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2022 | Buch

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The Bitcoin Dilemma

Weighing the Economic and Environmental Costs and Benefits

verfasst von: Colin L. Read

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

There are few innovations that have the potential to revolutionize commerce and have evolved so quickly that there remain significant misunderstandings about their operation, opportunity, and challenges as has Bitcoin in the dozen years since its invention. The potential for banking, transacting, and public recording of important records is profound, but can be displacing if not done with appropriate care, and is downright dangerous if certain pitfalls are not noted and avoided. Among other things, this book proves the existence of a Bitcoin dilemma that challenges the conventional wisdom which mistakenly asserts the incredibly intensive energy consumption in Proof-of-Work cryptocurrency mining will be remedied by more efficient mining machines or sustainable power sources. It shows for the first time within a well-specified economic model of Bitcoin mining that the recent runup in electricity consumption has a simple and inevitable explanation. For a coin with almost completely inelastic supply and steadily increasing demand, the conditions for accelerating electricity demand is consistent with economic theory and may well characterize the future of Bitcoin.

The book also demonstrates the counterintuitive result that improvements in mining efficiency, in terms of electricity consumption per terahash of processing power, or decreases in electricity costs as cheaper sustainable energy is diverted to this industry, merely exacerbates the acceleration of energy consumption because of a prisoner’s dilemma arms-race-to-the-bottom. The book proposes policy solutions to mitigate this Bitcoin dilemma but note that the mobility of industry capacity which needs but a ready supply of electricity and an Internet connection frustrates local regulation and warrants global solutions. The incredible opportunities of this industry will only be realized if our regulators, legislators, entrepreneurs, and general public garner a more complete and objective understanding of this and other Proof-of-Work mining techniques. The book provides this broader perspective based on the author’s research as an economist, his position as a director of a large regional bank, his understanding as a technologist and as an environmental and sustainability researcher, and his public policy experience as a mayor who has also written books and articles about public policy and public finance.

Inhaltsverzeichnis

Frontmatter

The Cypherpunk Bible

Frontmatter

Chapter 1. In the Beginning

Abstract

The Cypherpunk generation was proud and intelligent. Like many smart and well-educated young males, they are sympathetic to the writings of Ayn Rand and her sense of resourcefulness and self-sufficiency in spite of government and institutions determined to discourage independence and creativity. Indeed, they have faith in the marketplace for ideas and for democracy itself, albeit in a different and decentralized form than we see in a republic. They also inspired a new digital currency.

Colin L. Read

Chapter 2. The Creator

Abstract

Some among us are driven to create, without thought of personal gain, or for that matter whether the value of their creations will be recognized by others. These individuals take profound ownership in concepts they create and guard the intrinsic beauty of their works with the pride of an artist. Stories abound of artists who destroy their works rather than have them coopted and warped by others, just as the protagonists in the novels of Ayn Rand, who inspired many cypherpunks. Satoshi stated, “The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime.”

Colin L. Read

Chapter 3. The Disciples

Abstract

The pioneers of cryptocurrency share a number of interests and attributes. A good measure of the culture shared among these early pioneers can be characterized by Marshall McLuhan’s famous statement that “the medium is the message.” We shall even see that Satoshi included in bitcoin’s first block, known as the Genesis Block, a statement that taunted the Bank of England. In doing so, Satoshi made a declaration to all those who will follow the coin.

Colin L. Read

Chapter 4. The Genesis Block

Abstract

Recall Satoshi’s motivation for the need of a Proof of Work cryptocurrency. Satoshi advocated for a digital payment system that would allow direct transactions between parties without the intervention of a “trusted third party.” These transactions can be memorialized in perpetuity by raising the cost of corrupting the system of transactions to an impracticably expensive level. The security of the system is ensured if there are a sufficient number of honest, independent and uncontrolled nodes with more collective processing power than any possible coalition of those who would try to corrupt it. Satoshi’s bright flash of creativity provided the basis for the encryption of all digital coins that will follow.

