PROOF OF WORK: REFRAMING THE BITCOIN ENERGY DEBATE (PART I)

[IN CRYPTO | Sunday, 4th February, 2024]

⬆️ UPVOTED | PROOF OF WORK: REFRAMING THE BITCOIN ENERGY DEBATE (PART I)

This week, I’ve decided to begin another two-parter, delving into the thorny topic of Bitcoin’s energy profile. To date, I’ve avoided covering this, not because it’s not important, but because it’s an emotionally-charged issue for many — tied into all kinds of other potentially polarising stuff like climate change, global governance and ESG. It’s a bit of a thankless task, in other words — hence my hesitancy.

It’s also no great secret that the Bitcoin network is a massive consumer of electricity, so it’s a difficult one to tackle (as an advocate of the technology) without sounding like an apologist. Indeed, its underlying ‘Proof of Work’ consensus mechanism is literally built upon the expenditure of significant energy resources by the network’s miners — who are (in simplified terms) rewarded for solving complex, energy-intensive mathematical puzzles as an incentive for securing the network.

And the more energy Bitcoin consumes, the more secure the network becomes. Put simply: Bitcoin’s energy profile is a feature of the system — not a bug. Hence, much has been made of the network’s power-hungry characteristics in recent years by the mainstream media as the network continues to grow — with headline-driven stories that depict Bitcoin as a smokestack-hugging, hydrocarbon-guzzling pariah, and even (on the odd occasion) as an existential threat to Gaia herself.

The purpose of this piece, therefore, is not to deny the energy-intensive nature of Bitcoin (largely because it is undeniable) — but rather to present the flip side of the story, the one that doesn’t get adequately covered by the mainstream media outlets, for a whole host of reasons, not least of which is the topic’s complexity; as well as to underscore some of the broader (hidden) agendas at play, as Bitcoin increasingly finds itself in the crosshairs of the central bankers and their government agents — especially concerning the legitimacy of its all-important ‘Proof of Work’ consensus mechanism, which provides a solid, incorruptible foundation for a viable alternative to the existing (and increasingly indefensible) fiat Ponzi scheme.

So, before we get into the weeds, I’d like to begin by first placing Bitcoin within a much broader historical context — as a truly revolutionary, disruptive, transformational technology, which seriously challenges the dominance of some of the most deeply entrenched, incumbent power structures in the world...

BITCOIN AND THE REFORMATION

On October 31st, 1517, the German monk and theologian Martin Luther affixed his Ninety-Five Theses to the door of the Castle Church in Wittenberg, Germany. And whilst nailing a treatise to a church door conjures up (for me at least) that sense of a dramatic scene from a movie - perhaps the equivalent of Rosa Parks refusing to give up her seat on that historic bus journey in Alabama in 1955 (i.e. a poignant and courageous act of defiance against an illegitimate authority) - the reality probably wasn’t quite as charged with symbolism as we might imagine, since the posting of announcements and circulars related to theological discourse in such a fashion was entirely commonplace at the time. In other words, the church door in Wittenberg regularly served as the public bulletin board of its day.

Furthermore, written in Latin, Luther’s theses were initially intended only to spark academic discourse within the local university community (where he was a professor of moral theology). But irrespective, given the explosive nature of the content, Luther was seriously sticking his neck out by posting them in the public domain. In any event, what transpired was a perfect storm of sorts: Johannes Gutenberg’s prior invention of the printing press with movable type (coupled to a growing appetite in Europe for reformist ideas) facilitated the work’s rapid dissemination in numerous modern languages, including German — thus making it accessible to a much broader audience than would previously have been possible (during the medieval era of handwritten manuscripts).

So, as far as the Roman Catholic Church at the time was concerned, October 31st 1517 was the fateful day that Pandora’s box was officially opened. Once out in the wild, Luther’s theses represented a full-frontal assault on its control system, effectively challenging its longstanding ‘monopoly on God’ in the Western world. For example, Luther emphasised the concept of salvation by faith alone, rather than by works, whilst openly criticising the sale of Indulgences — a snake oil cash cow dreamed up by the Catholic Church as a proxy “to reduce the amount of punishment one has to undergo for (forgiven) sins" (if that isn’t an appalling contradiction in terms).

