Bullish or can't bear it?
Thought 3 | The ecological debate on crypto-currencies
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Hi, this is Clément from HUB612👋
Welcome to all the new followers and hello to everyone!
You can’t have missed that. It’s everywhere in the news: The crypto market is booming again. The market capitalisation of almost every protocols is at an all-time high. While some predict the bursting of a buble in the coming months, the recent corporate and institution’s investments in the market have given an even bigger interest to it.
The number of retail investor keep growing so as the debate as whether crypto-currencies are good/bad for the planet. As I was writing a few weeks ago an issue about Neo eco-banks, I questionned myself about the financial impact of our savings. Now I’m wondering what about our crypto-investment ?It's time to look it up because I have a lot of questions
Let’s dig down into the mine
In short, cryptocurrencies are basically virtual currencies secured by cryptography technologies. It can be used as a form of payment in exchange for goods, services, other cryptocurrencies, .. and all transactions that take place in a given cryptocurrency blockchain network are written in its immutable chronological register of transactions.
The debate starts here.
For a transaction to be validated within a network and saved to its register, multiple validation systems have been created over the years. Call it a crypto-mining mechanism, mining process, or validation algorithms, the goal is to validate a transaction and add a new block to the given blockchain.
As of today, a 2 min research reveals the preponderance of two mining processes (in terms of the aggregated market capitalization of the protocols using them): Proof of Work ( ≈ $1200B ) and Proof of Stake ( ≈ $40B).
Most of the cryptocurrency market is currently using the Proof of Work mechanism (PoW) that why I’ll focus on it for now. It’s by the way the first validation algorithms that appeared with bitcoin. That why it’s still largely used as a standard.
I’m sure you heard stories about these random guys that were already mining bitcoin 10 years ago. At the time there was no easy access to cryptocurrency, to get some coins you had to mine them. Meaning that you had to download a program on your computer and run it long enough until your computer solved a mathematical equation before every other participant of the network. By doing so, you (i) secured the network by validating a block of transactions (ii) got rewarded in bitcoin for being the first of the network to do it.
And here is the thing. Mining is a process of problem-solving. Each computer participating in the mining process is racing against the others, at guessing what’s the answer to the mathematical problem generated by the network. This is simply a try and error process for everyone, and there’s no shortcut.
Over time and up to the present day, people kept mining in the hope of being rewarded by the network. Things have changed quite a bit over the years. Mining has become increasingly difficult:
The longer the chain, the longer it takes to validate a transaction. When comparing equivalent GPU, in January 2011 a miner could have expected to find more than two blocks a day. Whereas in November 2018, the same miner could expect to find a block every 472,339 years.
More and more people got interested in being part of the validation process, thus increasing the competition and reducing the possibilities of being rewarded. In fact, people started to equip themselves with next-gen GPU (some made for crypto mining) to upgrade their calculation power to a whole new level, and even mining farms appeared across the globe.
This is what makes the debate so heated.
To run these calculations on your computer, you need electricity. As it’s a winner takes all mechanism, all the electricity used by other validators that didn’t succeed to solve the equation is simply wasted. Call them resistors, they’re nothing more than that.
In a nutshell, mining is seeking a potential reward for spending electricity to run calculations on a computer. Weird right?
When talking about energy consumption, there’s absolutely no doubt that cryptocurrencies are an energy sink. The energy required by the networks keeps increasing.
Orders of magnitude
Before looking at the debate, let me introduce you to interesting figures I found while digging at the market :
Bitcoin has a carbon footprint comparable to that of New Zealand, producing 36.95 megatons of CO2 annually
Bitcoin consumes as much power as Malaysia — around 134.62 TWh (Equivalent of the 27th country in terms of energy consumption)
Around 60% to 70% of bitcoin is currently mined in China, where more than two-thirds of electricity generation comes from coal
Electricity generation in other key bitcoin mining centers are also dominated by renewables, including Iceland (100%), Quebec (99.8%), British Columbia (98.4%), Norway (98%), and Georgia (81%)
Bitcoin accounts for 0.62% of our total electricity consumption
Our current renewable production could power the entire bitcoin network, multiple times: Hydro (x31), Biofuel & Waste (x4), Solar & Wind (x10)
The amount of electricity consumed every year by always-on but inactive home devices in the USA alone could power bitcoin network for 1.6 years !!!
If you have others, please send them!
Opposite points of view
As the debate is multifaced, I’d like to describe both sides and let you decide for yourself what is your view on the matter.
This part will expand as get comments from the readers :)
The believers
Mining is powered by sustainable energy
A great benchmark led by the University of Cambridge on crypto-asset revealed that 39% of hashing’s energy (= energy used for calculation) consumption comes from renewables and that up to 76% of miners use renewable energies as part of their energy mix.
Mining profitability is related to the cost of electricity
The equation for a miner is simple. Except for the investment in hardware, the principal cost is electricity. Therefore, the lower the cost of energy, the better for profitability.
I was surprised myself, but did you know that renewable sources of energy are among the cheapest in the world? For instance, in 2019 the electricity supplied by solar photovoltaic was the least expensive source.
