How do we solve the carbon problem in Bitcoin? | Cryptocurrency

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When bitcoin miner Bit Digital began shipping its energy-intensive computers from China in early 2021, amazement was raised. “A lot of people thought we were overly paranoid,” says Sam Tabar, chief strategy officer, who helped move all of the company’s machines to the US and Canada.

But the company’s paranoia paid off. The ban on bitcoin mining in China last summer, spurred in part by environmental concerns, turned the industry into chaos. The announcement sparked a benign sale of computers used to power bitcoin, as miners scramble to ship more than two million machines from China. They arrived by loading in countries such as the United States, Russia and Kazakhstan.

China was home to about 65% of global bitcoin production in 2020, according to a Cambridge University estimate. Although the country banned bitcoin mining for a number of reasons, one of them was the massive energy consumption that bitcoin requires and the obstacle that represents China’s goal of carbon neutrality by 2060.

Chinese regulators aren’t the only ones concerned about the environmental impact of bitcoin mining. The latest calculations from the University of Cambridge’s Bitcoin Electricity Consumption Index indicate that Bitcoin mining consumes 133.63 TWh of electricity per year – more than the entire countries of Ukraine and Norway. This number continues to grow: Bitcoin mining currently uses 66 times more electricity than in 2015.

A worker at a cryptocurrency mining platform in Dujiangyan, Sichuan Province last year, before China declared all cryptocurrency transactions illegal. Photo: AFP/Getty Images

Bitcoin makers like to say that the Chinese ban has proven the network’s resilience. Although the “hash rate” — a measure of global computing power dedicated to bitcoin mining — declined around the time of the campaign, it recovered by the end of the year. But bitcoin’s energy consumption is now an existential threat to the mining industry, with more and more lawmakers around the world eager to follow China.

Kazakhstan initially welcomed stranded bitcoin miners in China as a potential boon to the economy. Lured by the promise of lax regulation and cheap coal power, an estimated one-fifth of global bitcoin mining production has migrated there. But the greedy energy demand of bitcoin has put severe strains on Kazakhstan’s aging power grid this winter. Soon, the threat of emergency government power cuts allowed network operators to limit power supply to miners, leaving some facilities without power.

The greedy energy demand of Bitcoin has put heavy pressure on Kazakhstan’s aging power grid this winter

Even in renewable energy havens, the future of bitcoin mining is far from certain. Iceland, which gets nearly all of its energy from renewables, will not welcome more bitcoin miners to its shores. Regulators in Sweden say that bitcoin mining takes energy from the most productive industries, and they are currently pressing the European Union to ban the practice altogether. Torbjorn Paul Jensen, CEO of Arkan, a Norway-based bitcoin miner, dismisses this as a “highly planned economic approach.” But even in the free-market-loving United States, a growing number of lawmakers are upsetting the industry.

In theory, it is possible to use an environmentally friendly Bitcoin. The power consumption of the digital currency is tied to its underlying Proof of Work (PoW) protocol. This is a decentralized consensus mechanism that secures the currency and prevents fraud or hacking, in the absence of oversight from banks or other central authority. The role of bitcoin miners is primarily to verify transactions on the blockchain.

Think of bitcoin mining as a competition where miners compete to solve complex crypto puzzles. The “winner” adds the next block of transactions to the distributed ledger (i.e. the blockchain) and claims payment in the form of new bitcoins and transaction fees. The miner who uses the most computing power is more likely to solve the problem faster, creating an incentive to spend more energy in order to “win”.

Bitcoin mining in Quebec, Canada. Photo: Lars Hagberg/AFP/Getty Images

This power consumption bulge is driving the popularity of a less power-hungry alternative: Proof of Stake (PoS).

Kathleen Breitman, co-founder of Tezos, a blockchain platform that allows users to create and trade security tokens, says a friend of hers was running a crypto mailing list when bitcoin was first announced. “Arguably the first Bitcoin skeptic,” his first reaction was, “If this works, it will absorb all the energy in the universe, and it will be terrible.”

Tezos is built on PoS instead, which uses a different consensus mechanism than Bitcoin. Instead of “miners” competing with computing power, the different nodes of the distributed network compete by committing “lots” of tokens. Placing a larger number of tokens – which may be forfeited in case of fraud – increases the likelihood of a node being chosen by an algorithm to produce the next block of transactions, and rewards in the form of more tokens.

Since it is ‘quota’ (i.e. number of tokens) rather than ‘work’ (i.e. energy expenditure) that secures the network, PoS reduces network power demand by more than 99% relative to PoW. Instead of warehouses crammed with purpose-built machines, PoS can run on a Raspberry Pi microcomputer.

Although Breitman says environmental concerns aren’t what drove her company to opt for POS, they have become more useful with increased proof-of-work scrutiny.

The problem with proof-of-stake is that it is neither trust-free nor censorship-resistant Chris Bendixen, CoinShares

Ethereum, the second largest public blockchain after Bitcoin, is planning to move to PoS by the end of 2022, and a number of new blockchain applications such as Cardano and Polkadot have chosen to launch using this protocol.

The European Commission is among the regulators trying to incentivize the industry to migrate apps from Proof of Work to Point of Sale, but the Bitcoin network has so far resisted any such move.