Hence, Martin Luther’s 16th Century blog post contributed directly to the undermining and (note this word for later reference) disintermediation of the Catholic Church, by fostering a spirit of religious freedom and individualism — as well as ultimately leading to the separation of church and state (an outcome I would suggest we have much to be thankful for in the broader arc of historical affairs).

Fast forward to October 31st, 2008, exactly 491 years later to the day (an interesting coincidence, n’est-ce pas?)… when the pseudonymous Satoshi Nakamoto posted a 21st Century treatise (entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”) on a popular cryptography mailing list — the modern day equivalent of Wittenberg’s ancient church door.

In it, Nakamoto described (in 9 pages) the first fully functioning system for a new form of digital money (Bitcoin), which did not require the involvement of any centralised intermediaries to keep things honest (ho ho).

As I have mentioned in previous articles, this was a profound breakthrough, since Nakamoto’s white paper solved the perennial “double-spending” problem; and in doing so it provided a mechanism to accomplish the disintermediation (there’s that word again) of the existing centralised financial control system. And just as the printing press had facilitated the rapid dissemination of Luther's Ninety-Five Theses (contributing to their widespread popularity and sparking debates far beyond the academic circles of Wittenberg), so the internet provided the frictionless medium for the dissemination of Nakamoto’s white paper — which spread like wildfire within the cypherpunk community.

The cherry on top? Some 15 years on from that historic moment, Bitcoin (which was physically launched only a few short months later, in January, 2009), is showing early but clear signs of challenging the state’s ‘monopoly on money’ — just as Luther had challenged the Catholic Church’s ‘monopoly on God’ some five centuries earlier. And, perhaps in a similar vein, the ultimate end game in this case may be equally profound: the complete separation of the state from money.

Now, whilst this analogy makes for an unusual introduction to a two-part article concerning Bitcoin’s energy credentials, I can assure you there’s a clear rationale behind it. The bottom line is this: in both instances, we are talking about a serious challenge to an incumbent, centralised power structure. And the point of teasing out the analogy to the extent that I have is that I believe it would be hugely naive of us to assume that such challenges are dealt with lackadaisically when they are deemed to pose a significant threat to the status quo — which I would argue Bitcoin clearly does. It’s a simple case of self-preservation: incumbent power structures will inevitably use every means available to preserve their sphere of influence and control — and that includes kicking, biting and scratching.

The Catholic Church, for example, didn’t just say “oh bugger… I wish we’d seen that one coming, our bad…” and carry on with the important business of selling papal indulgences. Martin Luther was promptly excommunicated by the Pope and declared an outlaw by the Holy Roman Emperor. And by 1521, he was such a marked man that he was forced to take refuge at Warburg Castle with Frederick III, Elector of Saxony — one of the first German princes to support the ideas of the Protestant Reformation. Perhaps Nakamoto was a student of history, taking no such personal risks — and instead choosing to disappear, undoxxed, into the ether…

But Luther’s excommunication and outlaw status was just the opening salvo in a much longer war. A Catholic Counter-Reformation was initiated — a sophisticated, multifaceted response intended to reassert the authority of the Catholic Church. The Counter-Reformation’s various fronts included: the Council of Trent (1545-1563), a series of meetings held by the Catholic Church to address doctrinal and disciplinary issues (in other words to make sure everyone understood the consequences of not doing exactly what they were told to do); the formation of the Jesuits in 1540 (effectively the Catholic Church’s secret intelligence service); the creation of the Index of Forbidden Books, a list of publications deemed heretical or contrary to Catholic doctrine; an intensification of the activities of the Inquisition; and a series of military conflicts, including the Thirty Years' War (1618-1648); as well as a variety of diplomatic and political efforts, which included curbing the spread of Protestantism through alliances with Catholic monarchs.

