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From the outside looking in, it seems like a hard life earning a crust on the bitcoin mining breadline. Last year, when China imposed a blanket ban on the practice within its borders, a small army of miners hastily scrambled into action, powering down their machines, closing shop and redeploying their equipment overseas. Within a matter of months, China went from controlling two-thirds of all bitcoin mining worldwide to effectively exiting stage left.
Cryptocurrency miners are nothing if not resilient, but in few other industries would one have to up sticks and move country just to keep the lights on. It isn’t a case of hopping across a land border either. At considerable expense, ousted miners had to ship many tonnes of equipment from mainland China to far-flung territories such as the United States, Russia, Kazakhstan and Canada. If China left a gaping void it has been hurriedly filled, with Kazakhstan in particular cultivating a reputation as a mining hub.
Of course, things move fast in the much-maligned mining world. In recent weeks, Kazakh authorities have talked up significant tax increases for miners, some of whom are “severely damaging” the country’s energy system according to minister of digital development Bagdat Musin. The intrepid miners who made a home in the Central Asian Republic after being banished from China may soon be dusting off their passports, again.
Sandra Ro, the CEO of the Global Blockchain Business Council, speaking at the Senate Agriculture Hearing into cryptocurrencies in February addressed climate concerns related to bitcoin mining saying, “What we have today is actually an opportunity… mining has shifted to the U.S., Canada, and Nordic countries… [so, Congress] should encourage crypto mining firms to set up in an environment with (global) oversight, [to] champion the increase in renewables for the industry.”
Against this chaotic backdrop, it’s worth asking where is bitcoin mining headed? Will more countries join China and others in imposing outright bans? Or will stances soften thanks to the efforts of the Bitcoin Mining Council and eco-friendly innovations like Bitmain’s liquid-cooled rig?
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Nothing less than the future of bitcoin is at stake, and with it the chance to exercise financial self-sovereignty via a decentralized cryptocurrency revered as digital gold. This, more that ever, in the current state of global political and economic volatility, is increasingly seen as a human right in the free world.
Bitcoin Mining: The Origin Story
Mining, of course, is the process that brings fresh bitcoin into being. The eponymous blockchain, which recently celebrated its 13th anniversary, depends on a Proof-of-Work (PoW) consensus algorithm that compels miners to solve mathematical problems that are difficult to solve but easy to verify.
Amid fierce competition from rival miners, PoW math problems are tackled and deciphered in exchange for a set quantity of bitcoin known as a block subsidy. This subsidy is then added to the sum of the transaction fees held in the block that is being mined to make up the block reward.
Just as gold-mining is the only way to increase the supply of the world’s most valuable precious metal, bitcoin mining is the only way to increase the supply of bitcoin. Of course, the currency does have a hard cap of 21 million bitcoins – so nodes can’t go on “producing” new bitcoin ad infinitum. Based on bitcoin’s predictable issuance model, the final coin will be mined some time around 2140.
Against all odds, Proof-of-Work has kept bitcoin ticking along for 13 years now with no recorded instances of double-spending. Those who expend electricity to verify transactions have a strong incentive to maintain the ledger’s integrity, and because PoW makes the cost of writing a block punishingly high, the security of the bitcoin network is more robust than it’s ever been. In fact, even if an attacker were to marshal 100 percent of the network hash rate, he would need over two years to completely rewrite the ledger dating back to January 3, 2009.
The Proof-of-Work PR War
Proof-of-Work is considered a marvel by bitcoin maximalists. As inventions go, they put it up there with the lightbulb and telephone. PoW has continued to attract criticism however, with many deeming the industrial-scale use of computing and electrical power wasteful. This has become the great bitcoin energy debate.
Such censure is not, on the face of it, unmerited. According to the Cambridge Bitcoin Electricity Consumption Index, the bitcoin network consumes 125.1 Terawatt Hours (TWh) per year, a little more than Ukraine (124.5) and a bit less than Egypt (149), a country that has banned bitcoin, along with Iraq, Qatar, Oman, Morocco, Algeria, Tunisia and Bangladesh. In the CBECI’s country rankings, bitcoin currently occupies 27th place.
Should a borderless cryptocurrency really consume more electricity than nation states? That depends on your perspective. If you’re a net-zero energy campaigner, the answer is probably no. If you believe the people of the world need a self-sovereign digital asset now more than ever, the answer is clearly yes.
Certainly, the miners are undeterred. 2021 saw the highest miner revenues to date, a remarkable fact given the block subsidy is halved every four years. Last year, bitcoin miners raked in $16.7 billion in revenue, more than the combined takings of the previous three years.
Evidently, China’s crackdown didn’t hit miners in their pockets the way many had expected. Perhaps that was just blind luck, China’s ban coinciding with bitcoin’s best year, but whatever way you look at it, miners seem to shrug off adversity with breathtaking ease.
