Topic: Solving the Crypto Energy Challenge (Read 76 times)

Original post: https://bitflate.org/post/2021/05/14/solving-the-crypto-energy-challenge.html

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.

The crypto market is on fire. Hashrate keeps reaching an all-time high. The energy debate has made a big comeback. The Xinjiang Bitcoin mining outage in April crashed the market. The incident spotlighted the inconvenient fact that a lot of Bitcoin mining energy is not coming from renewable sources. Elon Musk published his concern on Twitter: Bitcoin increases the use of fossil fuel. Bitcoin supporters and critics continue to battle over the issue.

Bitcoin is a unique invention. It offers a future where we can enjoy more freedom. Since its invention, Bitcoin remains a highly speculative asset. The Store of Value use-case becomes increasingly entrenched. However, supporters and critics view Bitcoin through different lenses. For supporters, Bitcoin is the ultimate future. For critics, Bitcoin is madness. Mining is the hot button topic because it uses real-world energy. Energy spend makes Bitcoin real. But it can damage the environment through increased use of fossil fuel. Bitcoin is money. Money embodies the ultimate fear and desire of humans. Supporters and critics are increasingly polarized.

Energy spend is good

Throughout history, humans have gone through different kinds of money. We’ve used gold as the ultimate form of hard money. It exists in the physical world. The Gold Standard is the Standard for thousands of years. Without a reliable Proof of Work system, it is impossible for humans to effectively agree and collaborate. Bitcoin presents a new paradigm. Being completely virtual, there are ways for us to minimize mining damage to the environment. With gold, we have to mine where the gold is. With Bitcoin, we can consciously select renewable sources for mining.

Supporters of Bitcoin and decentralized cryptocurrencies see the Proof-of-Work mining system as the holy grail. Energy spend is the proof. It is the way to reach a decentralized consensus. An alteration will lead to centralization and broken trust. We must not go back to previous consensus models. We cannot abandon the Proof-of-Work system. We need to work on using renewable energy sources. Some Bitcoin advocates, like ARK Invest and Square, claim that Bitcoin can help the world transition to renewable energy sources. We’d need to see how and when these advocates would spin up mining rigs.

Energy spend is bad

The free market is very efficient at driving down costs. But it doesn’t always give us the most desirable system. The cheapest source of energy is often the most polluting. That’s what we mostly do. We dig up some fossil fuel from the ground and burn it. We are supposed to become more conscious of the environment. We need to become more efficient at usage. We need to switch to less polluting and renewable energy sources.

These changes take consensus, regulations, and time. The world is slowly moving away from using fossil fuels for electricity generation and transportation. Meanwhile, Bitcoin appears. In many ways, Bitcoin is reversing the renewable energy trend. It consumes an enormous amount of energy. Experts have studied and debated about renewable energy used for Bitcoin mining. Bitcoin mining is a free market. Energy comes from where it is abundant and cheap. A sizable amount of the energy comes from fossil fuels like coal and gas. Energy usage remains one of the most heated aspects of Bitcoin.

Alternative models

Cryptocurrency designers have studied the Proof-of-Work system. They have proposed alternative models. Some cryptocurrencies, like Litecoin, use different hashing algorithms. Litecoin’s algorithm, scrypt, consumes less energy than SHA256. The Ethereum community is in the process of moving to a Proof-of-Stake consensus model. That would eliminate energy usage. The drawbacks of Proof-of-Stake are well known. It appears to have centralization issues of existing monetary systems.

Chia uses a Proof-of-Space-and-Time consensus model. This PoST system gives rewards to participants, aka farmers, based on how much space they are allocating. This system doesn’t require energy burn. But it requires farmers to contribute storage. PoW is OPEX (operating expenses). PoST is a CAPEX (capital expenditures). Farmers need to buy more and more hard drives to participate in farming. A CAPEX system does not consume much energy. But it consumes more resources to produce hard drives.

Driving payment adoption as a solution

Energy consumption is neither bad nor good. Bitcoin’s price is related to mining energy consumption. The higher the price goes, the more energy we’d spend. Bitcoin’s price is a distraction. The Ponzi-like price scheme draws people into an endless debate. Supporters will not give up the Proof-of-Work system. Critics will keep attacking Bitcoin’s energy consumption. Both sides cannot settle the debate because they view the issue from their narrow perspectives.

Bitcoin is a digital commodity. It lives in the virtual realm. It has no connection to reality. Its price is entirely speculative. In theory, the price can be infinite. See The Bitcoin Price Paradox. We don’t have infinite energy. Instead of lauding or rejecting Proof-of-Work energy spend, we need to figure out how much energy spend is appropriate.

The key to solving the energy debate is payment adoption. When people can use cryptocurrencies for payments, we can compare them with the existing systems. Payment adoption will let us gauge how much crypto transactions cost. At that point, we can decide how much energy we need to spend to operate cryptocurrency networks.

Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to be a Medium of Exchange.