I should probably point out at this stage - given the fact that some readers may already regard aspects of the above as being a touch confrontational - that I don’t have a dog in this particular fight. I’m a Catholic by birth (of Irish descent), and I’ve always been deeply suspicious of any institution that claims to play an intermediary role between “we the people” and God here on Earth — be it the Church of England or Rome…

Anyway, I digress… back to the point at hand: this may sound like a bit of a stretch to some, but I would argue that a comparable crypto-centric ‘counter-reformation’ has been underway for a good few years now — in an effort to undermine and delegitimise the challenge that Bitcoin and other cryptocurrencies pose to the financial status quo. Admittedly, things haven’t been going so well of late for this particular counter-reformation, with the rapid adoption of crypto by people everywhere, plus the recent arrival of Wall Street on the scene — who have hitherto sat on the sidelines, witnessing the emergence of an entirely new asset class; and who (now that this asset class has comfortably survived a series of near-death experiences) want to get their hands on a decent chunk of the pie.

But that doesn’t mean that the war is over — and my strong sense is that there may be many more battles to come…

WARS AND RUMOURS OF WARS

Just by way of a brief recap, recent (crypto-related) counter-reformational skirmishes have included:

• Operation Chokepoint 2.0, with the US administration using its considerable clout to engage in a covert war on crypto, including trying to shut down the on-ramps and off-ramps between crypto and the traditional financial sector, in an effort to deprive it of oxygen (i.e. starve it of liquidity);

• Elizabeth Warren’s increasingly rampant crusade against crypto via her falsification and misrepresentation of facts related to the role of crypto in the financing of terrorism (which, when compared to the use of fiat currency, is demonstrably a complete nothing-burger);

• The widespread fast-tracking of the central bankers’ version of digital currencies, in the form of central bank digital currencies (CBDCs), alongside state-sanctioned inter-ledger protocols to make the whole system an interoperable walled garden — all of which is the complete antithesis of what crypto is about (and which basically represents an attempt to co-opt or subvert crypto in order to substantially increase state and central bank control);

• Attempts to ring-fence the vast majority of existing cryptocurrencies and tokens by labelling them as unregistered securities, as per the SEC’s ongoing enforcement actions (although there has been significant judicial pushback, and Bitcoin gets a free pass because of its truly decentralised nature and the fact that there’s nobody to file suit against);

• And finally, the “orange coin bad” narrative surrounding Bitcoin’s carbon footprint, which basically argues that Bitcoin shouldn’t exist (without its code and the underlying protocol being significantly altered) — for pressing (perhaps even existential) environmental reasons.

So, in relation to the last of those current battlegrounds - Bitcoin’s environmental impact and its use of substantial energy resources - I shall return next week, to get into much greater detail, having set the broader historical backdrop here. The bottom line is, I believe, that we should be extremely wary of taking any of the establishment-promoted arguments decrying crypto (and especially Bitcoin) at face value.

Finally, in closing out Part I, I would like to make one general point on Bitcoin’s environmental impact so I don’t have to waste time on it next week…

BITCOIN IS BAD FOR THE ENVIRONMENT, COMPARED TO WHAT?

It’s a profoundly relativistic thing — suggesting that a form of technology is inherently bad because it consumes a lot of electricity (a substantial proportion of which still comes from the burning of fossil fuels). This cannot be taken seriously as an argument when it is stated as some kind of absolute, in isolation, and without reference to its utility — or without comparison to other things. So I would say, compared to what? Compared to the status quo with EVs? Or the server farms run by the social media leviathans? Or the explosion in Ai we’re currently living through? Or the existing financial services sector? Or the military industrial complex? Or space exploration? Or the people that take private jets all over the world to lecture normal people (who have never seen the inside of a private jet) about their carbon footprints? Compared to what?!

All technologies have tradeoffs. And whether or not the benefits (to both society at large and sovereign individuals) afforded by Bitcoin outweigh the energy it consumes is ultimately a subjective question. But for what it’s worth, here’s my personal opinion: YES, it is most certainly worth it. And in spades… ♠️♠️♠️

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US GOVERNMENT SURVEYS CRYPTO MINING’S IMPACT ON ELECTRICITY USE

Erm, in light of the above… no comment!

In brief:

The United States Department of Energy (DOE) has begun a mandatory information collection drive to develop a “baseline snapshot” of the energy consumption of the country’s cryptocurrency mining industry.