Prior to its war with Ukraine, the central bank of Russia called for an outright ban on cryptocurrency mining, with a recent report claiming the “potential financial stability risks associated with cryptocurrencies are much higher for emerging markets, including in Russia.”
The pendulum has swung with Western governments concerned that Russian’s central bank, the regime, and oligarchs will now use cryptocurrency to evade sanctions, a concern that most agencies believe to be unfounded due to the inability of the cryptocurrency ecosystem to process such large volumes – bitcoin can’t fund a war.
Erik Thedéen, vice chairman of the European Securities and Markets Authority (ESMA), has meanwhile urged the EU’s 27 member states to ban Proof-of-Work mining, claiming PoW has become a national issue in his native Sweden due to the amount of renewable energy it uses. This itself is an interesting observation, since critics normally slate bitcoin for its dirty energy usage.
A few weeks back, concerns were raised by a text circulated by the European Parliament that created a defacto ban on proof of work consensus mechanisms in the EU. Following advocacy work from the industry, MEP Berger, the Parliament rapporteur, postponed the committee vote on February 28th and revisited the text highlighting the fostering innovation mandate of MiCA and its importance in this and setting global standards. As such, the text removed the reference to the ban.
A new text was inserted on the March 9 which is the one that will be voted on Monday March 14, now re-enters wording but instead creates a phase-out approach. The operative text in article 2a, makes no reference to proof of work consensus mechanisms directly but instead refers to those crypto assets already in issuance putting in place a phased rollout plan to ensure compliance with the minimum environmental sustainability standards.
Lavan Thasarathakumar, EMEA government and policy director at Global Digital Finance says, “What this means in practice will only become clear through the delegated acts with: the intensive consumption of energy; the use of real resources; carbon emissions; electronic waste; the specifics of incentive design; and, the scale of operation of the crypto asset being the attributing factors.
The text as sent to vote does include two recitals 5a and 5aa, which includes reference to proof of work consensus mechanisms and its propensity to be energy intensive, however crucially, the call for action is in the non-legislative part of the text but also asks for action to be taken on a horizontal basis as opposed to being product specific – good policy making.”
U.S. President Biden issued an Executive Order last week on Digital Assets paving the way for a new era of digital innovation, better coordinated cross-agency collaboration with industry, and ensuring America maintains its market leading position as the world’s digital innovation hub. E.U. parliamentarians are advised to pay close attention to the digital space race unfolding with the China ban and Russia at war, Europe’s responsibility open and fair competitive markets should be clear, and bitcoin and the crypto industry are key to this future.
“Banning mining is becoming a trend in the medium term,” observes Louis Cleroux, CEO of Canadian crypto platform Timechain. “Bitcoin miners need to find creative ways to reach agreements with countries right now. Using wasted energy with miners should be something to consider.”
Cleroux’s latter point is worth emphasizing, particularly as the bitcoin energy debate heats up. For all its energy demands, mining could actually reduce greenhouse gas emissions by consuming methane that would otherwise be leaked into the atmosphere via flaring.
On February 15, oil and gas giant ConocoPhillips confirmed that it was selling extra flare gas to bitcoin miners in North Dakota, part of its commitment to reduce routine flaring to zero by 2030. Ostensibly, the company will allocate gas that would otherwise be burned off to a pilot project managed by a third party, effectively making bitcoin a load balancer for energy waste.
“We need to increase awareness on actual losses we incur due to our inability to store energy,” says Louis Cleroux. “Selling excess energy to miners is the best for both parties. Also, in a Proof-of-Work ecosystem, the winning miners are the ones who are able to be competitive in terms of hashrate /energy cost. This competitive system promotes healthy competition between miners to push for more efficient mining activities.”
According to Erik Thedéen, the crypto industry as a whole should be nudged towards Proof-of-Stake, a less energy-intensive form of mining wherein users stake coins to become validators. With this model, staking replaces the computational arms race of Proof-of-Work, with validators selected at random to add a block to the ledger. Number two network Ethereum is in the process of transitioning to Proof-of-Stake, a move which it’s claimed could reduce its energy use by up to 99.95 percent.
For the moment, though, there is no sign that the Bitcoin network will abandon its tried and tested Proof-of-Work mechanism. The model has stood the test of time and PoW is more decentralized than its energy-lite counterpart, aligning incentives to secure all transactions. According to bitcoin bull Michael Saylor, PoW architecture “anchors the crypto-asset network physically and politically to the firmament of reality, driving ferocious competition in the marketplace to decentralize, improve, and secure the network, thus assuring vitality and integrity over time.”
Saylor’s business intelligence firm MicroStrategy is one of the world’s major bitcoin hodlers, having acquired 125,051 BTC for around $3.8 billion, and earning the company huge profits in the process. Last summer, amid mounting criticism from energy activists, Saylor co-founded the Bitcoin Mining Council to promote energy usage transparency and accelerate sustainability initiatives worldwide.
