Another week, another CMB newsletter.
To be completely honest, I worked on a different article for you but decided to table it until next time. Yesterday, the House Energy and Commerce Committee held a hearing (the first one in four months!) all about crypto energy consumption. This topic remains an important one, as it is one of the main arguments against widespread implementation of blockchain technology.
I thought to take this opportunity to talk about the issue.
Here are some useful resources about the hearing:
Hearing details: list of witnesses (also discussed next) along with their biographies and witness statements and the hearing memo
List of committee members
Video of the hearing
Also, I recommend listening to this podcast that provides a thorough overview of Bitcoin mining.
Before you click away, the hearing is not as boring as it may sound. Hopefully, you agree by the time you finish reading this article.
Have a wonderful Friday, and see you next week!
-Katja
P.S. After my long abstinence from Twitter, I finally gave in. You will be able to find some of my unfiltered thoughts here (once I figure out how to use the platform).
House hearing on crypto energy consumption
Witnesses
Mr. Ari Juels is a professor at Cornell Tech and a Computer Science faculty member at Cornell University. He is a co-director of the Initiative for CryptoCurrencies and Contracts (IC3) as well as chief scientist at Chainlink.
Mr. John Belizaire has a long track-record in venture capital, entrepreneurship, and technology. Currently, he is the CEO and co-founder of Soluna Computing Inc (NOT the blockchain Solana).
“Soluna Computing builds modular, batchable computing centers for intensive applications like cryptocurrency mining, AI and machine learning. Soluna’s scalable data centers provide a cost-effective alternative to battery storage or transmission lines. Soluna Holdings, Inc. is the leading developer of green data centers that convert excess renewable energy into global computing resources.”
Mr. Brian Brooks recently served as CEO of Binance.US and is currently the CEO of Bitfury Group (bitcoin mining and crypto tech unicorn). Brooks worked in the US government during the Trump-era, serving as the Acting Comptroller of the Currency, member of the FDIC board of directors, and voting member of the Financial Stability Oversight Council. He has also become one of the most prominent voices of crypto regulation.
Mr. Steve Wright is the former General Manager of Chelan County Public Utility District. Chelan County attracted bitcoin miners for its cheap hydropower resources and high-speed internet, so Wright has the first-person perspective on how crypto mining impacts a community.
Mr. Gregory Zerzan also worked in the government as Deputy Assistant Secretary and Acting Assistant Secretary of the U.S. Treasury, Principal Deputy Solicitor of the U.S Department of the Interior as well as counsel to three different congressional committees: Energy & Commerce, Financial Services, and Agriculture.
Bitcoin mining
At the end of 2021, Bitcoin mining consumed 0.14% of the world’s energy production and 0.44% of the world’s energy wasted.
On top of such a small percentage of energy consumption, Bitcoin mining has the highest sustainable energy mix (59%). This is 28% higher than what the US currently has.
This means that Bitcoin consumes less than 0.06% of the world’s non-sustainable energy, while maintaining a market capitalization of $800 billion (a metric that underestimates the true value of Bitcoin, as discussed later).
Energy consumption
Brooks brought up during the hearing and in his testimony that “not all energy consumption is created equal.” Brooks argues that Bitcoin’s value doesn’t just come from crypto transactions but also from the entire ecosystem of applications and protocols built on top of the blockchain (like decentralized finance). Therefore, the question isn’t how much energy is consumed but what is the economic productivity created per unit of energy consumed?
To illustrate this idea, Brooks described a comparison:
“The market capitalization of bitcoin over the past six months has fluctuated between about $800 billion and $1.2 trillion; the market cap of the global banking system is approximately $8.6 trillion. The banking system consumed just over 4,900 TWh to produce that market capitalization; bitcoin mining consumed 188 TWh to produce its market cap. Put differently, the banking system requires 573 TWh of power to produce $1 trillion of value. That is about 2.5 times the amount of power required to produce the same amount of value in bitcoin.”
Tom O’Halleran (D-AZ) also pushed a similar point by asking about the number of jobs produced per unit of energy consumed. He wanted to understand the broader economic and societal impact of Bitcoin mining.
The reason behind the energy consumption: PoW vs PoS
Proof-of-Work (PoW) and Proof-of-Stake (PoS) are mechanisms by which blockchains verify their transactions. The energy consumption debate typically comes down to a discussion of these protocols since they determine the level of computing power needed for a blockchain.
During the hearing, two sides of the argument emerged. Brooks took the side of PoW (the mechanism behind Bitcoin), while Juels took the side of PoS (this is ironic since Juels coined the term PoW back in his 1999 paper).
Brooks argued that PoW is the only completely trustless system of peer-to-peer exchange, which comes about due to the nature of its blockchain protocols. In order to “hack” the system, one computer would have to go against 51% of the network’s computing power (making it impossible due to prohibitive costs). Although this calls for higher energy expenditure, it enhances the security of the network.