That means miners have a financial incentive to use renewable energies. By the way, I’m curious if they have pushed/accelerated, in some ways, the development of infrastructure for renewable energies.
Cryptocurrencies valorize the over-produced energy
We create energy for various sources. When looking at renewable energies, sometimes it happens that we over-produce electricity.
In given geography, the energy bottleneck is either at the source, the storage, the grid capacity, or the consumer level. Some are pushing the idea that miners could locate in certain places that are forced to cut the output of green power in order not to overload the grid. Therefore, using the excess energy (that would be generated but wasted anyway) they could power crypto-mining.
Interesting opposition as to whether cryptocurrencies are load-balancing economic batteries between Nick Grossman’s blog post and Elad Verbin's answer.
Crypto mining heat-waste can be recycled
Nothing is created, nothing is destroyed, all is transformed.
When running calculations, computers are an aggregate of resistors. Thus, they tend to produce a lot of heat. This heat can be captured and used for multiple purposes, thus reducing the waste of energy of crypto-mining.
The recent seed round of MintGreen reveals the interest of investors in the startup efforts for the monetization and repurposing of mining-generated heat.
Carbon footprint is absolute. See crypto-currencies relatives
On a carbon footprint approach, crypto-currencies like bitcoin can be compared to gold, coin, paper notes, ..
All of these currencies are terribly damaging the environment:
Gold needs to be mined, treated, transformed, transported, and then stored.
For the mining part alone, its annual energy consumption is 115TWh (BTC is at 108 TWh). However, for equal creation of value, gold has a smaller footprint. But this may change with the increasing value of BTC and others cryptocurrencies.Paper currency (sometimes these are not paper but polymer) is responsible for deforestation, and in the US up to 95% of the notes printed are used to replace notes already in circulation. Wow.
Nb: Cryptocurrencies are by design, infinitely recyclable.
Here a good read that should be updated for a better understanding of the current situation
Crypto-mining could reduce global warming on certain specific cases
Upstream Service or Great American Mining are two companies working on using natural gas wasted by Oil&Gas operations to power crypto mining farms. Instead of releasing Methane into our atmosphere, which is a much more potent greenhouse gas than CO2, they use methane as a source of energy and generate “energy + water + CO2”.
Methane emissions from global oil & gas operations in 2020 are broadly equivalent to all the energy-related CO2 emissions from the entire EU. It’s a big deal
There are green crypto-currencies
Multiple projects are so-called green crypto-currencies. Here are some examples:
Celo: it distributes Celo Gold (cGLD) to various network participants and funds, including the Carbon Offset Fund. The fraction of the rewards are based on the projected carbon emissions of the network, the estimated average value of the epoch rewards, and the offset project costs.
Eco Coin: Every coin is earned through sustainable actions. And behind every coin, there a tree planted (the offset will take years to grow of course)
SolarCoin: a project that mints 1 Solarcoin for each Megawatt hour generated using solar technology.
PowerLedger: when an individual generates an excess of electricity, they should be able to sell it immediately into the grid.
The haters
Mining hardware deteriorate the environment
Crypto miners are primarily equipped with computers. To get their processing power, they are upgrading them with chips made of rare materials. This has a massive carbon footprint, from the extraction to its refinement until its making.
By the way, we’ve reached an absolutely crazy situation with a current global chip shortage, that will probably last till 2022 because the demand for chips now exceeds supply by about 30%. The demand keeps growing, so as the concerns about the environment.
Less energy, the better
Should we keep using more and more energy? Some consider that to avoid an environmental disaster, we need to drastically use less energy. If the demand is reducing, the supply will follow and fewer fossil fuels will be burned thus less CO2 will be emitted.
This argument can be counted with the fact that the more energy a society uses, the more prosperous it becomes. This source states that energy usage is correlated with a higher standard of living and quality of life. Energy is necessary to power our home, our transportation, .. It gives us time.
Therefore the topic is not about reducing our electricity usage but rather where we spend it. It’s a topic of efficiency.
There are more efficient algorithms
Bitcoin is the first crypto-currency and ever since its chain used a proof of work validation algorithm. However, the growing concerns about its energy consumption and the slowness of transaction validation as brought new algorithm alternatives. One of the most serious alternatives being the proof of stake (PoS) algorithm that is currently used by a large range of protocols.
Interestingly, the world’s number two cryptocurrency Ethereum, is currently in the process of converting its algorithm from one that’s fundamentally competitive (proof-of-work) to one that’s collaborative (proof-of-stake), a move that will conserve more than 99% of its electricity use.
However, we can wonder if PoS and others algorithm alternatives are secured because they’ve not been deployed at scale. Only time will tell.
Energy cost per transaction
Linked to the above comment, at the moment Bitcoin only can handle about 350,000 transactions a day. At that rate, Bitcoin would require 14x the world's total electricity just to process the 1 billion credit card transactions that take place every day. Outch.
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Previous issues (wait, there’s more!)
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💵 Cash Management for SMEs | Investment Memorandum #2 Agicap
✈️ Sorry, that’s excluded | Market Review #8 Travel Insurance
🖼️ Culture is the new asset | Investment Memorandum #6 MasterWorks
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📧 I’m clement.parramon@hub612.com and @cparraam is my Twitter
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