30/06/2022
From the outside, it appears to be a difficult existence trying to make ends meet through bitcoin mining. A small army of miners swiftly sprang into action last year when China enacted a sweeping ban on the activity inside its borders, shutting down their machines, closing up shop, and sending their equipment outside. China basically exited the stage after dominating two-thirds of all bitcoin mining globally in a few months.
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Although cryptocurrency miners are incredibly resilient, there are very few other professions where one would need to uproot and relocate merely to keep the lights on. Additionally, it is not a simple matter of hopping a land border. Expelled miners had to transfer tonnes of equipment from mainland China to distant locations including the United States, Russia, Kazakhstan, and Canada at significant expense. If China left a huge space in the market, it has been hastily filled, with Kazakhstan in particular working to establish a reputation as a mining center.
Naturally, things move quickly in the infamous mining industry. The government of Kazakhstan has recently promoted major tax increases for miners, some of whom, according to the minister of digital development Bagdat Musin, are "severely undermining" the nation's energy grid. The brave miners who fled China and settled in the Central Asian Republic may soon be dusting off their passports once more.
"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," said Sandra Ro, CEO of the Global Blockchain Business Council, at the Senate Agriculture Hearing into cryptocurrencies in February.
Where is bitcoin mining going given this turbulent backdrop is a worthwhile question to ponder. Will more nations impose total bans on China and others? Or will attitudes change as a result of the Bitcoin Mining Council's initiatives and environmentally friendly inventions like Bitmain's liquid-cooled rig?
Nothing less than the future of bitcoin is at risk, along with the opportunity to use a decentralized cryptocurrency dubbed "digital gold" to exercise financial self-sovereignty. More than ever, in the present climate of political and economic unpredictability throughout the world, this is seen as a fundamental human right.
Mining Bitcoin: The History
Of course, the mechanism through which a new bitcoin is created is mining. The eponymous blockchain, which recently marked its 13th birthday, relies on a Proof-of-Work (PoW) consensus method that forces miners to solve challenging but straightforward mathematical puzzles.
PoW math puzzles are solved in fierce competition with other miners for a predetermined amount of bitcoin known as a block subsidy. The block reward is then calculated by adding this subsidy to the total of the transaction fees included in the block that is currently being mined.
Bitcoin mining is the only method to expand the supply of bitcoin, just as gold mine is the only way to increase the supply of the most expensive precious metal in the world. Naturally, there is a hard cap on the currency of 21 million bitcoins, so nodes can't keep "creating" more bitcoin indefinitely. The last coin will be mined somewhere around 2140, according to the predictable issuance methodology of bitcoin.
Despite all odds, Proof-of-Work has maintained bitcoin running smoothly for the past 13 years without any instances of double spending being documented. The integrity of the ledger is strongly encouraged by those who invest energy in verifying transactions, and because PoW makes creating a block expensive, the security of the bitcoin network is stronger than ever. In reality, it would take an attacker more than two years to entirely rewrite the ledger going back to January 3, 2009, even if they could control 100% of the network hash rate.
The War on Proof-of-Work PR
Bitcoin maximalists praise the Proof-of-Work PR War Proof-of-Work as a wonder. They rank it with the lighting and telephone among innovations. However, PoW has remained the target of criticism, with many believing that the industrial-scale usage of electricity and computers is inefficient. The main discussion surrounding bitcoin energy is now this.
Such criticism is not, at first seem, unjustified. The nation that has outlawed bitcoin, along with Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, and Bangladesh, is Egypt (149), according to the Cambridge Bitcoin Electricity Consumption Index. The bitcoin network consumes 125.1 Terawatt Hours (TWh) annually. Bitcoin is now ranked 27th in the country rankings by the CBECI.
Should a cryptocurrency with no borders use more energy than countries do? Depending on your viewpoint, yes. If you advocate for using net-zero energy, the answer is probably no. The answer is undoubted yes if you think that the world's population needs a self-sovereign digital asset more than ever.
The miners undoubtedly persist. Given that the block subsidy is cut in half every four years, it is astonishing that 2021 witnessed the biggest miner revenues yet. More money was made by bitcoin miners in 2017 than in the preceding three years put together, at $16.7 billion.
It appears that the crackdown in China did not have the financial impact on miners that many had anticipated. Possibly the timing of China's ban and bitcoin's finest year was just pure coincidence, but whatever way you look at it, miners tend to handle hardship with astonishing grace.
The Russian central bank demanded a complete ban on cryptocurrency mining before it conflicted with Ukraine, alleging in a recent study that "possible financial stability risks connected with cryptocurrencies are substantially larger for emerging countries, particularly in Russia."
