Think Bitcoin™ Issue #21
Last week's Congressional hearing; Energy misconceptions; why Proof-of-Work matters
Hey friends, welcome back to Think Bitcoin™. As always, if you have any questions or comments, feel free to reach out!
In this issue:
Headlines/Insights: Last week’s Congressional hearing on Bitcoin’s energy use and clarifying some common misunderstandings about how Bitcoin uses energy; why proof-of-work matters and is essential for Bitcoin’s use case
Content Round-Up: 3 articles
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Headlines and Insights
Congressional Hearings and Thoughts on Bitcoin’s Energy Use
On Thursday of last week, the House Committee on Energy and Commerce held a hearing on the environmental impact of crypto, which they dubbed “Cleaning Up Cryptocurrency: The Energy Impacts of Blockchains.” Prior to the hearing itself, the chairman of the committee, Frank Pallone, Jr., circulated a memorandum, which outlined his concerns about proof-of-work mining, Bitcoin mining in particular. The memorandum contained lots of problematic and misinformed assertions and, as Nic Carter (who has published extensively on the topic of Bitcoin mining) noted, relied on questionable, compromised, and discredited sources for its data. Which is to say it was not exactly a rigorous, good-faith, well-researched contribution to the discussion of environmental impact.
I want to touch on a couple of the very common misunderstandings about Bitcoin’s energy use that are especially prevalent among policymakers in D.C. and the media, as evidenced by Chairman Pallone’s memo and some of the dubious, clickbait news articles it cites. I’m not going to break the memo down line-by-line, but there are several points on which I think everyone interested in Bitcoin and eager to understand its environmental footprint needs to have clarity. I also want to share some general thoughts on Bitcoin’s energy use and some of the presuppositions harbored by lawmakers that I think are simply incorrect and/or unfair.
First, it’s common to seek (or outright assert) an energy-per-transaction figure for Bitcoin. These formulations get tossed around with maddening regularity in news coverage of Bitcoin, as well as in the written and public statements of lawmakers (e.g., Chairman Pallone’s memo).
Here’s the thing. Bitcoin does not have a per-transaction energy cost. Transactions themselves do not require energy consumption. At all.
Rather, the energy being consumed by the Bitcoin network at any given time is being expended to secure the network. The more energy being consumed, the harder it is for a malicious entity to acquire 51% of the hash power and attack the network.
Bitcoin miners use energy to hash strings of data (transactions) until they are able to achieve an output below the network’s target number at any given time. This is essentially just like rolling dice a bunch of times until you hit a specified number. As we’ve covered more extensively in the early issues of this newsletter, miners use computer power to make these “dice rolls” until they hit a number that is below the target number. If they do so first, they win the right to publish the next block of transactions. If those transactions are verified by the rest of the network and confirmed as valid, the winning miner gets a block reward, which is a specified amount of new bitcoins.
For the purposes of this discussion, it’s important to note that when the winning miner publishes a new block, that block can be totally full with transactions or only less full with transactions. The number of transactions in a block can vary. Whatever the case may be in terms of number of transactions within a block, the amount of energy being used by the network at that time is not dependent or related to the number of transactions going in the block. Rather, it’s related to the amount of energy being used to hash, which is to say, the amount of energy being used to find an output below the target number.
Lyn Alden uses two great analogies for this concept in her article, “Bitcoin’s Energy Use Is Not a Problem. Here’s Why.”:
As mentioned earlier, this expenditure of energy secures the network. For someone to attack the network and control what transactions get published they would have to commandeer more than 51% of the network’s hashing power, meaning 51% of the electricity being used by the network. The more energy being used, the more prohibitively costly this becomes, which is a good thing.
As Bradley Rettler succinctly puts it (in reference to Chairman Pallone’s mistaken assertion):
Next, Chairman Pallone avers in his memo that “validation mechanisms that use less energy, such as Proof of Stake (PoS), exist, and demonstrate that exponential energy consumption is not necessary for cryptocurrencies to function.” This mistakenly assumes all cryptocurrencies are attempting to perform the same (or similar) function.
Bitcoin is unique among cryptocurrencies in that it aspires to be sound money. Many other cryptos do different things and aspire to fulfill different use cases, but no crypto is utterly, totally intended to function as sound, unmanipulable money. In order for money to be sound, it needs to (a) not be printable and (b) be unmapiulable by powerful parties, which is to say those with greater wealth should not be able to exert greater influence on the rules of the monetary network, which is the case in our current fiat system. In order for Bitcoin to be unmanipulable, it needs to be trustless and decentralized. And the way it stays trustless and decentralized is by requiring real-world energy use.
Proof-of-stake, as Brian Brooks testified, is an inherently different framework, and, I would argue, one that is not conducive to or designed for the purpose of being a global, sound monetary network.