As Cointelegraph previously reported, the DOE’s Energy Information Administration (EIA) will carry out a provisional survey to measure the electricity usage of local mining firms. The DOE’s statistics agency received approval for its “emergency request” to collect data in January 2024.

Cointelegraph contacted the EIA to confirm finer details of the data collection drive and its reasoning. EIA media relations representative Morgan Butterfield cited a memorandum from the agency’s Administrator, Joe DeCarolis, requesting emergency clearance, which outlines the organization’s belief that the resurgent price of Bitcoin (BTC) is driving increased mining activity in the United States:

“As evidence, the price of Bitcoin has increased roughly 50% in the last three months, and higher prices incentivize more cryptomining activity, which in turn increases electricity consumption.”

Link to full story: https://cointelegraph.com/news/us-crypto-mining-electricity-survey-energy-department

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FTX CREDITORS LIKELY TO BE PAID IN FULL

Very few people expected this. One of FTX’s Ai-related investments paid out big time. But it’s ‘paid in full’ according to the value of digital assets in the immediate aftermath of the bankruptcy (which shook crypto to its core) — in values were considerably lower compared to where they are now in the overwhelming majority of cases. But regardless, I would still classify this as a seriously positive result for FTX’s creditors…

In brief:

FTX, the bankrupt cryptocurrency exchange that was run by Sam Bankman-Fried, said it expects to fully repay its customers, according to a court hearing.

However, the full recovery of customer assets is – unfortunately for those waiting for their money – based on the point of FTX’s actual bankruptcy, when the markets were already in turmoil. That date was preliminarily approved by U.S. Bankruptcy Judge John Dorsey, and it's a point of contention for some claimants.

Bitcoin’s price has rebounded to more than $43,000 as of publication time, up 110% from its price of roughly $20,500 at around the time of FTX’s collapse in early November.

“Many of those claims are premised upon currencies which declined dramatically in value in that tumultuous period leading up to the petition date,” FTX Creditor Committee lawyer Kris Hansen said Wednesday during the hearing.

Link to full story: https://www.coindesk.com/policy/2024/01/31/ftx-expects-to-fully-repay-customers-but-wont-restart-defunct-crypto-exchange/

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POLYGON LABS TO CUT 19% OF STAFF

This news came as a bit of a shock to many. There’s a perception within the industry that employment prospects seriously pick up heading into a bull market. But this story runs counter to that narrative, with many tech companies (not just in crypto) currently laying off staff. And perhaps it signals much tighter controls on finances for large crypto companies this time around…

In brief:

Polygon announced that it laid off 19% of its workforce, or 60 employees, in a blog post on Thursday.

The post, written by CEO Marc Boiron, said that the decision to lay off staff stems from the company’s attempt to right-size, rather than from the company’s financial state. 

“To move as ambitiously and nimbly as possible where everyone is able to take ownership of what they’re doing, we must create an efficient surgical team, with significantly less bureaucracy,” Boiron said in the post.

“Right-sizing for the sake of enhanced performance, rather than for financial reasons, may seem unconventional. The reality is that achieving our mission often demands challenging decisions, and while difficult, the Founders and I agree that we must move forward in a thoughtful way that gives us the greatest chance to execute successfully,” he added.

Boiron added that the team rapidly grew during the last bull market, which “diluted” the company’s goals of “extreme focus, diligence, efficiency and agility.”

Link to full story: https://blockworks.co/news/polygon-layoffs-right-size

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BITCOIN EFTS COULD ACTUALLY BE GOOD FOR THE ENVIRONMENT

On op-ed by Elliot David arguing that spot Bitcoin ETF providers (BlackRock, Fidelity, etc.) have an opportunity “to directly incentivise bitcoin miners to utilise clean energy sources and adopt sustainable practices”…

Intro:

The quest for a US-listed spot bitcoin exchange-traded fund is almost as old as the asset class itself. The US Securities and Exchange Commission has rejected dozens of applications in the last decade. 

