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Pantera Capital partner: Bitcoin is not the enemy, Musk's energy consumption view is questionable

Pantera Capital

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In short, Bitcoin is the first truly scarce decentralized digital currency.

Original title: 《 Pantera Capital partner: Bitcoin is not the enemy, Musk's energy consumption view is questionable 》

Original source: Planet Daily Odaily

Original author: Paul Veradittakit

Original translation: Moni

At the end of the last century, the Internet economy began to take off. But on May 31, 1999, Forbes published an article claiming that “there is reason to expect that within the next decade, half of the electric grid will be powered by the digital Internet economy.” The article also accused the Internet (especially hardware companies) of consuming large amounts of fossil fuels and putting the world on a “dangerous energy use trajectory.”

In 2000, the California energy crisis sparked a nationwide discussion about energy use, and this statement gradually became mainstream, with dozens of well-known media citing the Mills Air Quality Report and claiming that the Internet was gradually devouring energy supplies. Internal reports from JPMorgan Chase, Bank of America, and Deutsche Bank also cited the relevant numbers, which soon led to people debating the issue and eventually - a shocking consensus in society for such a provocative claim: the Internet will affect the environment!

Was there a problem? Obviously there was! Because the predictions were wrong. The calculations in the Mills Report were riddled with errors, and according to later estimates, they overstated the internet’s energy usage by at least an eighth. Now, twenty years after the Forbes article was published, the data clearly shows that incorrect predictions can spell doom and gloom for emerging industries. Even if we push the numbers to the limit, the forecasts show that internet companies will only account for 20% of global energy consumption by 2025, and many of the tech giants have already fully transitioned to renewable energy.

Source: Forbes

In other words, despite the outrageous early energy predictions for the internet and the wildly inaccurate outputs, this absurdity persists to this day.

To me, the debate over Bitcoin’s energy usage today — even if it’s sometimes barely an issue — bears striking similarities to the energy consumption critiques of the early internet. Musk recently tweeted:

"Tesla suspends Bitcoin payments due to concerns about its environmental impact. Cryptocurrency is a great idea and we believe it has a bright future, but this cannot come at a huge environmental cost. Tesla will not sell Bitcoin and will continue to use it for transactions once its mining method transitions to sustainable energy. We are also considering using cryptocurrencies with lower energy consumption (<1% of Bitcoin's energy consumption)."

There are many similar news stories that portray cryptocurrency as the main cause of accelerated climate change. Obviously, this issue is deep, nuanced, and full of misunderstandings.

It is undoubtedly important that we pave the way for a sustainable energy future. However, we also need to take seriously any "accusations" that technology companies are affecting climate change. If we were to go back to the early 21st century, would we still believe their media reports at the time? It's okay to shift attention to long-term sustainability, but don't let these issues affect the development of technology. Any mistake will have serious consequences.

It should be noted that this article is not a "hard truth" to solve the energy consumption problem of crypto companies, but a "thinking framework" given by a cryptocurrency supporter when faced with the problem of climate change and Bitcoin's energy consumption.

There is a reason why Bitcoin uses energy

Although digital currencies existed before Bitcoin, they encountered many technical problems that forced them to remain centralized, thus limiting their potential. Notably, Satoshi Nakamoto solved the thorny "double-spending" problem. In short, Bitcoin is the first truly scarce decentralized digital currency.

In order for this blockchain to remain secure, a "consensus algorithm" is needed to verify transactions. In fact, when designing the Bitcoin system, Satoshi Nakamoto could have simply formulated a majority voting algorithm. In other words, each node has a vote, and if a simple majority (> 50%) of network participants confirm the validity of a transaction, then the transaction can be deemed valid. However, there is also a problem with this: malicious actors can create an unlimited number of these nodes, making it unbearable for "honest" nodes. Since it costs nothing to create additional nodes, fake or "Sybil" identities can be created - this is called a Sybil attack.

The greatness of Satoshi Nakamoto is that nodes must "cost money" to run, so that the blockchain can resist Sybil attacks. Inspired by this idea, Bitcoin uses a consensus algorithm called Proof-of-Work. Bitcoin miners are nodes that verify transactions and usually have to use specialized hardware to solve computational mathematical puzzles. Since this process consumes a lot of energy, it ensures that the Bitcoin blockchain makes it difficult for attackers to "overwhelm" the entire network.

What's more, the energy consumed is not actually "wasted", as the media sometimes describes it. Once you understand the basic principles of why proof of work was chosen, it becomes clear that Bitcoin's energy consumption is a feature, not a system design error.

While Bitcoin, Litecoin, Monero, and other cryptocurrencies all use Proof of Work, many have begun to deploy new, less energy-intensive consensus algorithms. Ethereum, for example, is currently transitioning to the Proof of Stake (PoS) consensus algorithm, a less energy-intensive way of validating transactions. As a result, the current debate over cryptocurrency energy is much more narrow than many people think. The current criticism of cryptocurrency energy consumption is not a broad argument against cryptocurrency or decentralization, as sometimes these criticisms are framed, and frankly, it is actually a criticism of a specific consensus mechanism: Proof of Work.

