Let’s say $100 per transaction — keep in mind that one on-chain transaction can potentially settle hundreds of transactions on further layers such as the Lightning Network, so the seemingly high on-chain transaction fee can actually be diluted among many actors and their economic activities happening on the higher layers. This brings us to a total spend of $30 million per day. Current mining rewards (issuance + transaction fees) are around $60 million. So per our calculation, the mining revenue — and with it the energy usage — would be half of what it is today.
Of course, the key variable in such a calculation is subject to speculation: maybe the future on-chain fees will reach $1,000 and thus the energy usage would be much higher than it is today. But still not as high as some journalists claim when extrapolating based on completely false assumptions.
If you’re going to extrapolate, understand what it is you are extrapolating.
Bitcoin: a stranded energy accumulator
Some critics paint a gloomy picture of Bitcoin miners consuming inordinate amounts of electricity which could have been better utilized elsewhere. Miners are painted as greedy, irresponsible leeches, sucking the valuable energy out of the grid to play their silly numbers game. Such a critique again omits the real-world facts.
Bitcoin mining is more and more focused on utilizing the so-called stranded energy. What is stranded energy you ask? It can be divided into two categories:
- on-grid energy in the times of supply and demand mismatch. Peak in the renewable energy production or overproduction in the local grid can bring an overabundance of energy that has to be somehow dealt with — often by simply burning the energy on some unproductive activity;
- off-grid energy, which is potential energy in remote locations without any connection to the electricity grid.
Nic Carter calls these energy sources “nonrival”, as their utilization doesn’t compete with any other use and doesn’t drive up the electricity costs for anyone else.
The first category — the on-grid energy mismatch — is partially the reason why so much mining activity is to be found in China. The three provinces with heavy mining activity are Xinjiang, Sichuan, and Yunnan (Inner Mongolia used to be the fourth, but miners were recently driven away by the local government). These provinces have the following characteristics in common: they are sparsely populated, they have massive overabundance of energy, and are confronted with a general inability to direct the energy to population centers.
The second category — the off-grid energy — is starting to be popular among the mining operations worldwide. One of the best examples is the utilization of natural gas. Natural gas is a byproduct of oil extraction, and is usually flared (lit on fire on site). Bitcoin miners are increasingly transforming the natural gas into electricity and mining at the site of oil wells — and this practice is actually much more environmentally sound than flaring. Gas flaring isn’t very efficient, and a lot of methane can still escape into the atmosphere; combusting the gas inside an aggregator is a much cleaner practice. For more on the practice, check out the footage from a mining operation of this sort:
“It goes without saying that completely off-grid natural gas is entirely nonrival with household or commercial energy consumption. It was never going to be monetized, captured, consumed, or delivered to households. Its fate was simply to be combusted or vented.”
Bitcoin naturally incentivizes miners to look for stranded energy worldwide, as unutilized or otherwise wasted energy is the cheapest. The good news is that estimates of the world’s stranded energy suggest that Bitcoin can be fully sustained on such energy sources, many times over.
The Visa argument, or comparing apples to koalas
Comparing Bitcoin’s energy usage with that of Visa transactions is also a popular pastime of misinformed critics. Such critique is usually based on a per-transaction energy cost (which is nonsensical, as explained above) and a simple comparison of the results, such as that single Bitcoin transaction is 10,000x more energy-hungry than a transaction done over Visa. As Carter succinctly puts it, such comparison is of an “apples to koalas” sort.
While Bitcoin is a full stack monetary network encompassing the monetary policy, transaction propagation & confirmation, and a ledger of all the past transactions, Visa is just the last mile of the transaction lifecycle. Visa relies on central and commercial banks, on various government bodies, and on settlement networks (ACH, Fedwire, Swift).
“Bitcoin offers fast, high-assurance, final settlement. This means transactors can trust that value transfers are absolutely final within a short period of time. This permits Bitcoin to scale to enormous size — billion-dollar transactions are common and settle without incident. Can you do that with Visa?”
Bitcoin is an easy target for an ecology-impact-driven critique, as the whole monetary system is integrated and transparent, so anybody can calculate the footprint. Such a thing is almost impossible for the opaque fiat networks.
Comparing a full-fledged monetary system with the transactional last mile is dishonest and wildly misleading. If confronted with this critique, point out the major flaws of such comparison.
The proof of stake fallacy
If all else fails, there’s always the proof of stake (PoS) argument. Since PoS doesn’t use any power-hungry mining algorithm, it is presumed to be the cleanest consensus mechanism, and is sometimes presented as almost a moral obligation for cryptocurrency networks to adopt.
But, as we economists like to say, TANSTAAFL — There Ain’t No Such Thing As A Free Lunch. Proof of stake comes with two major caveats you should know about:
First, it does consume resources. Financial capital is as much a resource as energy. And compared to energy, financial capital is much more global and mobile, so every capital deployment has an opportunity cost. If you deploy $5 billion a year into staking, you forego any other usage of this capital — medical research, green energy initiatives, startup investments etc. While proof of work offers the potential to utilize stranded energy, the same cannot be said for proof of stake and financial capital. If we look at the available resources holistically, proof of stake can be viewed as the more wasteful consensus mechanism.
Second, we cannot really be sure proof of stake offers the same settlement assurances as the proof of work does. Proof of stake is still largely untried in decentralized, long-running monetary networks. We already know of many theoretical vulnerabilities (such as long-range attacks, nothing-at-stake attacks and many more), and we even saw some play out for real. The major problem with proof of stake is the incentive to pool the users’ coins together to reach the validator thresholds. Various exchanges are already offering staking-as-a-service for their users and are among the largest stakers in PoS networks. This dynamic inevitably leads to centralized points of control — effectively a recreation of the fiat system we’re trying to escape in the first place.
“‘Proof of Stake’ is just a fancy phrase meaning ‘those who have the most wealth wield political control.’ That sounds a lot like our current system, which Bitcoin is specifically designed to solve.”
Proof of work isn’t impractical, wasteful, or unecological. On the contrary, it’s our best chance to fix the monetary system that’s failing billions of people worldwide. And as a counterintuitive side effect, it seems to be improving the efficiency and ecology of energy production as well.
Tired arguments need to be laid to rest
Each of the refuted points above have now circulated for many years, some for a decade. No matter how much the community seems to grow, blatant misinformation continues to be published by some of the most respected publications wherever bitcoin is mentioned. It is easy to feel that some ulterior motive is behind the disingenuous reporting, which throws accusations without accepting blame for misleading readers.
The ecological implications of Bitcoin are badly misunderstood and missold to the general public. We all want to preserve the planet and the idea of unnecessary energy waste is equally unacceptable to bitcoiners. The fact that bitcoin actually provides solutions for capturing stranded energy and incentives for clean power, however, means misinformed reporters are standing in the way of more efficient money, in service of institutions that benefit disproportionately from fossil fuel investments and the global financial incumbents.
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