The question which people keep asking themselves in the aftermath of Ethereum’s merge is: Does Bitcoin want to make such an eco-friendly change? And there is a lot of news surrounding the merge (or the Merge, as ETH advocates like to call it) regarding the creation of some token to revive Ethereum Proof-of-work mining.
Governments around the world are trying to preserve their electricity in the wake of extreme heat waves, and in the case of Europe, to save fuel for the coming winter.
Now I know very well that Russia wants to weaponize gas supplies to Europe to force them to drop the sanctions against it, but this is not the topic of this post. It is about Bitcoin and how it relates to periods of low electricity supply and the political situation created by that. And against this backdrop, Russia is not a good example to use here, constantly legalizing and then banning cryptocurrencies over and over again. So let’s forget about them.
A vocal group of people have been telling me how Bitcoin of all things is not going to survive the coming winter, because of its electricity consumption under the Proof-of-Work (PoW) model. I have the following reply against such verdicts:
There are currently AWS data centers and ones belonging to other cloud platforms around the world, including Europe. These use enormous amounts of energy and electricity, yet they won’t be shut down by Europe or anyone else because they are classified and generally accepted as critical infrastructure. Considering that Bitcoin forms a large part of institutions’ portfolios, which will cause a knock-on effect on the world economy if it is banned, it has already likely been classified by policy makers as critical infrastructure as well. So that’s the end of that matter as well.
The rest of this blog post is going to be about whether Bitcoin will ever use an eco-friendly model.
First of all, it’s noteworthy to point out that Bitcoin developers cannot control what type of energy the miners can use to mine Bitcoin, so putting the blame on Bitcoin developers’ shoulders is pretty unfair considering that they could not forecast a problem like this emerging. This is exclusively miners’ affair.
Proof of Work
Here is a diagram I drew that demonstrates how Proof-of-Work works in cryptocurrencies such as Bitcoin, Litecoin, and Doge:
It is very easy to see here that in a given network, there are nodes connecting to other nodes, and some of the nodes are also connected to nodes which happen to be attached to a miner . The combination of these two is depicted as a “Miner” box. In the PoW model, miners compete with each other to solve an computationally difficult problem (usually finding a SHA256 double hash that is lower than some number) and the first one to succeed gets the block rewards with their own block and transactions.
This model is pretty safe from external interference, provided that there are enough miners competing with each other. Nobody can bug the system by making miners go rouge, since that would be contrary to their financial incentives which the game theory of this model accounts for. Marathon already tried censoring transactions, and they quickly found out why that was a bad idea.
Proof of Stake
By contrast, here is what a Proof of Stake (PoS) network would look like:
Note: Exchanges are not technically the only entities who run staking pools. Other types of organizations run them, but most of the post-merge Ethereum staking groups are exchanges. So that has been reflected in the diagram accordingly.
In direct contrast to Proof of Work, staking pools reward some node at random, in proportion to the amount of coins that are staked (locked) into the mining system. Game theory and economic greed are replaced with a lottery system.
In the large PoS cryptocurrencies, there are only staking pools involved in mining. It is technically possible for any chap to put all his Ethereum into the system and stake privately, but realistically, the chances of average Joe or even millionaire Joe of winning this lottery are very, very slim, considering that the whales have billions of dollars worth of staked cryptocurrency, such as exchanges which I have demonstrated in the diagram above.
Three of the top five staking pools are ran by exchanges (Coinbase #2, Kraken #3, and Binance #4). Exchanges usually wont take into account the projects’ needs when making a decision as usually they only look for ventures that will increase their own revenues. Thus it could happen that a government places a mandate on an exchange or other staking entity, to blacklist (censor) some transactions should they find a block. And it would be much harder for users to fight against this, because all of the is concentrated with the exchange staking power (i.e. money) is concentrated with those who have the most money such as exchanges. It would be very hard for the users to create a competing staking pool that does not censor transactions.
In other words, it is much easier for staking operators to carry out a 51% censorship attack at the behest of a government, and there is nothing much the users can do about it.
