For a few years now, I and others been banging on about the environmental cost of Bitcoin, and similar cryptocurrencies. This cost from the electricity wasted on the pointless calculations used to ‘mine’ Bitcoins, under the ‘proof of work’ protocol used to ensure the validity of entries in the Bitcoin blockchain. The cost is huge, about the same as the energy use of a medium size country.
For almost as long, we’ve been promised an alternative ‘proof of stake’, in which the integrity of the blockchain would be protected by participants putting up some of their cryptocurrency as a ‘stake’ (more details here). But like nuclear fusion, proof of stale always seemed just over the horizon.
Now, it seems, it may be going to happen. Bitcoin’s biggest rival, Ethereum, has been testing a proof-of-stake blockchain for some time, in parallel with its existing proof-of-work chain. On 15 September, it is planned, the two will be merged in an event creatively called The Merge, and future operation will be proof-of-stake.
If this succeeds, the electricity consumption of Ethereum will be reduced by around 99 per cent. That will make it, in the words of Douglas Adams, mostly harmless. That doesn’t change the fact that, like cryptocurrencies in general, Ethereum is also pretty much useless. Its most notable function is as the basis for pricing non-fungible tokens (NFTs), digital certificates asserting ownership of an image (which anyone else can duplicate, but not own). That’s frivolous but no worse than collecting baseball cards or postage stamps (remember them?).
The big payoff from successful proof-of-stake is that it provides a way to kill the Bitcoin monster once and for all. Rather than banning Bitcoin, all that’s necessary is to ban proof-of-work. If Bitcoin made the transition to proof-of-stake, well and good. If not, no problem. Either way, its disastrous drain on world energy would be over.
{ 19 comments }
Moz 08.30.22 at 10:56 am
The trouble with Ethereum is that it’s a centrally controlled system subject to frequent revision outside the control of its “investors”. Oh and it’s run by people with a history of making money at the expense of their “investors”. I’d rather use a bank, they might not pay much interest but they do actually pay. Even Paypal is more regulated than crypto.
The Ethereum “proof of stake” is just an inequality-enhancing move, paying people who already have many of the thing. In that sense it’s a big improvement over Bitcoin, or more accurately it’s significantly less awful. Still awful.
But the fundamental question remains: what is it useful for? Why would anyone pay real money to use the Ethereum system? In that light I could run an equivalent setup, also outside the legal system, by buying a notebook and writing things down in it. Proof of stake and all, you give me money and I tell you that you might get it back if things go well.
Anonymous 08.30.22 at 12:20 pm
How would you actually enforce a ban on proof of work? It’s computation.
Trader Joe 08.30.22 at 6:03 pm
Its obvious that the Merge is a positive from an energy consumption standpoint and that’s likely reason enough to do it. That said, there is a very real chance that it converts a medium of exchange that has proved to be pretty reliable and pretty hard to defraud into something with a giant “hack me” target painted on its back. Buyer (seller) beware of course. The Merge basically reduces a society problem by augmenting a community one – which seems fine to me (not being much in said community, but obviously a citizen of Earth).
Whether Bitcoin could achieve the same seems doubtful (though I’m hardly a tech-head on this, perhaps some know better – what I’ve seen seemed skeptical). While JQs environmental concerns are laudable – vaporizing a couple trillion of wealth (and who knows what the knock-on effect would be) seems a steep bar to get people to unplug.
John Quiggin 08.30.22 at 9:57 pm
Moz: What’s it useful for? As I said, nothing much, but I’d settle for mostly harmless
Anon@2: New York legislators have passed a partial ban (governor still vacillating on signing), which suggests that a ban is feasible. China banned it a while ago. https://www.cnbc.com/2022/06/03/heres-whats-in-new-yorks-new-bitcoin-mining-ban-.html
Moz 08.30.22 at 11:28 pm
Trader Joe, the “couple of trillion” is a highly leveraged number and an awful lot of the real money is criminal. So while killing crypto would definitely vapourise millions of dollars of sucker money, it would take even more proceeds of crime out of the system. And perhaps teach the suckers that giving money to criminals is a dumb idea, even if the criminals are wearing suits.
