Origins and Birth
Edited by Co-Editors in Chief
Trusting Bitcoin in a Trustless World?
Bitcoin uses more energy than all of Argentina!
Bitcoin requires 80% as much power as the whole of New York!
Bitcoin requires seven times more energy than the global operations of Alphabet!
All these comparisons are valid and none of their claims are incorrect.
In this article, I’ll attempt to explain why the energy cost of bitcoin is so absurd, look at how people are taming that absurdity, and discuss what all those absurd gigawatts could possibly be yielding for humanity.
Let’s start from the ground floor. When you buy bitcoin, what do you actually get? Simply, you get a fraction of the bitcoin network and the right to authorise what happens to it next. You might have heard people rationalise this ‘value’ as analogous to a dollar or euro, but the comparison is completely inaccurate.
Fiat currencies (dollars, euros, pounds, etc.) are guaranteed only by the potential violence of their issuers. That violence can manifest as fines, arrest, imprisonment, or far worse throughout history and in many places today, but fundamentally a euro is valued as a euro and a dollar as a dollar because respective governments make the maintenance of this value an inextricable part of their exercise of power. The institutionalised coercion of a police force, justice system and army result in my ability to pop down the supermarket and swap a handful of signifiers for some sandwiches and a coffee. A fiat currency doesn’t take value from anything ‘real’: its value rests on the tangible power and institutional complexity of the nation itself.
Not that fiat currencies don’t work - indeed they’re efficient and convenient - but the fact that arbitration of this value system is monopolised certainly has its disadvantages.
First of all, circulation: in the first three months of the pandemic, the US Federal Reserve (Fed) magicked up three trillion dollars to pump into the commercial banking system.This electronic money swells the reserves of banks like Goldman Sachs and Morgan Stanley who typically use it to make large asset purchases on the free market. The Fed then receive large amounts of bonds (Treasury and agency securities) in return, all of which are backed by bundles of home mortgages. Since the banks are now flush with trillions of digital dollars, they immediately lower barriers to entry for more mortgages, fulfilling the circular prophecy while encouraging more borrowing of the sort that created biblical rack and ruin in 2008. It only gets even more absurd. Every year, the Fed buy trillions in Treasury securities, but it doesn’t buy them from the Treasury itself. Instead, the Fed take generated cash and buy these securities back from the commercial banks who originally bought them from the Treasury. The Treasury then pays the interest it owes on those securities to the Fed, who pay the profit from these securities right back to the Treasury. In case that little loop confused you (it’s confusing me), the US government is simply paying its debts back to itself. Can you imagine if you or I could make credit card payments into our own bank accounts?
It only gets even more absurd. Every year, the Fed buy trillions in Treasury securities, but it doesn’t buy them from the Treasury itself. Instead, the Fed take generated cash and buy these securities back from the commercial banks who originally bought them from the Treasury. The Treasury then pays the interest it owes on those securities to the Fed, who pay the profit from these securities right back to the Treasury. In case that little loop confused you (it’s confusing me), the US government is simply paying its debts back to itself. Can you imagine if you or I could make credit card payments into our own bank
This is before you learn how Congress regulates the market in its own interests. The STOCK act of 2012 finally required lawmakers to publicly disclose their trades, but violations usually only result in a $200 fine and the bill fails to even mention insider trading - an act rife among members of congress that is classed as severe felony if carried out by a member of the public.
On January 24, 2020, the Senate Committees on Health and Foreign Relations held a closed meeting to debrief senators on the novel coronavirus and its projected impact on the US. Immediately after the meeting, Senator Kelly Loeffler sold stock worth up to 3.1 million dollars, Senator David Perdue began buying stocks in DuPont, who make PPE, and the goddamned Chairman of the US Intelligence Committee Richard Burr decided to offload up to 1.7 million dollars in stock even as he told the public: "Luckily, we have a framework in place that has put us in a better position than any other country to respond to a public health threat like the coronavirus". And lest you think it only Republicans who engage in this type of behaviour, Nancy Pelosi has been dubbed ‘the Queen of Stonks’. An industry has grown up around copying her trades, with retail investors scrabbling to find where she’s putting her money. In July of this year, her husband made $5.3 million trading Alphabet stock right before the House Judiciary Committee voted on antitrust regulation. Naturally, Nancy had ‘no knowledge’ of her husband’s trades.
The Department of Justice launched a probe into this insider trading scandal last year. As of now, all investigations are closed and no charges were brought against any individual.
In this world of national currencies, there is no democratic ruleset. The way money (value) works for you and I is entirely different to the way it works for those in positions of political or economic power. It’s a pyramid of descending priority, where those at the very top interact with finance as they please and everyone beneath is forced to accept the existence of myriad rulesets: not just one for us and one for them, but one for Kelly Loeffler, another for Richard Burr, another for Nancy Pelosi, and an entirely different one for you.
Seems a bit unfair, doesn’t it?
