Bitcoin’s climate reckoning
Bitcoin’s climate reckoning
DEEP-DIVE: Whatever the motive, Elon Musk’s bitcoin broadside can only be A Good Thing for cryptocurrencies and the climate
The bitcoin energy debate is going full-throttle mainstream. Tesla CEO Elon Musk triggered a mass sell-off after tweeting that the electric car manufacturer won’t be accepting bitcoin for purchases due to concerns over the “increasing use of fossil fuels” for mining and transactions:
Tesla will retain the bitcoin remaining in its corporate treasury, having invested $1.5 billion in the cryptocurrency in February and then sold off 10% of its holding at a huge profit in April.
The company did not establish a threshold for acceptable emissions to resume BTC transactions. The CO2 footprint is in any case is very hard to judge since mining is an opaque sector with operations spread all over the world.
The Tesla statement throws up many questions: Was Musk not aware of bitcoin’s energy and emissions profile when his company made that huge investment? This seems unlikely. So why say this now?
Musk also promotes Dogecoin, a ‘joke’ cryptocurrency that has skyrocketed in value since his celebrity endorsement. Dogecoin has a very low energy footprint, estimated at 0.12 kWh per transaction compared to bitcoin’s 707 kWh* – and Tesla intends to accept payments in Doge.
It is notable that Tesla continues to hold bitcoin. The most energy-intensive aspect of bitcoin is securing the network and ‘minting’ new coins, not transactions – so merely holding bitcoin contributes to its emissions footprint. If Musk was true to his word, Tesla would sell all its bitcoins immediately.
It is conceivable that Musk, who missed out on the early bitcoin boom and is playing catch-up, is using his influence to game the market and ‘buy the dip’. Or maybe there is some other reason to explain it. Twitter is abuzz with speculation:
Known unknowns
Whatever Musk’s motives, the Tesla announcement has thrown bitcoin’s soaring energy footprint firmly into the limelight – which, however you look at it, can only be A Good Thing.
Greater scrutiny could help put bitcoin on a more sustainable trajectory, or spawn a replacement that is somehow ‘better’. (Existing alternative cryptos come with trade-offs — more on that below.)
If bitcoin disappeared forever tomorrow and was not replaced, a chunk of distributed power demand – estimated at almost 150 TWh per year in aggregate – would vanish. Some of that demand is propping up decrepit, out-of-the-money coal or gas-fired power stations. Some of it is providing fresh revenue streams to hydroelectric dams, geothermal plants or stranded flare gas.
How it breaks down across those categories is not precisely knowable. Nor is Tesla’s claim that bitcoin’s fossil fuel consumption is “increasing”. The broad renewable-fossil split is estimated at somewhere between 39% and 73%, and has probably changed since those two figures were calculated.
What is clear is that, in keeping with the wider energy industry, there are efforts underway to increase renewables penetration in bitcoin’s aggregate power mix. And this presents an opportunity for those invested in the energy transition.
The energy intensity of mining, and its modularity, provides a useful demand anchor that can underpin the economics of any power generator. It is particularly useful to those that are subject to curtailment when power supply outstrips demand on the grid, or are rewarded for offering demand-side response.
As previously explored in Energy Flux, monetising stranded power sources by mining bitcoin doesn’t just give energy resource owners an additional diversified revenue stream in the near-term. It gives them a stake in what could become a new global monetary order, if you believe the utopian hype.
Climate risk = security risk
Backlash over bitcoin’s energy and emissions intensity might yet come to pose an existential threat to the leading cryptocurrency.
If public opinion swings decisively against bitcoin to the extent that it unifies global powers and triggers an orchestrated international response, there could be a prolonged selloff. In this case, the price would fall and the least competitive mining operations would be rendered unprofitable.
If miners at the marginal end of the cost curve start shutting down, the bitcoin network would shrink. And if enough of them go offline, there are implications for overall network security. That’s because every blockchain gleans its security from the participation of many decentralised miners.
To take control of any blockchain, a malicious miner or mining pool that owns more than 50% of the network’s overall hashing (computational) power can re-write the blockchain to ‘double-spend’ bitcoins and disrupt transactions. This is known as a 51% attack, which would kill any cryptocurrency by destroying public trust in the network.