Colin L. Read

Cryptocurrency Corporatization

Frontmatter

Chapter 5. A New Testament

Abstract

Bitcoin was certainly no overnight success. Following the mining of the first block on January 3, 2009, it was not until six days later, on January 9, 2009, that the source code to run a bitcoin node was released to SourceForge, a site that functions as a clearing house for digital innovators. From then on, Satoshi was hashing blocks regularly and earning 50 bitcoin with every additional linked block in the chain, even though no transactions had occurred. It would take more than a year for a single purchase to be made with bitcoin, and two years before bitcoin attained a value above one dollar.

Colin L. Read

Chapter 6. Public Ledgers, Private Wallets, and Crypto Vulnerabilities

Abstract

Bitcoin was designed from the onset so that each new set of transactions to be mined across a peer-to-peer network could be processed over the Internet with no institutional intervention or oversight necessary. In doing so, it had to establish a mechanism of self-policing in which participating nodes on a network would do the work necessary to maintain the bitcoin protocol, possibly improve upon it over time by proposing enhancements to the protocol through a democratic vote of all nodes, and perform the grunt work every ten minutes to ensure the most recent set of transactions in the digital currency are legitimate. This protocol has remained remarkably resilient over the years, but so have competing protocols.

Colin L. Read

Chapter 7. Bitcoin Goes Corporate

Abstract

Satoshi could not have imagined the corporatization of bitcoin mining and the vast exchanges that now hold our accounts. In the early days while Satoshi was active, private keys still resided on hard drive as large coin exchanges did not yet exist. New financial institutions grow to control our accounts while venture capital flowed to fund and control mining itself.

Colin L. Read

Chapter 8. The Fundamental Flaw of Bitcoin

Abstract

For the reader interested in the economic theory behind bitcoin mining, this chapter describes the industry dynamics. Those less interested in the mathematics of the industry may prefer to skip to Chapter 9. With some understanding of the economics of the industry at hand, I next complete the economic picture. First, notice that industry dynamics are unique in that the supply of bitcoin is essentially fixed and will expand by only about 5% over the next 118 years. Economists call this supply inelastic because supply varies little, regardless of price and the level of demand. Indeed, when private keys are lost, or coins owned by Satoshi go unspent, supply actually declines in the bitcoin model. The unusual supply dimensions of bitcoin, combined with increasing demand over time combine to cause an increasing bitcoin price and hence energy consumption over time.

Colin L. Read

Chapter 9. The Bitcoin Dilemma

Abstract

Bitcoin security was based on the premise that a sufficiently large miner base would make the commandeering of more than 50% of the network expensive and not feasible. Satoshi predicted, “I anticipate there will never be more than 100 K nodes, probably less. It will reach an equilibrium where it’s not worth it for more nodes to join in. Satoshi could not have imagined that the price of bitcoin wold approach six figures, and more than ten million mining machines would be operating continuously, with electricity consumption continuing to rise to approach that of some major industrialized nations.

Colin L. Read

Cryptocurrency Consequences

Frontmatter

Chapter 10. Towns and Cities Against Noise and Power Hogs

Abstract

By 2016, the Application Specific Integrated Circuit-based Bitcoin Antminer S9s became available. Earlier machines were no match for the S9 miners that appeared en masse in 2016. They represented a huge increase in mining efficiency that moved bitcoin beyond hobby mining to corporate mining. Corporate miners scoured the world for cheap power and converged on localities best able to provide the most power at the cheapest rate with the least regulation. Localities rarely knew what hit them, at first.

Colin L. Read

Chapter 11. No More Duffel Bags Full of Cash

Abstract

There are certainly legitimate needs for the privacy that so concerned cypherpunks. There is also no doubt that anonymity obscures illegal transactions. Satoshi recognized a potential seedy underbelly to anonymity, but was not willing to throw the baby out with the bathwater.

Colin L. Read

Chapter 12. States and Bitcoin

Abstract

While a number of aspects of bitcoin production affect local jurisdictions, states have also been drawn into controversies. Local issues arise because bitcoin produces minor and limited local benefits, primarily in the form of a few jobs created, but with substantial local nuisances. States can assist localities by legislating provisions that contribute to the greater health of the economy.