Bitcoin has had a “hack me” on it from day one, and there are innumerable stories of people losing anything from a dollar to their life savings. Either by losing their password, an exchange being hacked, simple fraud or direct robbery. Not to mention all the extortion and scams made possible by crypto. There are still cases going on where people are fighting over whether an exchange was hacked or an insider made off with the cash. It’s telling that no-one knows…
Look, I get that fiat currency is by definition unreal so the bitcoin trillions are in that sense no less real that Elon Musk’s unusable billions. MMT is explicitly built on that from what I can tell. But at the same time, money isn’t valuable of itself, it’s an indirection. If you can’t buy anything with it, does it really exist? Viz, if I have $1B “worth” of bitcoin but could only get $1M by selling them… how much money do I actually have? (think of Elon selling Tesla… would he really get $100B or whatever it’s nominally worth?)
Ebenezer Scrooge 08.31.22 at 1:53 am
None of this cryptocrap is “harmless.” It is a playground for criminals, hucksters, and chumps. I’m happy if this playground stops producing more carbon dioxide than many countries. But it’s still a very nasty place to play.
Chetan Murthy 08.31.22 at 3:59 am
A long time ago, I looked very, very carefully at two Ethereum proposals: one for a form of “sidechains” (for scalability) and one for a kind of proof-of-stake. Both were fatally flawed. Both were touted by all the usual suspects. I think that unless this new proof-of-stake scheme has been vetted by the kind of actual protocol folks who do real work in distributed systems (and hence, people who wouldn’t touch crypto with a ten-foot pole), you should assume there are gaping security holes. That’s been a safe bet for all these protocols, and I mean even aside from the other problems (like coding errors, malfeasance, losing passwords, etc).
Trader Joe 08.31.22 at 11:35 am
@5 Moz
I agree the ‘couple trillion’ is a highly leveraged number, but that’s the number that’s important now. Its much the same as during the financial crisis – not even $100B of homes actually were foreclosed upon but the impact to the housing system broadly was well into the trillion. If the discussion was should the leverage be smaller I’d agree with you, the discussion however is what would be the consequences of burning all those coins and that would be massively larger.
Likewise, because of the financialization of bitcoin (and Ether) the proportion of coins both real and hypothecated is far more ‘legit’ than you are implying. 5 years ago before these were heavily financialized and there weren’t futures and funds etc. I’d have backed your view fully, but the financialization that has created the aforementioned leverage is all in the public market domain and accordingly the criminal money has stayed largely constant while the legitimate system has probably grown 20x.
I agree with you Bitcoin has always been hacking vulnerable, but Ether mostly hasn’t been so that’s why the Merge could prove destabilizing.
Finally – people need to move past this notion that you ‘can’t buy anything with Crypto so why have it’ that’s as true as saying you can’t buy a sandwich with Google shares so why own them. A crypto asset is freely and practically instantly convertible into any currency on earth – if you own it and it goes up in value you darn sure can buy stuff with the gains you make…the reverse is also true.
A bitcoin or an Ether is a claim on an intangible asset that has been assigned value. What’s the Mona Lisa worth? Its just paint and a frame – its worth what society believes its worth. If a Lisa coin could have value why can’t an Ether.
KT2 09.01.22 at 2:30 am
No to “The end of the Bitcoin [crypto blockchain] Monster?”
Maybe energy of Etherium, one of “Today, there are over 20,000 cryptocurrencies in circulation.”^4.
^3. Letter to Congress – “By its very design, blockchain technology is poorly suited for just about every purpose currently touted as a present or potential source of public benefit.”
^2. ! “Blockchain could boost global GDP by $1.76 trillion by 2030.” ^2.
*
Simplest blockchain problems article I’ve found. They are very serious problems.
^1.