Bitcoin’s enormous energy demand is what protects it from a 51% attack. The sheer volume of hashing power required to unleash such an attack entails controlling a gargantuan amount of electricity generation capacity. The logic of bitcoin’s security is that expending these resources outweighs the benefits of using them for this purpose. Put simply:
‘Green’ bitcoin pioneers
So, a big energy footprint is a security feature of bitcoin’s cryptographic consensus algorithm, known as ‘proof-of-work’ (which, if you’re new to all this, Energy Flux explained here). And since fuel is by far the biggest operational cost of mining, access to cheap power is the single greatest determinant of mining profitability.
This is why miners flocked to tap subsidised Chinese coal-fired power, overflowing hydroelectric dams in Sichuan or Scandinavia, geothermal power in Iceland and (increasingly) waste natural gas at upstream oil wells that would otherwise be vented or flared.
Many in the crypto community acknowledge that fossil fuel dependence is an impediment to bitcoin’s acceptance as a legitimate asset class. And there are innovative companies working to resolve this by launching renewable-powered mining rigs.
Only yesterday, London-listed Argo Blockchain acquired two data centres in Quebec, Canada, with a combined total capacity of 20MW “powered almost entirely by electricity generated from hydro power, which is a key part of the Company’s green mining vision”.
Argo is also expanding its operations in Texas to tap into booming solar and wind power output, which often exceeds demand. The company says its bitcoin miners act a little like demand-side response by absorbing excess load and throttling back the hashing power when grid demand picks up. In return, Argo receives cheaper power, which makes it more competitive.
As reported in Energy Flux, Australian mining start-up Iris Energy is expanding its Canadian hydro-powered mining operation in British Columbia. And then there are those pioneering companies using flare gas at upstream oil wells to power data processing operations such as crypto mining. This gas would otherwise be flared or vented into the atmosphere.
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Turning the tide
These are niche enterprises and there remains a glaring need to clean up all cryptocurrencies. This prompted the launch of the Crypto Climate Accord, which hopes to power the entire world’s blockchains by 100% renewables by 2025.
It is also aiming for net-zero emissions for the entire crypto industry by 2040 – including “all business operations beyond blockchains and retroactive emissions”. Members are developing an open-source accounting standard for measuring emissions from cryptocurrencies – an area devoid of transparency.
The accord acknowledges that initiatives must be entirely “community-driven”, so their progress will be a litmus test for the collective ability of crypto advocates to adapt to the imperatives of the climate crisis.
The accord is pitching a vision of “voluntary, market-oriented and value-added” action on emissions – designed to appeal to the libertarian instincts of crypto enthusiasts. It remains to be seen how many will embrace this, although initial uptake seems encouraging.
Stop gap
Energy Web, one of the accord’s architects, offers something of an interim tech solution to the crypto energy conundrum. Its EW Zero application allows energy consumers to “find and digitally source verified, emissions-free renewable energy globally”.
EW Zero acts as a middle-man, linking up energy buyers with global suppliers of verified green credits such as international renewable energy certificates (I-RECs). Think of it as a digital interface that enables renewable energy offsets.
Like all offsets, this poses some ethical challenges. If a coal-powered bitcoin miner in China buys I-RECs to cover its power consumption, it will have absolved itself of its emissions sins while still running on the dirtiest possible power source.
This might be enough to satisfy some ESG-focussed investors, but it is hard to see such a solution convincing the general public that bitcoin mining is now green if it means miners continue running on coal. Shifting to cleaner power sources must be the end-game.
Stepping stone
Still, matching or offsetting carbon-based power generation with renewables is an established model of corporate power procurement that is providing a useful stepping stone for data centres on the path to genuine carbon neutrality.
Google has matched its entire global energy use with wind and solar purchases since 2017 while still relying on carbon-emitting sources at some places and times of the day. By 2030, the tech giant aims to match its operational power demand with “nearby” carbon-free sources on the same grid 24/7, throughout the year.
“24/7 Carbon-Free Energy is about moving beyond offsets to remove carbon from our energy supply completely,” Google says.
A big part of this means shifting demand patterns to draw power when renewables penetration is at its highest. This model is analogous to Argo Blockchain’s wind and solar-powered Texas bitcoin mining project described above.
No free lunch
But what about ditching bitcoin’s energy-intensive proof-of-work system for something altogether less power hungry? Competing cryptocurrencies use less energy-intensive cryptographic consensus models such as ‘proof of stake’ and ‘proof of space’. Let’s take a quick look at each.
