Environmental Concerns & CBDCs Target Bitcoin Mining
Cynthia Dwork and Moni Naor created Proof Of Work (in 1993) as a tool to combat email spam. Adam Back (Blockstream) reinvented Proof Of Work in the form of Hashcash (again as a method to combat email spam), and finally, Satoshi Nakamoto utilized Hashcash as the engine that powers Bitcoin in 2009.
A system based on CPU power solving a cryptographic puzzle, a puzzle with increasing difficulty as new participants join.
As the hashrate increases, it becomes more difficult to mine a block. And as the price of Bitcoin increases, so does the hashrate.
Bitcoin, Bitcoin Cash, Litecoin, and Ethereum are some of the top cryptocurrencies that utilize the Proof-Of-Work protocol as a mechanism to secure the network from attacks and validate transactions.
Ethereum will soon upgrade its protocol and switch to the Proof of Stake (PoS) model terminating mining (PoW) from its consensus.
Bitcoin Mining In A Nutshell
The Cryptographic Puzzle, SHA256 Algorithm
The most widely used encryption for PoW cryptocurrencies is SHA256, designed by the NSA and published in 2001 by the National Institute for Standards and Technology (NIST).
Upon examining SHA256 further, we discover it is a patented algorithm under royalty-free copyright, which raises questions and perhaps provides another reason for Nakamoto’s anonymous identity.
Simple CPUs in our desktops and laptop computers could solve the SHA256 cryptographic puzzles in the early years of Bitcoin when difficulty was still low and the network no more than a few hundred tech-savvy pioneers.
As more and better CPUs join the Bitcoin network, the hashrate and difficulty increase (difficulty in BTC mining adjusts roughly every two weeks).
Although, the integration of ASIC hardware in the mining procedure changed mining and altered the concept of running a node to mine and use Bitcoin.
Application-specific integrated circuits (ASICs) are hardware customized to perform one single function. In the case of Bitcoin mining, ASICs solve the cryptographic puzzle by decrypting the SHA256 algorithm.
Security and Transactions
Securing a blockchain network may not require such excessive energy consumption. An attack on Bitcoin (51% attack) will demand an exorbitant cost to prepare, while the outcome would probably be null.
Those wondering if this much security is required, the answer is no. Bitcoin’s network was already secure enough in 2013, with a hashrate 99% lower than today.
What changed is the value of Bitcoin. The price is currently thousands of times higher than ten years ago. Price speculation, advertising, and promotional activities with top influencers (Brady, Snowden, artists, businesses) send the price skyrocketing.
Miners Operational Cost
The miners’ total cost can be analyzed (roughly) into the following fixed and variable costs:
- Electricity cost
- Hardware (ASICs miners) and any other accessories (cables, devices, laptops)
- Wages to personnel
- Property cost for land or monthly rent
- The building and reshaping of a warehouse
- Land improvement
- Security cameras and alarms
- Water bills
- Other operational costs
Electricity cost covers most of the total, but there can be unexpected threats and dangers while operating a business of this kind.
The price of Bitcoin (BTC) can drop significantly. It is difficult for mining businesses to make predictions or hold their inventory (cryptocurrencies), as they have electrical bills to pay each month.
It will lead to miners shutting down during the bear market, unable to cover their expenses, pay their loans, and fulfill their commitments.
EU Declared War on PoW Cryptocurrencies
“Bitcoin is now a national issue for Sweden because of the amount of renewable energy devoted to mining.
The European Union should ban the energy-intensive system used to mine Bitcoin
- Erik Thedéen ESMA’s vice chairman (source: Euronews)
Bitcoin is often accused of consuming excessive energy resources and generating a significant yearly carbon footprint, equal to some of the advanced economies of Spain or France.
Indeed, Bitcoin’s electricity consumption is reaching astronomical status, as mining facilities are rapidly expanding their operations worldwide, following the increased price movement of BTC.
Pundits and experts alike wonder how much will this demand for energy consumption increase and at which cost to the environment.
As long as Bitcoin’s price continues to rise, the same holds true for the cryptocurrency’s energy consumption, he says.
This is also why targeting the Bitcoin price is the only thing likely to work.
April 21st, 2022, Alex de Vries (Netzpolitik)
And it seems the EU may have targeted the price of Bitcoin (BTC) in cooperation with financial agencies and central banks.
The overwhelming resources at the disposal of the EU can generate pressure in secondary derivative markets and deal devastating blows to BTC, which can leave little chance of recovery even with the next halving.
Moreover, traders will peak the signals and short BTC in a similar approach to 2020, where the shorts were ready to send Bitcoin (BTC) to zero.
It raises many questions if the EU materialized this threat since right after these plans leaked, the price of Bitcoin (BTC) dropped in the following two months by more than 50%.
Another call for action against the whole cryptocurrency spectrum was raised for the first time by the European Central Bank (ECB) recently, mentioning carbon taxes on transactions and the ban of mining operations.
“So, while a hands-off approach by public authorities is possible, it is highly unlikely, and policy action by authorities (e.g. disclosure requirements, carbon tax on crypto transactions or holdings, or outright bans on mining is probable.”
Bitcoin’s Hashrate Growth
The massive increase in energy consumption by the Bitcoin network is the result of the price increase. Miners will boost their efforts, purchase more ASIC devices and rent more land to expand their operations as the price of Bitcoin (BTC) keeps rising.
Energy consumption at the industrial level increases the environmental cost.
However, in the case of cryptocurrency mining, the environmental concerns face difficulty processing the actual harm to the environment since miners are not located in a single region but operate globally.
We should all be concerned and aspire to preserve the environment and promote eco-friendly living conditions.
It seems, though, that some circumstances we recently encountered and actions taken against Proof of Work cryptocurrencies were masqueraded as an environmental policy while the target is different.
The war against PoW initiated by China has recently found an ally in the EU, and both decisions coincided with the development and release of Central Bank Digital Currencies (CBDCs).
Is it the magnitde of the footprint of Proof Of Work which is alarming, or perhaps the competition cryptocurrencies pose to CBDCs and the disruptive to centralization abilities that matter most?
CBDCs and Decentralization
The Proof of Work concept secures the networks from attacks and forms one of the many factors that decentralize a blockchain.
Decentralized cryptocurrencies are permissionless payment networks that eliminate the need for trust and trusted third parties.
On the contrary, CBDCs are centralized and further enhance the control of money by central banks on the daily use of cash.
("Bank for International Settlements head Agustin Carstens about CBDC and control")
The European Union is taking steps to combat the Proof Of Work mechanism, however, the timing of the decisions against PoW coincides with the European CBDC development, in a similar approach to the Chinese blanket ban on cryptocurrency.
PoW advocates relate the latest EU and ECB threats as an attempt to undermine cryptocurrencies and lay the foundations for CBDCs release unchallenged by competition.
The price speculation of Bitcoin is driving demand for an increased network hashrate (mining).
Miners’ profitability and price increase together. Hashrate increases as it follows the price.
While Bitcoin’s excessive demands for energy resources keep rising unhindered by the energy crisis we lately face, many wonder if Bitcoin (BTC) is significant enough to justify the environmental cost.
We expect the results of the Ethereum experiment that abandons Proof of Work to environmentally friendly Proof of Stake (PoS).
Ethereum could sustain an environmentally friendly approach without sacrificing its decentralized and permissionless features.
Other options are available, focused on delivering robust permissionless payments networks to support the rising digital economy (Bitcoin Cash, ZCash, Litecoin, Monero) with far lower energy demands than Bitcoin (BTC).
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Originally published at Medium