Proof-of-stake means the parties who own the most exert (or are able to exert) the most control over the network. This is not a categorically bad thing and there are plenty of scenarios in which proof-of-stake networks are useful and very salient practical reasons for this shareholder model.
However, sound money is not one of those scenarios. Sound money cannot abide, facilitate, or create any semblance or vestigial whiff of a Cantillon Effect. And this is what lawmakers fundamentally misunderstand when they suggest that Bitcoin’s proof-of-work consensus mechanism could simply be subbed out for a more environmentally friendly proof-of-stake mechanism. Proof-of-stake is definitionally contra to the entire raison d’etre of Bitcoin.
This also means that when we consider Bitcoin’s energy consumption we must take into account the purpose that Bitcoin serves, the value of that purpose, and the productivity it creates. We should not simply say well, it uses a lot of energy and therefore is bad. We should be asking to what end does it use energy, and how does it compare, productivity-wise, to comparable energy uses serving comparable ends.
Brian Brooks encouraged the committee to compare Bitcoin to gold mining or the traditional banking system in terms of energy use and productivity:
Speaking of productivity, as Nic Carter, notes “energy associated with Bitcoin mining is roughly equivalent to the energy consumption of zinc mining and refinery, and less than the energy associated with the extraction of either copper or gold. It consumes the rough equivalent of the energy associated with running domestic tumble driers in the U.S. alone, and one fifth the energy used for domestic refrigeration.”
In previous issues I have discussed and linked to resources about Bitcoin mining’s growing use of renewable energy sources, particularly as compared to general energy use in the U.S., so I won’t go into it again now. I will, however, leave you with one last quote from Brian Brooks’ testimony:
The point of all of this, again, is just to provide some basic clarification on some of the misleading assertions that are becoming ubiquitous in the discussion around Bitcoin’s energy usage.
For a deeper dive into how Bitcoin mining actually strengthens the U.S. electricity grid and incentivizes energy practices that actually move us toward more renewables and less waste, please check out the Nic Carter article linked below in the Content Round-Up.
Content Round-Up
1. “Bitcoin Mining is America’s Most Misunderstood Industry,” an article in Newsweek by Nic Carter. Bitcoin’s energy usage is obviously a hot topic, and it appears to be the preferred angle of criticism for particular politicians. Bitcoin itself is, per Congress’s own admission, not very well-understood in Washington D.C. Combine this new, seemingly esoteric (to lawmakers) technology with perhaps an even more poorly understood topic like the mechanics of electricity grids and energy usage and you get a perfect recipe for abundant, reductive misinformation. It’s much easier, after all, to just print a headline or proclaim that Bitcoin will use all the energy on earth than it is to actually understand how Bitcoin uses energy and why its particular way of using energy may actually benefit society. See, for example, this 2017 tweet from the World Economic Forum, which was wrong then and wrong in 2020:
Anyway, this piece by Nic Carter does a good job of explaining why Bitcoin is not, in fact, a disaster for energy grids by lucidly explaining how energy grids work.
2. “How Bitcoin Is a New Form of Property,” an article by Tomer Strolight. This is a short, cogent piece about the ways in which Bitcoin is a completely new and historically distinctive form of property. Strolight examines and elucidates the characteristics of Bitcoin that make it so unlike any form of property we’ve ever seen.
3. “What is Bitcoin Backed By?” This piece by Eric Yakes answers one of the most common questions I get about Bitcoin. The answer, per Yakes, is an emphatic “nothing.” Why? Because “only money that lacks inherent monetary properties must be backed by another money that maintains those properties. The idea that our base layer money needs to be backed by something is thinking from the era of paper money.” If this is a topic you struggle with or have questions about, I highly recommend this piece. Yakes lays it out clearly and succinctly.
Bonus/Miscellaneous
I know it’s hard out there right now. If you’re new here and want to understand why the dip is happening, check out Issue #20. In the meantime, keep your investment time horizon aligned with the time horizon of your ideas, by which I mean if, like me, you think Bitcoin and crypto will transform the world over the course of the next 5-10 years, then don’t sweat short-term volatility. Remember, Amazon was every bit as volatile as Bitcoin in the beginning of its life as a company.
Strive for this level of zen during the swings:
As always, thanks for reading! If you enjoyed it or found it useful, share this newsletter widely and freely!
“Civilization is in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.” -H.G. Wells
See you next week,
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DISCLAIMER: I am not investment advisor and this is not investment advice. This is not, nor is it intended to be, a recommendation to buy or sell any security or digital asset. Nothing in this newsletter should be interpreted as a solicitation, a recommendation, or advice to buy or sell any security or digital asset. Nothing in this newsletter should be considered legal advice of any kind. This newsletter exists for educational and informational purposes only. Do your own research before making any investment decisions.
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