“5 Problems With Blockchain Technology
By Adam Levy – Updated Jul 1, 2022
https://www.fool.com/investing/stock-market/market-sectors/financials/blockchain-stocks/problems-with-blockchain/
*
And the For team – just about EVERY serious report abstracted and linked here;
^2.
The Ultimate List of Blockchain Statistics (2022)
Rebekah Carter
UpdatedJun 12, 2022
“Blockchain could boost global GDP by $1.76 trillion by 2030.”
Sources
Markets and Markets
StatistaTriple A and Grandview Research
PwCMarkets and Markets
Vantage Market Research
DeloitteBIS Research
Global Newswire
GartnerFinances Online
https://findstack.com/blockchain-statistics/
*
^3. On the Risk side:
(Blockchain growth seems a ridiculous as proof of stake.)
– Cryptoverse: Blockchain bridges fall into troubled waters – Reuters
^3.
“On the Dangers of Cryptocurrencies and the Uselessness of Blockchain
(CRYPTO-GRAM)
Thu, 18 Aug 2022
“Schneier writes: Earlier this month, I and others wrote a letter to Congress, basically saying that cryptocurrencies are an complete and total disaster, and urging them to regulate the space.
“Nothing in that letter is out of the ordinary, and is in line with what I wrote about blockchain in 2019. In response, Matthew Green has written—not really a rebuttal, but”a general response to some of the more common spurious objections people make to public blockchain systems.”
In our letter, we write: “By its very design, blockchain technology is poorly suited for just about every purpose currently touted as a present or potential source of public benefit. From its inception, this technology has been a solution in search of a problem and has now latched onto concepts such as financial inclusion and data transparency to justify its existence, despite far better solutions to these issues already in use. Despite more than thirteen years of development, it has severe limitations and design flaws that preclude almost all applications that deal with public customer data and regulated financial transactions and are not an improvement on existing non-blockchain solutions.”
https://www.schneier.com/crypto-gram/archives/2022/0715.html#cg8
– Starbucks NFTs, Reddit
karma points on the blockchain, Saylor fired, Telegram ICO slight return.David Gerard
– Track carbon offsets with blockchain?Rob Slade
– Deepfakes Expose Vulnerabilities in Facial Recognition TechnologyPSU
Via Info on RISKS (comp.risks) via amediadragon
https://catless.ncl.ac.uk/Risks/33/40#subj6
*
^4
“Today, there are over 20,000 cryptocurrencies in circulation.”
Here’s a summary of what you’ll find below:
Cryptocurrency Statistics (Top Picks)
How Many Cryptocurrencies Are There In 2022?
Growth Of Cryptocurrency Over Time
Crypto Usage Demographics
Top 20 Cryptos By Market Cap
How Many Cryptocurrency Exchanges Are There?
https://explodingtopics.com/blog/number-of-cryptocurrencies
Enjoy. When and if blockchain is a global standard we may be on a winner. Until then, the crypto blockchain is still going to be a monster.
TM 09.01.22 at 12:17 pm
“what would be the consequences of burning all those coins and that would be massively larger.”
What do you think would be the consequences? Note, the trade price for BTC has already declined 70% from the peak. What worse would happen (in terms of systemic consequences) if it declined 100%?
Since comment 9 is pretty messed up, here’s the link to Schneier’s article (worth reading):
https://www.schneier.com/blog/archives/2022/06/on-the-dangers-of-cryptocurrencies-and-the-uselessness-of-blockchain.html
And here’s the Letter to Congress:
https://concerned.tech/
We are 1500 computer scientists, software engineers, and technologists who have spent decades working in these fields producing innovative and effective products for a variety of applications in the fields of database technology, open-source software, cryptography, and financial technology applications.
Today, we write to you urging you to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good. We urge you to resist pressure from digital asset industry financiers, lobbyists, and boosters to create a regulatory safe haven for these risky, flawed, and unproven digital financial instruments and to instead take an approach that protects the public interest and ensures technology is deployed in genuine service to the needs of ordinary citizens.