Colin L. Read

Chapter 13. National Policy and Bitcoin

Abstract

Satoshi harbored great skepticism about large financial institutions, especially in the wake of the artificial mortgage-backed securities-fueled asset bubble of 2007 and the ensuing financial meltdown that led to the Great Recession. The failure to sufficiently regulate banks and insurance companies too-big-to-fail cost Wall Street and required significant taxpayer-funded bailouts. But while Wall Street was saved, and these same institutions soon grew even larger, Main Street suffered. Ineffective regulation that fell far short of rapid innovation in the financial sector left citizens picking up the pieces and plunged economies worldwide into the worst recession since the Great Depression. The same concentration of financial wealth and power is now occurring in cryptocurrencies, with similar potential for economic harm.

Colin L. Read

Chapter 14. The Rise of Ethereum and Hobby Mining

Abstract

The subject of this book is The Bitcoin Dilemma, a result derived in Chapter 8 that demonstrates mining energy consumption is proportional to and bound by the price of bitcoin and can even accelerate with miner efficiency and electricity cost improvements. Should bitcoin remain popular and demand continue to increase, so will long run electricity consumption. Indeed, as miners secure for themselves less expensive power contracts, the additional price burden is borne by other ratepayers. This problem is shared with other Proof of Work coins beyond bitcoin.

Colin L. Read

Born-Again Crypto Bros and the Gospel of Profits

Frontmatter

Chapter 15. A Hard Fork in the Bitcoin Philosophy

Abstract

One’s self-identity is a filter which affects the way we relate to others. We each view the world through our individual eyes, filtered by a combination of our experiences and desires. Given the myriad different ways various people can judge differently the same circumstances, this ability to filter our environment based on our own world view creates self-coherence and offers a simpler path to navigate life. These are the characteristics of a cult, in this case the cult of cryptocurrency.

Colin L. Read

Chapter 16. The First Crypto Bros Millionaires

Abstract

Bitcoin has become a lure that fosters a pyramid investment scheme in which something becomes more valuable only because more people are induced to purchase it, rather than for the intrinsic enjoyment or value it can create. Bitcoin speculation is both enticing and dangerous for unsophisticated investors. Some people are easily swayed by promises of easy money, especially if there is an element of hip to it, as witnessed by the flocking of inexperienced investors to the Robin Hood investment platform aimed at young people, or the attempts to manipulate the price of Game Stop, a popular electronic games software retailer that was on the verge of bankruptcy.

Colin L. Read

Chapter 17. The Coin du Jour: The Rise of Initial Coin Offerings

Abstract

Myriad Crypto Bros have concluded the path to affluence can come from the design of a new coin. Some have done so for notoriety, and still others even on a lark. A few innovators, such as Satoshi, appear motivated only to satisfy a sincere ideology to bring banking to the masses without the need to rely on institutions too-big-to-fail. The Initial Coin Offering movement often purports to expand on Satoshi's ideal, but has instead left in its wake profits for a few but, many times, even greater losses for the many.

Colin L. Read

Chapter 18. Decentralized Finance

Abstract

The innovation of digital cryptocurrencies was prophesized by Satoshi to be a peer-to-peer method that may someday offer users a vast array of opportunities for digital financial transactions. On June 17 of, 2010, Satoshi posted to the bitcoin bulletin board a vision that “The design supports a tremendous variety of possible transaction types that I designed years ago. Escrow transactions, bonded contracts, third party arbitration, multi-party signature, etc. If bitcoin catches on in a big way, these are things we’ll want to explore in the future, but they all had to be designed at the beginning to make sure they would be possible later.” Such a vision that would bring many functions of banks and near banks to one’s computer or smartphone was revolutionary at the time, and is a natural evolution toward digitally denominated commerce.

Colin L. Read

Chapter 19. The Market Prognosis for Bitcoin

Abstract

Since the breakout of bitcoin prices in 2016/2017, the currency has navigated three price booms, which brought the price to a peak of $68,990.90 on November 10, 2021. The number of competing Proof of Work coins is declining, though, as some coins die off and new coins are proposed that invariably employ some sort of a Proof of Stake or similar more environmentally-benign authentication method. With the migration of Ethereum 2.0 to Proof of Stake, bitcoin dominates the Proof of Work sector, with dwindling numbers of competitors, as new cryptocurrencies now avoid Proof of Work from the onset, or specify a transition timetable to Proof of Stake.