Quantifying Bitcoin Emissions

It’s not hard to quantify Bitcoin’s energy usage: you can simply look at publicly available statistics on hash power, network difficulty, and mining equipment efficiency to calculate relevant metrics.

However, energy consumption and carbon emissions are two very different things, and while they are sometimes correlated, carbon emissions are essentially determined by the type of energy used, not the amount. Since we lack relevant information about Bitcoin miners (such as the hardware they use and their energy consumption), it is very difficult to make reliable calculations of carbon emissions.

Despite the challenges, many academics have attempted to quantify Bitcoin’s carbon footprint. However, a recent paper on the subject by Camilo Mora and other professors at the University of Hawaii (which has been cited many times within the industry) yields a bleak prediction:

Here we find that projecting Bitcoin usage at current widespread technology adoption (i.e., proof-of-work) and adoption rates leads to a conclusion that Bitcoin generates enough CO2 emissions to increase Earth’s temperature by more than 2°C in less than three decades.

In reality, this prediction is highly exaggerated. However, Camilo Mora’s paper is arguably the most influential proof-of-work related research. A closer look at media coverage of Bitcoin’s energy use shows that this paper is often cited, and the most frequently used statement is that it will “warm the Earth by more than 2°C in less than three decades”, an assumption that, while false, has become ingrained in many people’s minds. Given the importance of this paper, it’s worth taking a closer look.

In calculating Bitcoin’s energy consumption, Camilo Mora’s method is relatively simple, estimating the efficiency of mining equipment, using the average carbon emissions of their relative locations, and combining it with Bitcoin’s growth forecast to measure future carbon emissions.

However, some people have recently directly questioned Camilo Mora's research and pointed out a series of errors that have led to an overestimation of Bitcoin's carbon emissions. There are several main questions:

1. It does not take into account that energy-related technologies are constantly improving. Camilo Mora's research assumes that the efficiency of mining equipment and the carbon intensity of the grid will remain unchanged for the next century. In other words, he assumes that the emissions of mining hardware and energy grids will remain unchanged in the next 100 years, which is a very incredible assumption. In the words of one critic: "This questionable choice ignores the technological advancement of mining equipment and power grids, and Camilo Mora deliberately ignores this issue, which is considered in many forward-looking energy technology plans."

2. Predicting that Bitcoin's popularity will reach an unprecedented rate. Camilo Mora uses the growth trajectory of 40 technologies in the past (such as mobile phones, computers, and vacuum cleaners) to predict the growth of Bitcoin. Although this comparison is somewhat referenceable, it will produce some extremely unreasonable predictions:

Specifically, Camilo Mora found that Bitcoin transactions totaled 104 million transactions in 2017, accounting for only 0.03% of global cashless transactions, but would suddenly jump to 78 billion in 2019 (a 750-fold increase in just two years), reach a median scenario of 11 billion in 2020 (a 108-fold increase), and are expected to reach 8 billion by 2023 (a 76-fold increase). This is clearly inconsistent with historical trends (Supplementary Figure 4), and mathematically such an estimate would only lead to a large increase in emissions in the near term.

By assuming such a growth rate, the researchers' estimated carbon emissions are indeed too high. Instead, if Bitcoin is compared to the relatively low rate of adoption of other value storage applications, a more reasonable prediction can be made.

3. Keeping transactions on par with energy consumption. After predicting future Bitcoin transaction volume, Camilo Mora simply multiplied the number of future transactions by the current emissions estimate to get a "total emissions value" - this is wrong: Bitcoin energy consumption is based on block difficulty, not the number of transactions. In fact, in the three years since Camilo Mora conducted his research, miner energy consumption has remained relatively flat even as Bitcoin transaction volume has peaked.

Even if Camilo Mora's transaction prediction is correct, there is no evidence to support that this will lead to a proportional increase in energy consumption. In fact, most experts believe that Bitcoin energy consumption will continue to decrease over time due to the reduction in the number of BTC mined due to the Bitcoin halving.

After considering the problems with Camilo Mora's research, we should know one thing: Don't jump to conclusions:

The results show that Camilo Mora’s study contains critical errors, producing wildly different and alarming predictions for future Bitcoin carbon emissions. That is, the study design itself has many flaws—for example, using transaction volume as an estimate, comparing to 40 unrelated technologies, and ignoring the development of low-energy mining equipment. Based on these issues, we believe that Camilo Mora’s study design is fundamentally flawed and its results should not be taken seriously by researchers, policymakers, or the public.

In fact, one only needs to compare Camilo Mora’s study’s original predictions (Figure A) with the ones that correct for the study’s erroneous assumptions (Figure D) to see the big difference: Bitcoin carbon emissions look relatively stable over the next few decades, hardly a cause for alarm.

Source: Masanet et al., 2019.

This is not exhaustive, but the gist is this: quantifying Bitcoin emissions is a difficult problem, and many of the most worrying predictions use deeply flawed methods. While we specifically selected Camilo Mora’s work, this is largely because his results are widely used, and other researchers often make similar mistakes.