In its most recent report, the Council noted “dramatic improvements to bitcoin mining energy efficiency and sustainability due to advances in semiconductor technology, the rapid expansion of North American mining, the China Exodus, and worldwide rotation toward sustainable energy and modern mining techniques.”
Overall, the report put the percentage of renewable-powered bitcoin mining at 58.5 percent in the fourth quarter of 2021, a modest once percent rise since Q3. Nonetheless, things seem to be moving in the right direction. Ultimately, miners will always strive to seek out the lowest cost of power production they can find and the Council aims to highlight green options at every turn.
SpaceX founder and Tesla CEO Elon Musk was instrumental in bringing the Council into being, after all, it was the billionaire’s decision to reverse course on the acceptance of bitcoin for Tesla vehicles that reignited the debate around PoW. Musk even sat in on the inaugural Bitcoin Mining Council meeting last May. Energy concerns aside, Tesla still holds around $2 billion worth of bitcoin on its balance sheet.
“There are many initiatives that address criticism of bitcoin’s energy usage,” notes Maud Simon, COO of sharded blockchain Alephium, “Some are building alliances for clean mining, some are mining ‘green blocks’ with certified hydro electricity, and others are attempting to reduce the quantity of energy required. By capping energy consumption to less than an eighth of bitcoin’s after a certain threshold, our Proof-of-Less-Work innovation provides an example of how PoW chains can address the energy sustainability questions without sacrificing security and decentralization.”
One high-profile company that’s recently entered the mining business is Intel. Soon the California corporation will release its first crypto-focused chip, which it says provides “1,000x better performance per watt than mainstream GPUs for SHA-256 based mining.” Dubbed Blockchain Accelerator, the chip will put Intel in direct competition with the likes of Bitmain, Canaan, and Nvidia. We’ll soon know whether the technology is all it’s cracked up to be. The first two companies to trial the chip will be Argo Blockchain and Block (formerly known as Square).
Existing hardware specialists are not deaf to the criticism of PoW. Bitmain’s latest mining rig, the S19 Pro+ Hydro, utilizes liquid cooling technology to reduce heat, power consumption and noise, with the added benefit of extending the machine’s lifespan. By deploying the machines, U.S. mining firm Merkle Standard expects to be net carbon negative by the end of 2022.
Clearly, the bitcoin mining industry as a whole is drifting away from polluting energies and embracing a more sustainable matrix that includes solar, wind, geothermal and hydro-electrical. Even nuclear sources are being tapped, as in the case of the fast-growing Mawson Infrastructure Group. Where an energy balance is not carbon free, Mawson uses carbon credits to offset its emissions.
Adrian Eidelman, Co-founder of smart contract platform and bitcoin sidechain RSK says, “The primary running costs for bitcoin miners is energy consumption, and they therefore have a clear incentive to find and maintain cheap sources, which are often renewable. Larger bitcoin mining farms are often located in remote locations, close to these energy sources, and take advantage of low energy costs that would either go to waste or be impossible to transfer to large cities.”
Mining has, to a large extent, taken place in the shadows up to this point. But that is beginning to change. We need only look at the launch of the first ever Bitcoin Miners ETF on the Nasdaq stock market. Rather than offering exposure to BTC itself, the product, which was pioneered by crypto asset manager Valkyrie, gives investors exposure to companies specializing in hardware or software used for mining the asset.
Looking to the Future
Aside from the criticism that stems from Proof-of-Work’s energy-intensive nature, questions have been raised concerning the longevity of the mining industry itself. After all, over 90 percent of bitcoin’s total supply has already been mined. With the block subsidy halving every four years (the next one’s due in 2024), won’t bitcoin have to see continual price appreciation for mining to remain profitable?
Well, yes. But that’s exactly what miners are banking on. While there is only 10 percent of bitcoin’s pre-programmed fixed supply left to mine, mainstream investors have only recently begun to look seriously at the asset class, suggesting there is plenty of room for growth. Bitcoin’s absolute scarcity, security and decentralization continue to make it a desirable digital asset for buyers.
And what happens when the final block has been confirmed, the last ever bitcoin mined?
One can only speculate what life will look like in 2140, but it’s entirely plausible that mining will continue. As mentioned earlier, miners receive a reward in every block they mine, made up of the block subsidy and the transaction fees. In decades to come, the purchase power of bitcoin may be so strong, that the payout for the latter is enough to compel miners to maintain the ledger and mine blocks even in the absence of new bitcoins. It’s even possible that bitcoin will come to be regarded as so valuable a monetary base, that humans will allocate resources to keep the ledger alive despite money being lost when securing the network.
“Bitcoin mining will become an asset strategy of many countries in the future, and those opposing it will only be sacrificing their own prosperity by reducing innovation as well as jobs and wealth creation,” predicts RSK’s Adrian Eidelman.
Whatever happens, cryptocurrencies and mining will likely be front and center in the coming months, not just in the the great energy debate, but also in the social and political debate of the peoples’ rights to access self-sovereign cryptocurrency, a debate the will continue to be openly and productively led by the industry.