The pendulum has swung, and Western governments are now worried that Russia's central bank, the government, and oligarchs will now use cryptocurrencies to evade sanctions. However, most agencies believe that this worry is unfounded because the cryptocurrency ecosystem cannot handle such large volumes of transactions — bitcoin cannot be used to fund a war.
In the meanwhile, Erik Thedéen, deputy chairman of the European Securities and Markets Authority (ESMA), has encouraged the EU's 27 member states to outlaw proof-of-work mining. He claims that because of how much renewable energy PoW consumes in his native Sweden, the practice has become a national concern. This is an intriguing finding in itself, given that bitcoin is frequently criticized for using unclean energy.
A draught that the European Parliament released a few weeks ago that effectively outlawed proof of work consensus procedures in the EU caused worry. As a result of lobbying efforts from the industry, MEP Stefan Berger, the Parliament's rapporteur, postponed the committee vote on February 28 and went over the text again, emphasizing the mandate of MiCA to foster innovation and its significance in this as well as in setting international standards. As a result, the text dropped its mention of the prohibition.
The text that will be voted on Monday, March 14, was changed on March 9. It no longer re-enters words but instead outlines a phase-out strategy. The actual language of article 2a refers to those crypto assets already in circulation putting in place a phased rollout strategy to guarantee compliance with the minimum environmental sustainability criteria rather than specifically mentioning proof of work consensus processes.
According to Lavan Thasarathakumar, director of government and policy for Global Digital Finance in EMEA, "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.
Importantly, the call for action is in the non-legislative part of the text and asks for action to be taken on a horizontal basis rather than being product-specific, which is good policy making. The text as it has been submitted for a vote does include two recitals 5a and 5aa, which mention proof of work consensus mechanisms and their tendency to be energy-intensive.
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 hub for digital innovation are all made possible by the Executive Order on Digital Assets that U.S. President Biden issued last week. With China banned and Russia at war, European legislators are advised to pay close attention to the digital space race that is developing; Europe should be clear about its responsibility to maintain open, fair, and competitive markets, and bitcoin and the cryptocurrency sector are essential to this future.
In the medium term, says Louis Cleroux, CEO of the Canadian cryptocurrency network Timechain, "banning mining is becoming a trend." "At this point, bitcoin miners must devise novel means of settling disputes with nations. Utilizing unused energy with miners is something to think about.
The last argument made by Cleroux is particularly important now that the discussion of bitcoin energy is heating up. Mining might potentially cut greenhouse gas emissions despite its energy requirements by consuming methane that would otherwise be released into the atmosphere through flaring.
As part of its promise to decrease normal flaring to zero by 2030, oil and gas colossus ConocoPhillips stated on February 15 that it was selling additional flare gas to bitcoin miners in North Dakota. In theory, the firm will use bitcoin as a load balancer for energy waste by diverting gas that would otherwise be burnt off to a trial project run by a third party.
According to Louis Cleroux, "We need to raise awareness on the real losses we suffer as a result of our incapacity to store energy." "It's advantageous for both sides if we sell extra electricity to the miners. Additionally, in a Proof-of-Work environment, the successful miners are those who can maintain a competitive hash rate/energy cost. This type of competition encourages healthy rivalry among miners to strive for more productive mining practices.
Environmental Evolution
Erik Thedéen believes that Proof-of-Stake, a less energy-intensive form of mining where users stake coins to become validators, should be encouraged across the board in the cryptocurrency sector. With this architecture, validators are chosen at random to add a block to the ledger, replacing the computational arms race of Proof-of-Work. The second-ranked network Ethereum is switching to Proof-of-Stake, which is expected to cut down on energy use by up to 99.95%.
However, there is currently no indication that the Proof-of-Work algorithm used by the Bitcoin network will be replaced. Since PoW aligns incentives to secure all transactions, it is more decentralized than its energy-lite sibling and has withstood the test of time. The PoW architecture, in the words of a proponent of bitcoin Michael Saylor, "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 ensuring vitality and integrity over time."
One of the biggest bitcoin holders in the world is Saylor's business intelligence company MicroStrategy, which bought 125,051 BTC for over $3.8 billion and made astronomical profits in the process. Saylor co-founded the Bitcoin Mining Council last summer to encourage energy consumption transparency and advance sustainability measures globally in response to growing criticism from energy campaigners.
The Council mentioned "dramatic improvements to bitcoin mining energy efficiency and sustainability due to advances in semiconductor technology, the quick growth of North American mining, the China Exodus, and worldwide rotation toward sustainable energy and modern mining techniques" in its most recent report.
