The Carbon Coin

As we move into a new age of Capitalism, renewable energy is at the centre of the discussion on how best to navigate the transition. While the advent of DeFi (decentralised finance) in the form of Bitcoin and Blockchain holds much promise for the technology of the future economy, it’s also at the source of the great carbon debate, given how much energy it consumes. Could progress in this area mean that technology becomes the solution to the very problems that it causes?

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Classifying Crypto Carbon

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What even is cryptocurrency? Despite the name, the many functions of this multi-purpose technology are still evolving. Suffering from more than a few reputational difficulties given its ties to money laundering and black market dealing (which are really no different from the mainstream), it is rapidly morphing out of its dark web days.

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Other revolutionary protocols such as Ethereum have emerged with new bags of buzzwords including ICOs and Web 3.0. The merger of digital identities, smart contracts, censorship resistance, and marketplaces makes this a complex ecosystem. The Internal Revenue Service (IRS) sees cryptocurrency as property, the Securities Exchange Commission (SEC) as securities, the Commodity Futures Trading Commission (CFTC) as commodities, and the Financial Crimes Enforcement network (FinCEN) as currencies. The list will continue to go on.

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The Bitcoin Battery

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Ultimately, the identity of the ecosystem will be determined by its user-base. One such area in prime position for this metamorphosis is in relation to energy consumption. The formation of crypto relies on a group of ‘miners’, who are incentivised to collectively use their processing power to ‘mine’ coins such as Bitcoin. The problem is, this requires a huge amount of processing power. At the same time, demand may drive the transition of energy from fossil fuels to renewables.

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An example of somewhere that converts renewable energy into value is Iceland. It has vast amounts of accessible, inexpensive renewable energy in the form of geothermal energy. By using this to convert electricity into Aluminium, it can indirectly ship this energy around the world for profit. In this sense, Iceland’s Aluminium is like a battery - a stored potential of energy.

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Gold-Digging

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Crypto mining converts electricity into value, in the form of assets such as Bitcoin, Ethereum and so on. These assets can then be transported, transferred and transformed. However, unlike Aluminium which must be physically shipped to its final destination, crypto assets are programmable, and can move there instantaneously via the interwebs. The key properties of Bitcoin are that it's always on and permission-less, so there’s no need to find customers, and it's naturally seeking low-cost energy, so will always buy when the price is right.

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As data from the Cambridge Centre for Alternative Finance demonstrates, China is at the epicentre of Bitcoin mining. Sichuan province's hydro-capacity is double what its power grid can support, leading to lots of waste. Dams can only store so much potential energy in the form of water before they must let it out, and it’s an open secret that this otherwise wasted-energy has been put to use mining Bitcoin. If your local energy cost is effectively zero but you cannot sell your energy anywhere, the existence of a global buyer for energy is a godsend.

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As Bitcoin is a global buyer of energy at a fixed price, it makes sense for miners with very cheap energy to sell some to the protocol. This is why so many oil miners (whose business results in the production of lots of waste methane) have developed an enthusiasm for mining Bitcoin. From a climate perspective, this is actually a net positive. Given its properties, Bitcoin’s battery can assist renewable builds in a number of ways:

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Interconnection Queues: when you develop new energy resources, you must apply to get them connected to the grid. Texas alone has over 100GW of renewables in its queue - and these queues can take years to clear.

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Project Finance: renewable developers need capital to finance build-outs before they have customers. Bitcoin’s battery is always ready to be the first customer.

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Geographic Issues: sometimes the sunniest or windiest places are not the ones with the most customers, so it’s hard to justify the development of new renewables. Bitcoin’s battery solves this as a virtual transmission line.

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Timing & Grid Balance:  Bitcoin’s battery is ready to buy 24/7, turning up and down as needed and participating via direct power purchase agreements

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Cleaning The Grid: even outside of renewable generation, Bitcoin’s battery can help improve both emissions and the energy mix. Profits from converting energy into Bitcoin’s battery could be re-invested in on-grid renewables elsewhere.

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There are many ways in which these ideas can be leveraged and implemented, and we are just at the start of uncovering crypto’s potential, an ‘economic battery’ being one of them.

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The Energy Mix

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Another common mistake energy detractors make is to naively extrapolate Bitcoin’s energy consumption to the equivalent CO2 transmissions. What matters is the type of energy sources being used to generate electricity, as they are not homogeneous from a carbon footprint perspective. Even though lots of Bitcoin is mined in China, it’s not appropriate to map China’s generic CO2 footprint to Bitcoin mining.

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We also need to think about the long-term horizon. Coins only need to be issued once, and it’s better for the planet that they be issued when the coin price is relatively low, and the energy expanded to extract them commensurately low. If Bitcoin ends up being worth substantially more in future, the country will have received a huge return on investment.

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Bitcoin does consume a lot of energy and produces externalities in the form of CO2 emissions. This is not under debate. What the question actually boils down to relies on a kind of utilitarian logic, about which industries should be entitled to consume energy. Although in practice, no one reasons like this - or we’d probably be having the same discussions around the annual consumption of Christmas lights or the cost to power the data behind Netflix.

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Something duly purchased cannot, by definition, be a waste. These same arguments have been made countless times about perceived “costs” of the gold standard, and rebutted on similar grounds. Fundamentally, millions of individuals the world over still value physical, bank-independent savings, and as long as people value Bitcoin, so too will it hold value in our global belief systems.

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What the above demonstrates is that the Bitcoin-energy worriers need not despair. As the space continues to develop, so will solutions. For example if Bitcoin fans can be persuaded to use and value an alternative settlement medium - their best bet will be to devise a system that is even more secure, offers stronger assurances, settles faster, is more privacy preserving and is more censor resistant – all without using Proof-of-Work. Such a system would be miraculous, and the world awaits such developments with baited breath.

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