Proof-of-stake allows cryptocurrency miners to validate block transactions based on the amount of coins they already hold. It bestows mining power according to the percentage of coins held by a miner, not the amount of work (energy) that it puts in. Some say this makes it more resilient to a 51% attack, although others dispute this claim.
Either way, proof-of-stake comes with drawbacks. It encourages miners to hoard their coins rather than selling them, because the more they hold the more likely they are to be chosen to mint the next coin.
Under proof-of-work, bitcoin miners are encouraged to sell their coins to cover the cost of mining, i.e. their power consumption. If most coins are centrally owned by those producing them, this undermines the democratic principles at the core of the bitcoin philosophy.
As Nic Carter of Castle Island Ventures puts it:
“‘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. Bitcoin explicitly rejects politics, and doesn’t grant any special privileges based on coins held.”
(It is worth noting here that bitcoin distribution is itself highly concentrated. Around 95% of all issued bitcoins are held by an estimated ~2% of the anonymous ownership accounts that can be tracked on the cryptocurrency’s blockchain, so take the democratic utopianism with a pinch of salt. Suffice to say, PoS would never fly with bitcoiners.)
‘Proof-of-space’ (PoSpace), also known as proof-of-capacity (PoC), involves miners allocating a significant amount of spare hard drive capacity to solving a mathematical challenge. This evades the power demand requirement of bitcoin’s proof-of-work consensus, but is already encountering friction.
Chia, a new ‘green’ alternative to bitcoin that runs on PoSpace, is reportedly causing demand for hard discs to spike in China, which is disrupting supply chains in Vietnam. Already, more than 4 million terabytes of hard drive space are devoted to mining Chia, up from 120,000 TB as recently as March 2021. Scaling this to cover the size of the bitcoin network does not currently seem feasible.
So, there is no free lunch. Proof-of-work requires energy. Proof-of-stake means ‘unacceptable’ centralisation. Proof-of-space means huge demand for hardware. Ditching crypto altogether to stick with ‘fiat’ means trusting Central Banks not to debase their currencies by printing more of it – which runs contrary to the post-pandemic Western consensus on monetary policy.
Time for shock therapy?
It might take a deep system shock to push bitcoin onto a genuinely sustainable footing. The Center for Global Development, an independent think-tank, said in a recent report that because there is no complete solution to the energy-hungry PoW algorithm, the price of bitcoin will remain the most important determinant of the network’s energy demand:
“The most hopeful case for the environment is that the price of bitcoin falls low enough to push most miners out of business, leaving behind only those with access to cheap renewable energy and the most efficient mining rigs.”
Such a market correction could be triggered by either a “security failure that calls into question the network’s viability” or a “mass sell-off”, CGD said, alluding to a 51% attack. And while unlikely at this stage, the risk of either happening rises the longer the bitcoin network takes to clean up its act (or at least its image).
This brings us back to the mutually beneficial nature of marrying bitcoin and the energy transition. Bitcoin mining is 100% decentralised. The energy industry is moving towards a distributed model as it shifts to cleaner, modular sources of power generation such as solar and wind.
These sources require backup capacity, and bitcoin is in theory a viable economic battery. There is scope for strategic partnerships that accelerate clean energy uptake and reduce mining emissions. But be warned: if the bitcoin price resumes its ultra-bullish ascent, power generators with a behind-the-meter mining rig might never see a reason to sell power onto the grid:
All the more reason to ensure that bitcoin is running on clean power sources. The status quo is unsustainable on many levels.
Seb Kennedy | Energy Flux | 14th May 2021
* The concept of ‘energy intensity per transaction’ is a misnomer. If ‘transaction’ means creation of a block on the bitcoin blockchain, then this can contain several individual payments bundled up into one block. And if payments are realised on a secondary layer such as the Lightning Network, then a single bitcoin ‘transaction’ is actually more like a settlement process for concluding hundreds or even thousands of micropayments.
Related reading from Energy Flux:
Brave new world: Bitcoin opens digital frontier in global clean energy transition
Hydro-powered bitcoin miner lures institutional investors ahead of IPO
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And yet PoS seems the future of cryptos because of much better scalability and lower transaction costs. Look at Eth 2.0 for instance. Anyone can stake their coins to a larger mining pool and therefore earn a share of newly minted coins.
Also don't forget that if a PoS miner tries to do anything stupid he will lose some of its stake so there is clearly a penalty for bad 'political' behavior.
In my view once PoS is widely accepted the party will be over for BTC and other PoW cryptos.