It’s not that bitcoin doesn’t care about the environmental impact – although a vocal minority on social media might give that impression, says Michael Rauch, lead digital assets at the Cambridge Center for Alternative Finance (CCAF). The problem is that the majority of Bitcoin still insists that POS is not a viable alternative to a Proof of Work.

Riot Blockchain’s Whinstone bitcoin mining facility in Rockdale, Texas, last October. Photo: Tanin Morey/EPA

Many bitcoin makers believe that POS subverts the basic principles of a decentralized currency that should remain out of the reach of governments and the banking system. “The problem with proof-of-stake is that it’s not trust-free, it’s not censorship-resistant, it’s not objective,” says Chris Bendixen, head of research at digital asset investment firm CoinShares. “There is no real difference from a high-level perspective between Proof of Stake and unanimous shareholder capital… Proof of Stake is not a substitute for Proof of Work, it is just a return to the pre-Bitcoin system.”

Some bitcoin makers claim that the environmental debate is exaggerated because energy use will decrease over the coming years. This is because the profits miners receive for minting new coins have been programmed to halve roughly every four years. Eventually, all bitcoins will be mined and miners will only receive transaction fees. “Ago [payment in the form of new coins] Longtime bitcoin investor and developer Pierre Rochard says in other words, shrinking rewards should shrink the pool of competing miners.

Whether or not this is the case, the reluctance to reconnect the underlying bitcoin protocol throws the ball back into the court of bitcoin miners to tackle the power consumption issue.

They rise to the challenge – at least in public speaking. Michael Saylor, CEO of MicroStrategy, founder of the Bitcoin Mining Council (BMC), said in a recent briefing that bitcoin mining is the world’s cleanest and most energy efficient use of any major industry. “The only way to be more sustainable and efficient is to create a fantasy industry.” (This is more fanciful than Bitcoin.)

The idea that you have to create a new order, like mining bitcoin, is not true

BMC is a body of bitcoin miners created last year to address growing concerns about cryptocurrency energy consumption. Its purpose is to promote sustainability within the industry, but it is also part of the fight against Bitcoin’s image problem.

The main figure promoted at the meeting was that bitcoin accounts for just 0.1% of all energy consumption on Earth – which appears to be much lower than frequent comparisons to smaller nations. (The 0.1% figure was quickly recorded among bitcoin miners – many of them moved it to the Observer.) Rauchs said the 0.1% figure seemed “roughly consistent” with the CCAF data.

Furthermore, 58% of the energy used to power the industry is sustainable according to BMC. A report from CCAF in 2020 put this figure at 39% more conservative, but Rauch stresses that this was just a snapshot of power consumption at that moment in time, and he can’t comment on the reliability of the BMC estimate without seeing the underlying data.

Some bitcoin makers argue that the cryptocurrency could catalyze a rapid transition to renewable energy. Because bitcoin mining operations don’t need to be running all the time, it fits well with the intermittent nature of renewable energy according to the argument, and could force energy companies to increase renewable energy capacity, as well as help balance the grid.

Bitcoin miner Marathon Digital Holdings, which has operations in Nebraska, Texas and South Dakota, claims to have such agreements with energy providers. “The company that generates the electricity can tell us to shut down our mining rigs,” says its CEO, Fred Thiel, which means “they’ll suddenly have 100-200 megawatts — no matter how much we’re consuming — available to put into the grid at any moment. We work like a big battery.” “.

BitRiver mining farm data center in Bratsk, Russia, January 2022. Photo: Alexander Ryumin/TASS

There is no evidence that this is happening on a large scale yet, says Rauch, although it may become more important in the future. However, bitcoin mining is not particularly unique in this regard, says Arvind Ravikumar, a petroleum researcher at the University of Texas at Austin. He also says that electric vehicle charging and so-called “level zero” data centers that do not support critical functions are also suitable for “demand-response” arrangements that can be paired with renewable energy on the grid. “The idea that you have to create a new order, like mining bitcoin, is not true.”

The flip side is where rising demands for energy are spurring defunct fossil-fuel plants back into operation. Controversial is that bitcoin miner Greenidge Generation Holdings reopened a former coal power plant in Dresden, New York, and converted it to natural gas, causing the plant’s greenhouse gas emissions to increase nearly tenfold between 2019 and 2020.

Discussions about Bitcoin’s energy consumption tend to end up in a philosophical deadlock over the industry’s inherent utility. Critics claim that this benefit is zero, which could provoke a defensive position among its proponents. “There are old-school bitcoins like, ‘Who cares about energy consumption? “Bitcoin deserves to exist,” says Breitman. “It becomes an argument about values.”

Many claim that over-energy is simply the latest wand with which to beat Bitcoin, and that the industry is subject to unfair ethical scrutiny compared to others – such as gold mining or Wall Street day trading. Rauchs is “in fact very sympathetic” to this argument, saying that bitcoin is right that overstating bitcoin’s destruction of years of climate progress is “completely disproportionate.” No matter how you slice it, ditching bitcoin is not a quick fix to global warming.

Ravikumar says the most important issue is what the industry is doing to reduce emissions. “This is the question we need to focus on — rather than what, if any, the advantages of bitcoin mining are.”

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