Despite this, Juels called out PoW for its inefficiencies. Over the years, the number of Bitcoin transactions has stayed steady while total energy consumption has increased (increasing the energy used per transaction).
“The Bitcoin network typically handles fewer than five transactions per second, and has an estimated peak capacity of seven transactions per second.14 In contrast, the Visa payment processing network handles roughly 1,700 transactions per second,15 with a claimed peak load of some 24,000 transactions per second.”
Bitcoin has developed multiple solutions (both Layer-1 and Layer-2) for this issue. As a Layer-1 solution, improved ASIC chips (physical mechanisms that facilitate mining) have made mining machines more effective. According to Brooks, Bitfury’s next-generation ASIC chip is 6100% more energy efficient than the first ASIC chip from 2013.
If the units that make up mining machines have become more efficient, then the whole system would have also increased its efficiency. On top of improving the mining system, these new ASIC chips can now be used outside of crypto, like in the computing industry, illustrating the spill-over effects that can occur from crypto mining.
On the other hand, Juels argues that PoS blockchains are inherently faster, provide more utility, and use less energy than Bitcoin. Considering how PoS systems deal with billions of dollars worth of transactions, it also becomes hard to argue that they are less secure than PoW systems.
As several members of Congress like Lori Trahan (D-MA) and Diana DeGette (D-CO) brought up, both mechanisms have faults around centralization. In PoW, four entities, called mining pools, control a majority of the mining power and, therefore, the whole system. Whereas, PoS creates an electronic means of traditional corporate governance, and those with the most shares have the control.
Understanding the tradeoffs between PoW and PoS helps to evaluate the productivity of the blockchain, and contributes to the discussion of “wasteful” energy use.
Bitcoin mining’s positive impact on energy
In his testimony, Brooks outlined several positive aspects of Bitcoin’s energy consumption. Most of these points did not see the light of day during the hearing, so I felt compelled to briefly discuss them here.
Bitcoin will try to minimize its costs by using low cost energy. Contrary to what most would expect, fossil fuels don’t always provide the lowest-cost alternative. In fact, as several witnesses indicated, the lowest-cost energy comes from consuming excess capacity (any left over energy that would have gone to waste).
Brooks and Belizaire both brought up the unprofitable nature of wind and solar power plants because production has often exceeded demand. In 2020 in California alone, 1.5 million MWh of solar production (5% of total) was wasted. At some peak hours, this figure rose to as much as 15%.
“Every week, I talk to developers of clean power projects: Independent Power Producers looking to build wind farms and solar farms. Here’s what they tell me, and what their views say about the marketplace. First, they are all worried about revenue. The grid is so congested that their investment returns are uncertain because of high levels of curtailment. Second, I’m not the first bitcoin miner they’ve spoken to, which tells me that clean power developers are beginning to view data centers like ours as a path to additionality. In other words, our data centers are the catalyst for building a clean power plant that wouldn’t otherwise get built.” - Belizaire
By establishing partnerships between bitcoin miners and renewable energy sources, these energy developers could finally become profitable. Profitable business means more people will enter the renewable energy industry, expanding it throughout the US.
US and crypto mining
The US is the most equipped to provide renewable energy for the cleanest mining. It does this by making renewable energy more affordable and accessible as well as through its strict energy regulations to oblige certain environmental standards.
If the partnerships between crypto mining and renewable energy production facilities happen, then miners will move to those energy sources. By facilitating or incentivizing such partnerships, the US government could make the US a haven for mining. This would not only bring in more tax dollars but would reduce the total environmental impact of mining.
Without such intervention by the government, the crypto industry will still continue to innovate to reduce its energy consumption and costs. Such developments can already be seen with immersive cooling technology as well as the ASIC chips discussed earlier.
Concerns about crypto mining energy usage will decrease as technology progresses, and crypto mining will ensure this innovation happens.
Crypto news of the week
The excitement over the growing crypto industry can be felt around the world, and I want to bring some of that enthusiasm and passion to you. Here are the top 10 news stories of the past week:
“Rio de Janeiro mayor plans to invest 1% of the city's treasury in crypto” (This comes on top of earlier news - “Miami wants to become crypto's financial capital. New York's response? Bring it on”)
“Walmart filings reveal plans to create cryptocurrency and NFTs”
“Tennis Australia goes metaverse as the Australian Open gets underway”
“NCR acquires LibertyX and integrates crypto services into 750,000 ATMs worldwide”
“Mercedes partners with NFT artists to celebrate G-Class series” AND “To the moon and back: Lamborghini presents the exclusive Space Key, Artwork paired with carbon fiber flown into outer space, part of the brand’s entry into the NFT world”
“Coinbase announces NFT marketplace partnership with Mastercard”
“Gucci releases ‘Vault,’ the latest fashion house metaverse play”
“Microsoft buying Activision is a $68.7 billion bet on the metaverse”
“Facebook and Instagram are reportedly exploring plans to make, showcase, and sell NFTs”
“Portugal opens first physical store for buying and selling of Bitcoin”