Chetan Murthy 09.02.22 at 4:18 am
Trader Joe: “Finally – people need to move past this notion that you ‘can’t buy anything with Crypto so why have it’ that’s as true as saying you can’t buy a sandwich with Google shares so why own them. A crypto asset is freely and practically instantly convertible into any currency on earth – if you own it and it goes up in value you darn sure can buy stuff with the gains you make…the reverse is also true.”
This very misleading. The reason people ask “what can you by with Crypto” is not to ask “is it valuable”, but to ask “what is its USE?” The USE of Google shares is that they represent a claim on the earnings of Google, a claim on the assets of Google. The USE of Crypto is supposedly as a currency for transactions — to buy and sell things — and hence, it is completely valid to ask “what can you buy and sell with Crypto?”
Your argument (“all that matters is that people will pay me for my Crypto”) applied equally well to South Sea shares (until they imploded), and that should tell you something about its validity.
Trader Joe 09.02.22 at 10:57 am
@10 TM
First – 100% with you on a better regulatory framework.
Consequences of burning all the existing BTC? In my opinion, you’d instantly vaporize 1-2 trillion of both actual coin value and hypothecated value (for those unfamiliar – hypothecated value is the value of other financial instruments – options, futures, fund holdings etc. that don’t directly own coin, but their value depends on the value of coin.
Beyond that we can be 100% certain that there is a lot of leverage associated with BTC ownership – There’s no way of knowing for sure, but it would not be unlikely that there is more than $500B of actual loans denominated in real currency that would suddenly have no collateral behind them. To put that in context it would about 2x greater than the assets that were suddenly unstabilized when Lehman Bros. failed in 2008.
In my view – BTC to $0 could easily precipitate another global financial crisis. Not least of the reason being the lack of regulatory framework that exists around it. Back in June when one single fund failed it precipitated a multi-billion dollar emergency rescue by private backers and destroyed several billion more in wealth of associated publicly traded companies. That was an ice cube on the tip of the iceberg of what an actual burning (i.e. destruction) of BTC would bring.
John Quiggin 09.02.22 at 7:24 pm
@TraderJoe Bitcoin will fail sooner or later, with some of the consequences you mention. The longer the bubble goes on, and more Bitcoin is integrated into the larger financial system, the worse the consequences will be.
TM 09.05.22 at 11:32 am
I agree with JQ, BTC is nothing but a pyramid scheme. Regarding your figures, https://www.coinbase.com/price/bitcoin indicates 19.1 million bitcoins in circulation, which gives a “book value” of <400 billion dollars. That is half of Tesla’s market cap (which btw is ridiculously overvalued and I’m sure will come down). I don’t see on what grounds BTC should be considered “too big to fail”. And any financial institution accepting BTC as collateral for loans must be exceptionally stupid and deserves to fail.
Trader Joe 09.06.22 at 2:47 pm
@13 and @14
Left to its own devices you are probably correct that BTC could fail. That’s why the financialization and corresponding regulation that members on both sides of the aisle are pushing is critical to its future and quite likely why in the end it won’t. Things that are regulated don’t often fail, indeed the regulatory moat provides actual support for the instrument (deserving or not).
TM your ‘book value’ calculation is correct in basic terms, but to the extent they are bought using margin that can lever into $1-2 billion (not all coins are margined).
Beyond that however are several hundred billion of notional value of futures contracts. These aren’t purchased with coin, they are purchased with dollars, Euro, Yen etc. but their value is 100% derived value from BTC itself. These contracts are financial instruments no different than corn, oil or gold and are collateralized by cash deposits same as any other commodity. Bitcoins are lent however but not by regulated lenders – accordingly those who choose to engage in such transactions deserve to fail if they do – that doesn’t make the size of the resulting crater any less problematic for governments and financial markets.