The survey estimated that 58.5 percent of bitcoin mining was carried out using renewable energy in the fourth quarter of 2021, a little increase of 1% from the third quarter. However, it appears like things are going correctly. In the end, miners will always look for methods to produce power at the lowest possible cost, and the Council works to constantly emphasize environmentally friendly choices.
Elon Musk, the CEO of Tesla and inventor of SpaceX, had a key role in the establishment of the Council; after all, it was the multibillionaire's decision to change his mind and no longer accept bitcoin for Tesla automobiles that revived the discussion around PoW. Musk even attended the first meeting of the Bitcoin Mining Council in May. Tesla still has almost $2 billion worth of bitcoin on its financial sheet, despite the energy issues.
According to Maud Simon, COO of sharded blockchain Alephium, "there are several projects to address concerns of bitcoin's energy use," "Some are forming partnerships for clean mining, some are mining green blocks using certified hydroelectricity, while yet others are working to use less energy. Our Proof-of-Less-Work invention shows how PoW chains may handle the energy sustainability problems without losing security and decentralization by reducing energy usage to less than an eighth of bitcoins after a specific threshold.
Intel is one well-known corporation that has lately joined the mining industry. The California company will soon introduce its first chip designed just for the crypto industry, which it claims offers "1,000 times greater performance per watt than conventional GPUs for SHA-256 based mining." With its Blockchain Accelerator processor, Intel will face off against companies like Bitmain, Canaan, and Nvidia. We'll soon be able to tell if the technology lives up to expectations. The chip will be tested by the first two businesses, Argo Blockchain and Block (formerly known as Square).
Hardware experts now in existence are not deaf to the critique of PoW. The S19 Pro+ Hydro mining rig from Bitmain uses liquid cooling technology to lower heat, power consumption, and noise levels while also increasing the life of the device. By using the equipment, American mining company Merkle Standard hopes to achieve net carbon neutrality by the end of 2022.
The whole bitcoin mining sector is moving away from dirty energy sources and toward a more sustainable grid that uses hydroelectricity, solar power, wind power, and geothermal energy. Even nuclear resources are being used, as shown with the rapidly expanding Mawson Infrastructure Group. Mawson utilizes carbon credits to balance its emissions when an energy balance contains carbon.
The key operating expense for bitcoin miners is energy consumption, so they have a clear motivation to discover and retain cheap sources, which are frequently renewable, according to Adrian Eidelman, co-founder of the smart contract platform and bitcoin sidechain RSK. Larger bitcoin mining farms are frequently situated nearby these energy sources in distant areas, making use of the cheap electricity that would otherwise be wasted or impractical to transmit to big cities.
Up until now, mining has been done to a considerable extent in secret. But things are starting to shift. We simply need to consider the Nasdaq stock market's debut of the first-ever Bitcoin Miners ETF. The product, created by crypto asset management Valkyrie, allows investors exposure to businesses that specialize in the technology or software needed to mine the asset rather than BTC itself.
Considering the future
Apart from the criticism that arises from the energy-intensive nature of Proof-of-Work, concerns have been expressed about the sustainability of the mining sector itself. After all, more than 90% of the available amount of bitcoin has already been mined. The block subsidy halves every four years (the next one is due in 2024), thus mining won't be economical unless bitcoin prices continue to rise.
Okay, sure. But the miners are actually betting on that. Only 10% of bitcoin's pre-programmed fixed supply remains to be mined, but mainstream investors have only lately started to take the asset class seriously, indicating there is still plenty of space for development. Bitcoin continues to be a sought-after digital asset for purchasers due to its ultimate scarcity, security, and decentralization.
What happens once the last block, the last bitcoin ever mined, has been confirmed?
Life in 2140 cannot be predicted with certainty, although mining is a very likely possibility. As was already established, the block subsidy and the transaction fees comprise the compensation that miners earn for each block that they mine. In decades to come, bitcoin's purchasing value may grow so high that miners would be forced to keep the ledger up to date and continue mining blocks even if there were no more bitcoins to be created. It's even feasible that people may commit resources to maintain the ledger while spending money protecting the network if bitcoin is perceived as such an important monetary basis.
According to Adrian Eidelman of RSK, "Bitcoin mining will become an asset strategy of many nations in the future, and those opposing it will only be sacrificing their own prosperity by decreasing innovation as well as employment and wealth creation."
Whatever happens, it's likely that in the months to come, mining and cryptocurrencies will be at the forefront of discussions about access to self-sovereign cryptocurrency in society and politics, as well as the great energy debate. This discussion will continue to be openly and effectively led by the industry.
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