To recap on our series so far, we were going to cover a human case for bitcoin form the point of view of three problems, which occur around at least my dinner table:
A consolidation of wealth and power into the hands of the few;
Protection of the natural environment; and
Nation state conflict and global war.
Yesterday, was to layout the basics of the consolidation of wealth and power, and the job today will be to lay out some thoughts on the protecting the natural environment.
Part 2: Protecting the environment
When looking at solutions to big problems I believe it is more important to look at the trends more than absolute value.
Or put another way the world never stands still so the direction it moves matters more than the current place it stands.
The way we interpret this direction is to understand the incentives that are at play in a system and what emergent activity and outcomes you get from the people involved.
As Charlie Munger once stated1.
“Show me the incentive and I’ll show you the outcome”
So the way I’d like to play this out is to look at bitcoins relationship with the environment, understand the incentives that drive bitcoin and then consider how this will improve or impact the environment over time.
Bitcoins relationship to the environment
The critique here revolves around the use of energy by the bitcoin and the assertion that it uses “too much energy” and that there is not enough benefit for that use.
As a believer in the concept of subjective value, I’m not going to try and convince you either way on that.
Instead what I’d like to do is point out what happens to the second order effects of this system when you consider time and innovation.
So whats the nature of bitcoins relationship with energy.
Bitcoin uses energy to run specialized computers, these in turn ensure that the network remains broadly decentralized, open to anyone and secure to attack and censorship.
The amount of energy has grown significantly over the last 11 years (albeit not linearly, it slows as we grow) and this draw of energy is through a network of specialized computers called “miners”.
The miners themselves do not have a direct impact on the environment, they consume electricity and produce random numbers, heat and noise.
The critique therefore is in the electricity infrastructure that provides power to the miners and the externalities of its generation in pollution, gas emissions etc.
From this point of view not all energy is created equal, some are considered clean and cheap others not.
For example: hydroelectric and geothermal power provide huge amounts of green power with minimal environmental impact.
So with this critique next we need to establish how good or bad are things and do we expect them to get better or worse?
The incentives of energy consumption in bitcoin mining
A bitcoin miner turns electricity into random numbers2, heat and noise.
The chief economic concerns of a bitcoin miner to be balanced are:
How fast can my computers generate numbers for minimal power consumption.
The cost of electricity being consumed to power these computers.
The first statement creates an incentive to produce highly efficient computers that produce as many numbers as possible.
We saw this play out in bitcoin mining aggressively in the first ten years as mining quickly progressed from standard laptops, to gaming computers, to high specialized computer chips that do nothing except calculate numbers for bitcoin.
This is a trend which appears to be slowing in its impact as these computers hit thermodynamic limits on speed and development focus on managing energy efficiency and adding chips.
The second statement creates another and very important incentive for our purposes today, one which is becoming the dominant driver of the industry.
Bitcoin is a location independent buyer of the cheapest energy available, as such we would expect bitcoin mining to move to areas of cheap and / or wasted energy
This trend can be observed as we see large mining operations co-locating with hydroelectric, geothermal and clean cheap power sources.
After all what is cheaper than a source of energy with free fuel!
Will this improve or impact the environment over time?
My argument here is not that bitcoin will ever use a lower absolute value of energy in the future, but that the type of energy used will matter.
Further, we expect to see the migration of miners to sources of clean, cheap and otherwise wasted energy and that the flow on effects of this process will develop new clean energy sources and provide an open global prize for innovation in effective renewable power.
So where are we now.
The latest survey results form the voluntary Bitcoin Mining Council report from Q2 2021 (based on a sample size of 32% global mining industry surveyed) show that respondents utilized approximately 67% sustainable power mix with an estimate of global electricity mix of 56%.
These are numbers that we should track over time, but this isn’t a bad place to start, ostensibly giving bitcoin the greenest energy mix of any industrial process on the planet.
So to understand how this might be develop consider the following logic:
Most of the energy in the world is simply not captured as it is not easily consumed where it exists as there are no people, industry or energy demands locally.
Due to lack of local demand means these abundant clean energy resources will never be developed.
The incentive of location independent energy buying allows bitcoin to provide a steady demand for this power bootstrapping demand and capital to build out new clean energy resources.
This incentives entrepreneurs to develop highly efficient, decentralized, clean power sources around the world, providing power as close to free as possible (often these sources are in poor regions with no capital to develop, until you introduce bitcoin).
As more efficient energy sources are developed, this will incentivize people, businesses and industry to relocate to areas of cheap and abundant energy.
If this happens this outbids the local bitcoin mining industry which is only interested in thel owest price energy globally which moves on to develop other energy resources or spurs further innovation in efficient energy production.
As look would have it the cleanest types of energy are often the cheapest sources of energy, as they’re the most efficient (lower waste, lower fuel) sources of energy.
Which is quite beautiful really and really makes you think why we didn’t think of turning energy directly into money before!
https://www.azquotes.com/quote/1388572
Technically this would be hashes of random numbers, but let’s not get hung up on that.