Undoubtedly, it’s important to understand Bitcoin’s carbon footprint. However, it’s equally important to identify, double-check, and correct incorrect predictions. The next time you see a new statistic related to Bitcoin’s energy consumption, track down the original research; you might find something that surprises you.

Comparing “Apples to Apples”: Energy Consumption of the Same Technologies

The discourse around Bitcoin’s energy consumption is particularly frustrating — first, it seems like an arbitrary metric to choose when assessing Bitcoin’s energy consumption, we rarely (if ever) use energy consumption to assess the value of other technologies, so why start with Bitcoin? Relatedly, the lack of apples-to-apples comparisons is also surprising. Yes, Bitcoin does consume energy, that’s obvious. But more importantly, energy consumption should be compared to similar technologies, especially those that have been “deemed credible alternatives.”

According to the Cambridge Centre for Alternative Finance, Bitcoin currently uses about 110 terawatt hours of energy per year, which is only 0.55% of global electricity consumption.

As we know from Camilo Mora’s research, estimates of energy consumption can be inaccurate, but I’ve tried to compile some reasonable estimates that also help put Bitcoin’s energy consumption into context.

The most obvious comparison is centralized finance (CeFi), which is no stranger to energy consumption. Physical bank branches, backend servers, and ATMs alone consume a total of about 100 TwH of energy per year, which is comparable to Bitcoin. And this figure does not include other high-emission activities in the banking industry, such as their frequent business trips on airplanes and various long-distance freight, which also cause a lot of carbon emissions.

Since Bitcoin has been called "digital gold," it should also be compared to the mining of precious metals on Earth. It is estimated that mining $1 of aluminum consumes almost ten times the energy of mining $1 of Bitcoin. However, when measured in dollar value, Bitcoin currently consumes more energy than gold and copper. But as Bitcoin mining pools transition to renewable energy, Bitcoin will become more "green" than gold, a transition that is much more difficult for the metal mining industry.

Here are some other comparisons:

* Global energy consumption for YouTube videos is about 600 TWh per year, six times that of Bitcoin;

* Global video games use about 104.7 TWh per year, roughly the same as Bitcoin, but they use almost no renewable energy;

* Clothes dryers in the United States use about 93.6 TWh per year, and that’s just one country;

* In the United States alone, idle household devices (electronic devices that are plugged in but not used) use enough energy per year to power the Bitcoin network for 1.5 years.

I could go on with the comparison, but I think my point has now been made clearly: all industries consume energy, and often much more than you would expect. However, energy consumption is not inherently bad, nor is it a framework for judging the moral worth of a technology or activity.

Bitcoin and Renewable Energy

What makes Bitcoin mining unique is that it is truly agnostic to location. In fact, miners are financially incentivized to seek out cheap power sources no matter where they are. As a result, Bitcoin mining naturally gravitates toward renewable energy because it is cheaper, thus allowing for greater arbitrage opportunities, and often with a surplus.

Of course, estimating the percentage of renewable energy used in Bitcoin mining is difficult, but one report suggests that 73% of mining farms are currently carbon neutral, while another puts the number closer to 39%. Either way, Bitcoin mining still uses a higher-than-average percentage of renewable energy compared to other technologies, countries, and organizational structures.

To visualize the types of energy consumed by Bitcoin, let’s look at two locations where miners are concentrated—

* Sichuan is the second largest province in China for mining, and the local government has built a large number of hydroelectric facilities, almost twice as much as the grid can support.

* Washington is one of the areas with the highest concentration of miners in the United States, due to the availability of cheap hydroelectric power around the Columbia River.

It is well known that electricity is difficult to transmit over 100 miles. However, Bitcoin mining provides an easy way to make use of excess clean energy.

The Real Question: Is Bitcoin Worth It?

So far, we have analyzed estimates of Bitcoin’s energy consumption, compared it to similar technologies, and examined Bitcoin’s potential for transitioning to renewable energy.

Now, let’s get back to square one – is Bitcoin’s energy consumption a problem, or is it disguised as one?

It is undeniable that Bitcoin consumes a lot of energy and will add some carbon to the atmosphere in the short term. However, Bitcoin’s carbon emissions are much smaller than most people assume.

Bitcoin energy consumption is not "wasteful". As the most secure blockchain on the planet, Bitcoin requires energy to power it, but at the same time it is also innovating on the second and third layers, thereby expanding the scope of financial use for billions of people. I think this is enough to prove that this kind of social consumption is a social welfare.

Bitcoin already uses a lot of renewable energy, and as the "last energy buyer", can help move us towards a carbon neutral future. In the end, let's hope to change the scope of the discussion a little bit - instead of judging Bitcoin's energy usage, let's focus on making energy production as clean as possible, supporting renewable energy projects, voting for carbon taxes... etc. But please don't make Bitcoin the enemy, doing so will only distract us and ultimately do us no good in creating a sustainable future.