But with these ETFs now newly approved, a whole new class of passive and active investors is exposed to bitcoin for the first time — and some of them may ask, will spot bitcoin ETFs harm or help the environment?

I believe that ultimately, this new wave of bitcoin adoption could be an incredible addition to forging a clean energy future.

As spot bitcoin ETFs launch in the US, there will be massive inflows of capital to bitcoin from both retail and professional investors. This is an opportunity to align these investments with our climate and clean energy goals. The injection of funds into the bitcoin market can serve as a driving force for sustainable development, specifically in the clean energy sector…

Read in full: https://blockworks.co/news/bitcoin-clean-energy-etfs

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RIPPLE CO-FOUNDER REPORTS UNAUTHORISED ACCESS TO SOME PERSONAL XRP ACCOUNTS

This story had Crypto Twitter twitching their proverbial net curtains. How could a crypto OG like Chris Larsen not have robust security measures in place? Was he holding over $100m worth of XRP *not in cold storage*, or what exactly? It’s a reminder that self-custody of digital assets may be the only way you can be certain that your assets belong to you — but on the other hand self-custody, if not done properly, may be the weakest link…

In brief:

Ripple co-founder Chris Larsen said Wednesday that there had been "unauthorised access" to "a few of my personal XRP accounts." His comments followed a post on X from crypto sleuth ZachXBT, who said that it appeared Ripple "was hacked" for about 213 million XRP worth $112.5 million. 

"Yesterday, there was unauthorised access to a few of my personal XRP accounts (not Ripple)," Larsen said. "We were quickly able to catch the problem and notify exchanges to freeze the affected addresses. Law enforcement is already involved." 

Larsen later added, "This is an isolated incident, and Ripple wallets are secure / were never compromised. We’ve confirmed nearly all the affected funds were converted out of XRP. We’re working with law enforcement and have been advised that a significant portion of funds have been frozen, and are pursuing the remainder aggressively."

Ripple CEO Brad Garlinghouse minced no words regarding the incident. "Given some irresponsible speculation and reporting, I want to reiterate that NO Ripple-managed wallets were compromised. Full stop," he wrote on social media.

Link to full story: https://www.theblock.co/post/275367/ripple-co-founder-reports-unauthorized-access-to-some-personal-xrp-accounts

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VISA ENABLES CRYPTO WITHDRAWALS ON DEBIT CARDS IN 145 COUNTRIES

In brief:

Global payment giant Visa is doubling down on cryptocurrency adoption by enabling another method to exchange crypto to fiat currencies without using a centralised exchange.

Visa has partnered with the Web3 infrastructure provider Transak to introduce cryptocurrency withdrawals and payments through the Visa Direct solution, the firms announced on Jan. 30.

The new integration allows users to withdraw cryptocurrencies like Bitcoin (BTC) directly from a wallet like MetaMask to a Visa debit card. Available immediately, the integration enables one to exchange crypto to fiat and pay at 130 million merchant locations where Visa is accepted.

“By enabling real-time card withdrawals through Visa Direct, Transak is delivering a faster, simpler and more connected experience for its users — making it easier to convert crypto balances into fiat,” Visa Direct’s North America Head Yanilsa Gonzalez-Ore said.

The collaboration significantly expands the number of options to convert crypto into fiat currencies and brings a big milestone in bridging the crypto and traditional finance worlds, Transak’s marketing head and investor relations lead Harshit Gangwar noted.

Link to full story: https://cointelegraph.com/news/visa-crypto-withdrawals-cards-145-countries

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CRYPTO GOES COMMERCIAL: GOOGLE POLICY UPDATE WELCOMES SPOT BITCOIN ETF ADS

In brief:

Google’s latest policy update, effective January 29, marks a significant shift in what ads are allowed to be shown. Google is now opening its vast ad network to certain crypto products, including the recently-emerged spot Bitcoin exchange-traded funds (ETFs).

This development is not just a nod to the growing mainstream acceptance of crypto but also a pivotal moment for investors and the finance sector at large.

Link to full story: https://beincrypto.com/crypto-commercial-google-policy-update-spot-bitcoin-etf-ads/

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That’s all for now — until next week! ✌️😉