Colin L. Read

Cryptocurrency and the Environment

Frontmatter

Chapter 20. Carbon Footprints

Abstract

The Bitcoin Dilemma is based on an economic model of the bitcoin mining sector that demonstrates the inexorable link between the price of bitcoin and the energy its mining consumes. I further demonstrated empirically in The Bitcoin Dilemma chapter that, on average, energy consumption has increased by 0.73% for every 1% price increase. This relationship proved to be both pronounced and statistically significant, even though bitcoin went through a halving event in 2020. Indeed, even with the halving in 2020, the bitcoin price actually rose at a quicker rate than the quantity of bitcoin rewarded declined in all but one year. The price of bitcoin is demand-driven and is completely disconnected from the reward offered to miners. This phenomenon is unique among commodities and has profound implications on bitcoin's carbon footprint.

Colin L. Read

Chapter 21. Greenwashing in the Bitcoin Industry

Abstract

The Bitcoin Dilemma shows that increased minerminer efficiency will merely further fuel the miner arms race and will result in more miners sold, and profits for IntelIntel, BitmainBitmain and CanaanCanaan Creative, but with no commensurate decrease in electricity consumption miner industry-wide. Indeed, if the advertised cost of miners fall per kilowatt of power capacity, as Intel promises, electricity consumption may actually rise.

Colin L. Read

Chapter 22. Infighting in the Crypto Bros Family

Abstract

Satoshi created a mechanism for decentralized exchange that yields a decreasing miner reward structure and prophesized that transaction fees will outswamp mining fees by 2040 or 2044, unless a fork is agreed upon that advances this date. The bitcoin mining industry remains resolute in maintaining the lucrative Proof of Work rewards and hence electrical consumption and environmental degradation nonetheless.

Colin L. Read

The Rewriting of the Cryptocurrency Bible

Frontmatter

Chapter 23. Central Banks Get into the Act

Abstract

Satoshi shared with the cypherpunks a mistrust in large financial institutions, especially central banks. In the late 2000s, many feared both a severe inflation arising from intense run-ups in asset and commodity prices, and observed an inability of the Federal Reserve and other central banks to prevent the Great Recession. Despite Satoshi’s concerns, central banks of major nations around the world are currently exploring the possibilities in sponsoring Central BankCentral Bank Digital Currencies (CBDCsCentral Bank Digital Currencies (CBDC)). ChinaChina, CanadaCanada, the European UnionEuropean Union, and the United StatesUnited States (US) have all published white papers or statements on their research of a domestic government-sponsored Stablecoin

Colin L. Read

Chapter 24. The Disruption of the Fractional Banking System

Abstract

Central banks act as the bank for commercial banks. In other words, a central bank considers the safety and soundness of our commercial banks and the soundness of the monetary system as its primary goals. Increased deployment of digital currencies must take into consideration the needs of and responses from their member banks to maintain a healthy economy.

Colin L. Read

Chapter 25. Shock and Awe and a Call for Regulatory Action

Abstract

Satoshi remained skeptical, though, and retorted “Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. Many of the frauds in cryptocurrencies arise from what would be securities regulation violations, at least in the world in which entities like the Securities and Exchange CommissionSecurities and Exchange Commission (SEC) can exercise oversight.

Colin L. Read

Chapter 26. Bitcoin’s Global Reach

Abstract

Not only have individuals gravitated to cryptocurrency as if some magical elixir, but nations have considered it too.

Colin L. Read

Chapter 27. Conclusion

Abstract

So much is now known about bitcoin. So many have marveled and many more have profited from Satoshi’s clever and altruistic concept. Few could have imagined the extent of the phenomenon. This book has described the varied aspects of the innovative new coin that few imagined at first. In retrospect, though, the phenomena, theory, and empirical analyses this book presents could possibly have been anticipated at the time of bitcoin’s inception, if only one could imagine its spectacular price growth. The case is made that while bitcoin and its crypto progeny are evolutionary in furtherance of more efficient commerce, environmental and other consequences behoove our leaders to proceed in a thoughtful and effective regulatory manner.

Colin L. Read

Backmatter

Titel: The Bitcoin Dilemma
verfasst von: Colin L. Read
Verlag: Springer International Publishing
Electronic ISBN: 978-3-031-09138-4
Print ISBN: 978-3-031-09137-7
DOI: https://doi.org/10.1007/978-3-031-09138-4