The major difference of course is no one on the internet shouts “Oil or corn should be Zero” whereas any number of people seem to think BTC should be. Again – value is where you find it. If a piece of cardboard with Mickey Mantle’s face on it can be worth $12.6 million why can’t a BTC be worth $20,000 or $50,000 or $5,000? We agree gold, diamonds and art have value despite few practical uses – why not BTC?
John Quiggin 09.06.22 at 10:47 pm
Trader Joe: The question isn’t one of practical use. If there were people who value owning the calculation that yields a Bitcoin (a number that produces a low value when input to a hash function) or a link to a picture of a monkey, then Bitcoins and NFTs would have intrinsic value. But, as far as I can tell, there are no such people or too few to matter.
People value BTC because they think they can sell them to other people.
Trader Joe 09.07.22 at 11:19 am
@16
“People value BTC because they think they can sell them to other people.”
Isn’t this true of substantially all trading of financial instruments? (Says a guy who makes a living doing just that). Every day gold, oil, shares of IBM or US Treasuries are traded and while some of the volume might relate to some intrinsic value to the buyer the vast majority of the volume every single day is a buyer who thinks he can make money holding it and a seller believing the value is fair to exit. BTC is no different.
To be clear I agree I agree with the original OP premise as far as power use and I agree, left to its own devices BTC could eventually fail – though my actual opinion is that regulators seeking to protect the broader financial system will actually enact guardrails that might prevent that.
BTC daily trading volume is routinely in $25-30B range based on verifiable exchanges (you’ll see numbers much higher than that which are B.S.). While that might strike you as “too few people to matter” that’s hardly an insignificant sum.
I get your point in economic terms, but there is a degree to which BTC has become a self fulfilling prophesy – it has value because someone said it does and others believe it does. The more that believe the more real it becomes. It could be risk will neutralize that belief, but it could also be that regulation will enhance it. That’s the race that is underway and the Merge is part of improving the ability to regulate as well as the power consumption aspect.
MisterMr 09.07.22 at 3:20 pm
The way I see things, if someone buys, for example, a home, he might buy it for 3 reasons:
reason (1), because he wants to live in it (use value)
reason (2), because he hopes to rent it to someone who will then have to pay the rent (capital good)
reason (3), because he thinks to sell it at a profit at a later date (speculative good).
When something like a housing bubble happens, it is because a lot of people buy the houses for the reason (3), and this causes a vicious cycle that pushes houses prices up and people buy them because they are going up, until at some point the leverage becomes excessive, the prices can’t go up anymore, people stop buyng houses for reason (3), prices fall etc., causing the crash of the bubble and a financial crisis.
Not all goods are suitable for (3), people will not buy icecreams or cars as speculative goods, but they could buy Picasso paintings, gold, houses etc. . The requirements seems to be: limited availability and does resist time.
However there is a big difference between value (1) and value (3), and the market is supposed to organize rationally to optimize value (1), not value (3), so from this point of view something like Bitcoin, that only has value (3) but no value (1) or (2), is a proof of the irrationality of the markets.
But it is important that this irrationality refers to the accumulation of speculative goods/savings, and has nothing to do with the ability of the market to accurately produce the right proportions of consumption goods (value (1)). This is a very important difference IMHO but I think many people don’t get the difference, so that there is sometimes a contrast between an extreme anti-market and an extreme pro-market view.
But, why is there such an excessive demand for speculative goods? To put it simply it is because in mature capitalist countries there is a chronic excess of desired savings VS investiment (value (2)), which we can describe as lack of demand, or tendency to the accumulation of wealth (ideally it would be capital overaccumulation, but once the accumulation surpasses a certain point it is impossible to have more capital accumulation, so we have just wealth accumulation).
Until this “excess desired savings” problem is solved, even if you kill Bitcoins something else will po pup.
Andrew Strang 09.08.22 at 10:12 am
@10 TM “Since comment 9 is pretty messed up, …”
For many more identically messed up posts, don’t hesitate to visit https://johnquiggin.com/
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