So where does bitcoin come in? Unlike national currencies, bitcoin is not guaranteed by violence. Instead, bitcoin is validated by its ledger, agreed upon across a wide network of “nodes”. In bitcoin’s case, “nodes” are computers, tasked with solving a cryptographic puzzle in order to create the next “block” of transactions. Each “block” records how much bitcoin moved and from where to where within the time it took to create itself (the network targets 10 minutes, but it varies slightly). This is the “chain of blocks” that “blockchain” refers to. Whichever node on the network successfully solves the block puzzle first is rewarded. These rewards began at 50 bitcoin / block, but have reduced to 6.25 today as a result of “halving,” a process by which rewards are cut fifty percent every 210,000 blocks (roughly 4 years). The more nodes you have competing to create the latest block, the more the network is decentralised and the securer it becomes.
As such, all users interact with bitcoin in exactly the same way. The ruleset is unchanging - and unchangeable. Its parameters were exactly the same on its launch 13 years ago as they are today.
In the blockchain space, a network that features this democratic parity is described as “trustless”. Typically, we think of trust as a positive human trait and something we should seek to foster in ourselves. The problem is, we trust elected representatives to behave, just like we trust bankers with all our money.
There is a reason bitcoin was first concepted in 2008.
In a trustless world, we wouldn’t have to trust that Morgan Stanley stopped selling repackaged subprime loans (they didn’t), we wouldn’t have to trust that the Chairman of the US Intelligence Committee is not dumping stock into the people he is supposed to protect (he is). Rather, we would know it, because every single thing they ever did would be there, accessible by all and validated by every decentralised node on the network. Block after block after block of accountability and transparency all the way back to 2008. This level of reliability and repeatability is unknown anywhere in traditional finance, or anywhere else in human society. There has never been an entity so fundamentally fair as bitcoin. It is nothing short of a revolution in property rights: no longer is your house your house because some lord and some knights choose (note the present tense) to protect this right with their swords. Bitcoin validates and protects value - and by extension your property rights - without violence.
So why does it need so much energy?
Because any blockchain operating on the proof of work validation principle (bitcoin among them) is vulnerable to a “51% attack”. If any bad actor controlled over 50% of the network’s total computing power, they could recreate the ledger as they pleased, stealing or double-spending bitcoin.
This is why the network must suck up the absurd amount of power that it does: energy is bitcoin’s immune system. In late 2021, a malicious attack on the bitcoin network would not only require the purchase and deployment of countless millions of computers, but access to the almost unattainable amounts of energy required to power them. As the network expands, so does its security and with it the foundations of a fairer, transparent digital economy that would benefit us all.
I am not trying to tell you that bitcoin is not a polluter. Quantifiably, it is.
There are, however, some promising signs.
Using and consuming energy is not inherently harmful to the earth. Charging my phone from a solar panel is no more damaging to the environment than sunbathing; ditto bitcoin mined from renewable sources. Since bitcoin is no more than an economic proposition to its miners, energy cost must be lower than the profits derived from expending that energy. As a result, a global shift has emerged for miners to either relocate towards existing renewable energy sources or simply build their own solar and wind farms - because these clean forms of energy are cheaper. Research published this year suggests that bitcoin mining was roughly 56% renewable by Q2 2021, making it one of the most renewable industries in the world - especially in comparison to related businesses like gold.
At the same time, bitcoin is rewriting the economics of renewable energy. A freak winter storm in Texas earlier this year knocked out dozens of power plants, sending the grid into meltdown. This tragedy killed 210 people and wrought billions of dollars in property damage. The wind and solar farms proposed to avoid such a breakdown in future are set to continuously generate enough power to serve an impermanent crisis, and as such would have been an economic impossibility just a few years ago. Now, bitcoin miners have agreed to act as an informal “battery,” buying up the vast amounts of excess energy these renewable plants will generate and shutting down in times of crisis to allow all that excess to flood back into homes and businesses that require it.
Crusoe Energy Systems are mounting bitcoin mining rigs in shipping containers, powering them with the excess natural gas that oil companies burn off in a process known as ‘flaring’. The International Energy Agency (IEA) estimate that the 150 billion cubic metres of natural gas burnt off in this process annually creates roughly the same carbon emissions as the whole of Italy. As Crusoe co-founder Chase Lockmiller observes, “the best way to improve the carbon economics of an oilfield is to add a few bitcoin rigs.”
Our societies still run on feudal economics. Governments wield currencies and their monopoly on the arbitration of value like latter day Midases, abusing the system for their own benefit and operating above accountability. Giants like Facebook and Apple apply medieval principles to the expansion and maintenance of their top-down empires. The promise of a world on even financial footing is not some fantasy, but a reality quietly taking shape under our noses. Bitcoin might be dirty and an enormous consumer of electricity, but it offers true freedom. A horizontal layer of value accessible to all on identical terms. Property rights guaranteed without violence. No discrimination. No borders. Bitcoin could usher in a world where we don’t need passports to travel or visas to work. We have a climate crisis, but we are also facing an unprecedented wealth gap across the developed and developing world. I don’t believe it makes sense to shut the door on a solution to one issue just because it is worsening another. Rather, as bitcoin continues to overturn outdated economic ideas, we must make it sustainable and ensure that its revolution is not a bloody one.