Bitcoin will not move to PoS
I’m not the Bitcoin leader and can’t speak for all community members here – but as they say, “we are all Satoshi”, and this is our collective opinion about this topic. Allowing a risk of entities such as exchanges to have censoring power over Bitcoin transactions is too great to transition to a weak consensus algorithm such as Proof of Stake.
It will never change the consensus model
Bitcoin will always use Proof of Work, unless in the future someone invents a way to layer some other consensus proof on top of Proof of Work. Why? Simply because that any direct change in the consensus code will result in a hard fork which will not merely split the network into two, it will shatter it into many pieces like glass. This will happen because code confidence will disappear, which encourages groups to make more hardforks, and starts a destructive feedback loop that will end with the price tanking to Ethereum’s level.
This confidence that the devs know what they are doing and that they can’t just introduce any change they like is the reason why Bitcoin’s price has outperformed Ethereum by at least 15x even during the merge process. In times of uncertainty, stick with tried, trusted and conservative solutions.
None of that happened to Ethereum!
Excuse me, did I say that the ETH community is full of conservative developers and users? They don’t, and that’s why none of what I described above happened. (yet?)
When you have a process that encourages people to develop and innovate new technologies and use cases – DeFi, NFTs, and DAO for example – the community seems disruptive activities such as the Merge as normal events, so nothing chaotic happens in there that’s coming from them.
Unfortunately, it also means that average Joe has no confidence in those kinds of cryptos to store his life savings in, knowing that some network change carries the inherent risk of losing access to their coins forever. That is how they view the situation, not how I see it.
Ultimately it is these users which inject money into their economy and without this huge flow of users you can bet on the price being pretty much low always, compared to something with user confidence such as Bitcoin, albeit still volatile.
In other words, it doesn’t matter what innovations you make. People will choose the currency which is most stable, both in price and in innovation. You don’t see the government engineering new banking solutions for people’s fiat dollars all the time, do you? That’s the point of money. It’s simply no longer regular software anymore.
Other options for Bitcoin
We can try to actually fix the problem (you know, by reducing the carbon emissions which is the complaint of most people in the first place), but this naturally requires miners to pay attention and start implementing them. And they have an incentive to do so. Like I said, Proof of Work is a game theory system. It is not a lottery like Proof of Stake, so it implies that the actions that you take matter.
A preliminary warning
A lot of people think that green energy usage is correlated to the amount of electricity that you use. This is wrong and dangerous thinking, since that would imply the only way to be completely green is to move off the grid. Data centers pull hundreds of thousands of Watts each day, yet nobody tries to take them offline because they know that many of these constitute as critical infrastructure. Same thing goes for power plants and factories – critical infrastructure. It means we must try to reduce their dependence on non-renewable pollution sources such as fossil fuels, and increase their reliance on renewable, eco-friendly energy sources.
Use waste energy from other industries
Certain industries emit hazardous gasses such as methane into the atmosphere, because they don’t have anything else to do with it. Bitcoin miners can capture this excess waste and use it to generate electricity for mining operations. The world, and especially the climate scientists, will be very thankful once they find that pollution levels are going down because of Proof of Work. (See, it’s called proof of work for a reason – it does actual work, and the process works!)
Generate electricity from carbon dioxide
What a revolutionary idea I’ve just come up with, how come nobody thought of that sooner?
The answer is that researchers have figured this out long before I did (so it wasn’t conjectured by yours truly, sorry). But they are plagued by lack of government funding for any of this stuff as they turn their focus on banning PoW mining – once again, putting a band-aid on the problem instead of actually solving it!
It’s a 21st century extension of the old Soviet joke “the bosses pretend to pay us, and we pretend to work“.
If some policy maker is reading this right now, this is what you should be throwing money at. Heck, make it an EU project if you want, or even a mini-Space Race between US and China to see which one will develop sustainable CO2 electricity generation first. At least China is ready to race.
And then the crypto miners will follow suit.