2x12 The True Cost of Bitcoint

The True Cost of Bitcoin

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A few weeks ago I divested myself of all my Bitcoin and used a fraction of the proceeds to buy a computer. You can watch me unbox the new computer on YouTube (hint: It's a System76 Lemur Pro). I didn't just use Bitcoin to buy the computer though; I completely sold all Bitcoin and fully divested myself of any holdings (or HODL if you're into the Bitcoin lingo).

Why?

Let's travel back in time to when people were scared of the volatility in the Bitcoin market. I remember hearing the constant refrain: "It's about blockchain, not Bitcoin." This was so people could hype the technology, while disconnecting the negativity, which they placed solely on the secondary market of Bitcoin exchanges.

The problem with that statement is that the peerless, decentralized blockchain needs immutability. That immutability comes from having as many miners competing as possible. Miners are only competing for the money pay-off: The Bitcoin. That is the incentive for burning electricity in order to keep as many mining nodes on the network as possible. You cannot disconnect Bitcoin from blockchain in a peerless, decentralized network. There is no blockchain without Bitcoin because it removes the incentive.

There are two caveats here:

  • We're focusing on "peerless" because that's what Bitcoin's blockchain is
  • We're emphasizing Bitcoin's proof-of-work algorithm

There are alternatives where "blockchain, not Bitcoin" makes sense. These are blockchain technologies like some of Hyperledger's peered systems. The applications built on peered systems put the focus on governing the immutability rather than incentivizing. If you're creating a peered blockchain network for a large organization (e.g., the College Board where all high schools and colleges participate), then the incentive is in the process and software, not the reward.

There are other technologies and ideas in the blockchain space such as proof-of-stake systems, mathematical tangles, and Stellar that could be wildly successful in the future and correct some of these problems, but I'm focusing explicitly on Bitcoin and proof-of-work systems here.

But peerless blockchain's have a problem. There is no centralized governing body because decentralization is the key. The goal is a highly decentralized, but highly immutable network of transactions.

How do you get people you don't trust to participate in a system of trust?

Bitcoin tried to solve this via burning money. Basically, anyone mining is expending resources on hardware and electricity in order to solve the block. This is the proof of the work being done. You have some skin in the game. Why would anyone burn money to keep a network sufficiently decentralized? Because of the incentive.

The theory is sound, but the practice leaves a lot to be desired. As more people entered the mining fray, most common hardware became inefficient, and in order to compete, you needed specialized hardware, costing more money. Eventually, most average individuals couldn't mine for Bitcoin, but had to join mining pools where the resources and the rewards were spread around. Soon, people began setting up mining hardware in specific geographical locations in order to reduce the cost of electricity for the hardware that was running—adversely affecting energy consumption in those locations.

What this led to was not a shift in monetary governance from governments to the people, but instead of shift of monetary value from one group of millionaires to another group of millionaires. Just like in our current economic system how a handful of individuals control most of the world's wealth, in the virtual world of Bitcoin, most of the Bitcoin value is held by a handful of individuals as well. We haven't decentralized anything. We've spread out the cost of mining, while giving the profits to a select few.

The recent Bitcoin halving (a process by which the reward for mining is halved in order to ensure that inflation doesn't occur within the Bitcoin network) reduced the rewards for mining enough that ~30% of the mining network dropped off because it became too expensive. This means that the network became a little less decentralized and those with the most power and money in the network just became more powerful and richer.

Bitcoin was supposed to revolutionize money, but transactions take long, decentralization is falling off, money is being consolidated among a handful of key Bitcoin millionaires and billionaires, and we haven't even gotten to the cost. Bitcoin consumes more electricity than the entire nation of Madagascar. And no matter how many arguments against this assessment Andreas Antonopoulos makes, there is overwhelming evidences that Bitcoin is less efficient (in terms of transaction speed) than traditional credit card processing, and it consumes way more electricity. Bitcoin is a dirty technology in an age where climate change ought to be our number one focus.

Consider this: When I speak at conferences about chatbots, I always say: "It's easy to build a bot; It's hard to build a useful bot." I then go over a handful of chatbots that—although they effectively accomplish the task at hand—they do it in a way that is worse than the traditional way of doing it. When that happens, the technology is useless.

If Bitcoin has slower transactions, more difficult usage, and creates greater waste, while also not giving us the decentralized, people-owned money it promised, what does that say about it? Maybe the Lightning Network will change all of this, but it hasn't even made a dent yet.

Back to energy consumption: Climate change is the single greatest challenge facing humanity today, and Bitcoin has done little to quell these concerns. Just look at the Digiconomist's Bitcoin Energy Consumption Index, which states—among other things—that roughly 50% of all data center usage is currently Bitcoin mining. Although I mentioned earlier that Bitcoin mining consumes more electricity than the country of Madagascar, we also have estimates dating back to 2019 that put it at the energy consumption of Switzerland.

This is not a good trend.

Ultimately, I sold my Bitcoins because I decided from an ethical perspective I could not be both an environmentalist and have any stake in Bitcoin. There are better ways to invest my time and money.

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Credits

Header photo of "Something Set Up" by Sean Ellis.