This week, a friend sent me an article about a new “eco-friendly” proposed Bitcoin competitor, Chia Network. Aside from my confusion on the “Proof of Space and Time” consensus algorithm Chia uses, the gist of the article, and many like it that have arisen recently, is that as Bitcoin’s mining difficulty continues to increase (existing power-consuming mining operations grow and new entrants arrive into the space), Bitcoin may ultimately consume all the world’s energy supply. The second, but often unstated, conclusion is that this lack of energy for the rest of the world will lead to lowered standards of living and the death of many millions of people.
I find this thesis unconvincing for several reasons.
1. Growth Mindset: Believing the people of the world will not find a way to solve this problem – and EVERY problem facing the world today – is an old-world way of thinking. We need to stop thinking linearly and adopt an exponential mindset, because we live in a world of exponential growth.
2. Why Not? The possibility of bad outcomes hasn’t stopped us before. One of the great privileges in life we all possess is the ability to undertake ill-advised risks. Sending a man to the moon wasn’t strictly “necessary” but it advanced humanity’s collective mindset and has served as a beacon of hope to millions for half a century.
Likewise, are we supposed to give up on the idea of perfect money because of a possible bad outcome? Changing the foundations of money, information, and power may not be strictly “necessary” but I believe it is at least worth a try.
3. What if Bitcoin mining does consume all of today’s energy supply?
I do not believe that the world will ever face a problem that cannot be solved through our collective will. I also believe that if this is the biggest problem facing the world, Bitcoin has already won; and we will be well on our way to implementing off-planet mining operations to reduce the negative effects of on-planet mining. But let’s keep things on earth to play out this interesting thought experiment.
Bitcoin is a race every 10 minutes to find the cheapest electricity (on the planet) – and that is a good thing. The winner of the race is currently rewarded handsomely with 12.5 bitcoins and transaction fees as they should be.
We want to incentivize good actors, who can mine cheaply and profitably, and let the market punish bad actors through wasted efforts and money. This is truly a game of survival of the fittest.
The good actors will continue to seek out the most efficient and profitable resources and will push technology and computing power to mind-boggling levels of efficiency.
Worst case, Bitcoin mining only accelerates the switch to renewable energy
Does the prospect of global widespread Bitcoin mining energy use actually change the situation we are already in? No. At some point in the future, we will all have to switch to renewables anyway. The world simply has a limited supply of natural resources and whether those resources are used by Bitcoin mining, powering Google servers, or heating orphanages there is no question they will all ultimately be used.
Rising Bitcoin mining energy consumption may accelerate hyperbitcoinization
Although I am someone who believes (more and more each day) that the concept of hyperbitcoinization will occur eventually even without additional pressure from the mining community on energy prices, rising Bitcoin mining energy consumption may accelerate any eventual Bitcoin hyperbitcoinization.
Step 1: New energy supply exhaustion leads to higher energy prices
An interesting situation arises in a future where bitcoin miners openly compete with other uses for productive energy consumption (as opposed to simply consuming excess energy that would not otherwise be used by individuals or industry). If miners are able to remain profitable in their efforts (as they would have to in order to continue to be competitive) in direct competition with other uses of energy, energy prices would have to rise across the broader market of participants due to increasing demand for this, now limited, energy.
Step 2: Inflation affects only non-Bitcoin hodlers
As individuals and industry participants compete with Bitcoin miners for this limited supply of global energy, the USD price of energy will increase dramatically. Interestingly, however, the bitcoin price will also be rising at least as much as the USD price of energy (because miners must remain profitable to continue consuming energy). This situation means that the USD inflation impact on energy prices will only be felt by non-bitcoin using energy consumers as the bitcoin price will at least keep pace with rising energy costs.
Step 3: Rational actors act
In this situation, any rational market participant would abandon the USD and adopt bitcoin as their unit of measure, thus accelerating the hyperbitcoinization process.
Hyperbitcoinization is a feature, not a bug
At some point, people who are in favor of or opposed to any idea actually feel the consequences of their decisions in the real world. This is the hyper-____-ization effect that is experienced with any technology that turns out to be revolutionary.
There were many people opposed to the idea of automobiles in the early 20th century – and that is OK. When 1% of the population has an automobile, people without one don’t really feel a negative impact from the 1% who have one. If you run a business and all but one of your distant competitors still transport goods via horse and buggy you can still maintain and even grow your business without much thought given to the person with the automobile.
The same is true of Bitcoin. When only 1% of the world knows about and uses Bitcoin the only “loss” anyone without bitcoin has is purely psychological in the form of a missed opportunity to make money (USD). While it does feel bad to “miss out” on gains, actual losses hurt much more.
As automobiles came into more widespread use, the people who were opposed to the idea of them were confronted with a real problem – maintain your personal status quo and risk being rendered obsolete through increased productivity of competitors or push through your old comfort zone and improve with your industry. I’m sure at this point it was an easy decision for most that getting an automobile was indeed the right thing to do for them personally.
With Bitcoin, for the short-term foreseeable future (until scaling solutions like the Lightning Network are broadly accepted) we will remain in the period when businesses and individuals will not feel direct actual pain or loss of competitiveness from the small minority who have adopted Bitcoin. However, should any of the Bitcoin mining energy consumption concerns being raised come to fruition, it is possible that the first real-world consequences that non-Bitcoin users will feel will be a decrease in purchasing power as the USD loses its ability to keep pace with bitcoin’s deflationary properties.
The inverse of this situation is obviously true as well. If bitcoin cannot continue to prove itself as a superior store of value (and ultimately a medium of exchange) then it will be the bitcoin hodler who is disadvantaged by using a sub-standard product. Time will tell.
My point is not that people shouldn’t be mindful of unproductive energy consumption (they should) and that inflation isn’t bad (it is), the point is that the fact that these systems can be gamed to take advantage of the fiat monetary system is a problem – and Bitcoin is the solution.
By: Daniel Hinton