Can Bitcoin Solve Its Green Problem?

Iceland — known for its stunning landscape, Instagramable hot pools, and over-representation in world strongmen competitions.

Its also a good place to launch your new bitcoin mining operation.

For bitcoin miners, cost vs reward is everything. If you’re lucky to get your hands on in-demand miner hardware, chances are you might not even recoup on your investment.

A simple rig of GPUs (now an older form of mining technology) can set you back £25k on Amazon. Then there’s the daily running costs, i.e. power. You’ll need a lot of it.

Location then comes in. Finding an area that will allow you to run mining off its power grid is a good start (recently, New York state passed legislation to ban commercial miners from running due to local energy constraints).

And to run at a profit, you better find somewhere cheap— like Iceland.

Not only will you be paying for cheaper energy near the Artic thanks to local geo-thermal resources, you can save on running expensive cooling systems for your hardware (simply leave the back door open).

This is the new reality as today’s bitcoin miners take drastic moves to stay competitive and reduce costs.

Bitcoin has an energy problem. By now most of us have heard that bitcoin mining power consumption is equal to small nations like The Netherlands. That was enough for Tesla to recently pull bitcoin as a purchase medium citing energy concerns.

Bitcoin’s green problem shows no signs of slowing down. As the below graph illustrates, the crypto-currency is set to overtake larger economies in energy consumption and with subsequent Co2 emissions.

It then begs the question: can bitcoin reverse the course and become greener? And will Elon allow us to buy Teslas again?

The Evolution of PoW

In 2009, Mr Nakamoto, the founder of bitcoin, smiled as he fired up his late-model laptop.

Up to now, its CPU had managed to run well under the strain of Microsoft Word while keeping multiple Solitaire games open.

His CPU however would have a very new and special task today. Mining bitcoin.

Proof-of-Work (PoW), the ingenious mining concept built in to bitcoin’s blockchain by Satoshi Nakamoto, is a work for a reward type model. Mining computers (nodes) must perform complicated calculations known as hashing to play along.

In simplistic terms, every node will pull together the latest bitcoin transactions from the last 10 minutes in to a block. Then it’s a race. The first node to find the special hashing number dedicated to the next block in the chain wins.

After matching the winner number, the miner’s block will be the first to be accepted by the blockchain and the victor will be showered with new bitcoin.

Back in 2009, hashing calculation was fairly simple and Nakamoto’s CPU didn’t burn up. However, the difficulty level for bitcoin miners never was never set to stay the same.

Here lies the root of bitcoin’s energy issue today.

Bitcoin’s founder, getting a sense that his (or their) beloved crypto-currency might find some degree of popularity, built in an auto-difficultly adjustment feature. Its design ensures that each block is created at an average pace of 10 minutes.

If the pace is getting too fast, that means the hash calculation for miners is too easy and subsequently the difficulty is automatically increased. Equally if the pace is becoming slower then the difficulty is turned down.

This difficulty is checked and adjusted every 2 weeks.

While this is a brilliant concept to factor in fairness through future competition, popularity and technology advances, I don’t think Mr Nakamoto ever expected the competition of bitcoin mining to evolve in to a cold-war race so quickly.

To provide context, the current block bingo reward sees miners take 6.25 bitcoin. That’s USD$280,000 up for grabs every 10 minutes (August 2021).

In 2010, as bitcoin began to increase in market capitalisation — early miners evolved from CPU power to repurpose their computer graphic cards (GPUs) — sacrificing their Call of Duty gameplay in order to perform more high powered PoW calculations.

As graphic card manufacturers danced their way to the bank, further enhancements to mining technology came to fruition. Next was the season of field-programmable gate arrays (FPGAs), closely followed by today’s era of application-specific integrated circuits (ASICs).

ASICs are integrated circuits, enormous networks of mining power pooled together. If a given ASIC wins a specific block, it will reward its members according to how much mining effort they contributed to the network ‘win’.

As a miner, to go it alone with your second-hand Amazon rig against these ASICs means that you’ll probably lose — even if you’re in Iceland.

Solution 1 — Regulation

Despite China’s recent crackdown on bitcoin exchange and associated mining activity, as the above graph of global ASICs reveals, China dominates the mining landscape for bitcoin.

By 2024, bitcoin mining within China alone is predicted to consume 296.59 Twh and generate 130.50 million metric tons of carbon emission. For perspective, that’s almost as much as the UK, a G7 country.

What doesn’t help is China’s reliance on coal power.

According to a nature.com report released in June 2021, an estimated 40% of mining operations in China are located in areas fully dependent on coal energy.

While this remains a bleak reality, there remains some optimism for green proponents after the Chinese Communist Party has effectively declared war on bitcoin.

Bitcoin exchanges and related activity has been banned. To add insult to miner injury, coal power is becoming increasingly more expensive thanks to tougher regulation spurred on by China’s commitment to the Paris Climate Accord.

Once Chinese based ASICs realise that their costs exceed revenue, they’ll move or shut down completely. If and when this event occurs, expect bitcoin’s hash rate difficulty to plummet globally — meaning less competitive power required to solve the next block.

Signs of this regulatory effect has already been seen as an investigation by the Economist found a sharp rise in Chinese ban enforcement through dedicated government taskforces.

There’s even an 0800 number to snitch on local miners in your area.

While regulation could soon take hold and bring overall bitcoin energy consumption down — environmentalists say that if China’s bitcoin coal dependency problem is not solved urgently — the Co2 damage may be irreversible.

Solution 2 — Decreased Rewards

Bitcoin’s future value will always be tied closely to supply and inflation. Satoshi realised this by coming up with another creative idea that is wired in to bitcoin’s blockchain.

Not to be outdone by the Olympics or presidential races, every four years bitcoin hosts its own publicised event. Mining rewards for each block are halved. This means approximately by the year 2140, the supply for bitcoin will reach its maximum coin circulation of 21 million.

That means in 2140, our great great mining grandchildren will face a new reality. Rewards will solely be limited to transaction fees, these service costs are already charged by nodes against bitcoin users for verifying blocks.

This change is likely to put off futuristic miners due to the reward vs cost ratio. While these fees can be increased by the nodes — higher transaction costs will undoubtedly impact bitcoin’s price.

With mining rewards decreasing over time until 2140, it would appear that incentives for miners to run expensive operating farms may become further limited. However that all depends on price. This cause and effect is summarised nicely by Investopedia.com:

The reward is halved → half the inflation → lower available supply → higher demand → higher price → miners incentive still remains, regardless of smaller rewards, as the value of Bitcoin is increased in the process.

So ‘bitcoin halving’ is likely to cause more energy consumption from triggering an increasing bull-run price every 4 years. This already seems to be the case following bitcoin’s last two halving events during its young life.

Our green hope in the decreased rewards solution will therefore rely on a) bitcoin’s price staying the same / decreasing over time, or b) waiting until 2140…

Solution 3 — Proof-of-Stake

Without interference from regulators or with changes to bitcoin’s own protocol, PoW will continue to increase competition and technology; meaning hashing calculation difficulty will likely go in one direction — up.

There remains hope however in potential solutions to limit the environmental effects of PoW. That is by changing bitcoin’s own protocol (or brain) to reward miners differently.

Bitcoin’s protocol is changed through a process of democracy. Miners vote on recommended changes (a Bitcoin Improvement Proposal (BIP) can be uploaded by any user), and if a 95% approval vote from the community is achieved then the update becomes accepted.

This community consensus system has resulted in over a dozen ‘hard forks’ (required during a major change in protocol) within bitcoin’s blockchain already.

One such update that is causing environmental optimism across other cryptocurrencies, including bitcoin’s closest rival ethereum, is Proof of Stake (PoS).

As defined by Investopedia.com, the PoS concept states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have.

Under PoS, your mining potential is limited by the percentage of coin ownership you hold. So for example if you own 4% of the total cryptocurrency, you are able to mine and verify 4% of the transactions.

This allows for a number advantages over the PoW model. Primarily the fact that everyone can chill out for a second. It doesn’t matter that you have the latest and greatest mining equipment at your disposal and prepared to drain half of Iceland’s natural energy supply.

At face value you might think that PoS represents an evil capitalist regime — power given to those that can most afford it which inevitably leads to corruption and mismanagement of the blockchain.

However the genius of PoS operating on a distributed ledger results in the opposite being true. That is, the more coins you hold the less you will wish for any type of foul play. As this will directly affect the price and subsequent value of your holding.

There are a few potential risks to PoS protocols, including the ability to create new forks (conflicts) within the blockchain to generate double spending (since there are minimal costs to launch an attack like this compared to PoW).

I mentioned ethereum, bitcoin’s rival, whose developers are working around the clock to transfer its protocol from PoW to PoS by the end of 2021. The potential result? An estimated 99.99% saving in energy costs.

PoS based coins are known as green crypto for a reason (see nxtcoin, peercoin and cardano).

Apart from serious regulation crackdowns, Proof of Stake appears to be bitcoin’s one great green hope. Getting there is a different story — perhaps an impossible technical feat — but one that must be tried.

It also means that Satoshi Nakamoto can go back to mining on his laptop… and move to a warmer climate.