I know almost nothing about cryptocurrencies or the blockchain technology that undergirds it. I was aware that all transactions by currency holders are recorded on a distributed public ledger, which apparently is what is meant by a ‘blockchain’. I had been aware that these currencies, of which there are many in addition to the best known one of bitcoin, are not backed by any government like ‘real’ currencies are. Their value is maintained by having their production limited by having it ‘mined’, which is a metaphor for actions that are done by computers.
Elizabeth Kolbert writes about how this ‘mining’ works.
Mining is the process by which bitcoin is both created and accounted for. Instead of being cleared by, say, a bank, bitcoin transactions are recorded by a decentralized network—a blockchain. Miners compete to register the latest “block” of transactions by solving cryptographic puzzles. The first one to the solution is rewarded with freshly minted bitcoin. Miners today receive 6.25 bitcoins per block, which, at current values, are worth more than three hundred thousand dollars.
It’s unclear exactly who dreamt up bitcoin, so no one knows what this person (or persons) was thinking when the mining protocols were first established. But, as Ari Juels, a computer scientist at Cornell Tech, recently explained to me, the arrangement seems to have been designed with equity in mind. Anyone devoting a processor to the enterprise would have just as much stake in the outcome as anyone else. As is so often the case, though, the ideal was soon subverted.
“What was quickly discovered is that specialized computing devices—so-called mining rigs—are much, much more effective at solving these puzzles,” Juels said. “And, in addition, there are economies of scale in the operation of these mining groups. So the process of mining, which was originally conducted by a loose federation of presumably individual participants with ordinary computing devices, has now become heavily consolidated.”
In the very early days of bitcoin, back in 2011, I downloaded this mining software, hoping to understand it by doing it but never actually got around to it. I still have the files though they they are likely no longer of any use.
Kolbert’s article does not address some questions that came to my mind, such as: Who makes up these puzzles? Who gives out these rewards? While I understand that the system’s appeal arises from its decentralized nature, there still has to be some body that overseas such issues.
Wikipedia discusses this a bit.
Proof-of-work cryptocurrencies, such as bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.
The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.
The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. Some sources claim that the current bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system. The main source for this inefficiency is the large mining cost, which is estimated to be 360 Million USD per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using bitcoin as a means of payment. However, the efficiency of the bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.
Who are these ‘benevolent nodes’? Whenever I read about this, I run up against the existence of some kind of collection of entities that are behind the whole thing but I never see them actually listed, which seems to be contradictory to the whole idea of transparency of the blockchain.
Kolbert says that this heavy use of computer mining is bad for the environment because it consumes a huge amount of energy.
According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin-mining operations worldwide now use energy at the rate of nearly a hundred and twenty terawatt-hours per year. This is about the annual domestic electricity consumption of the entire nation of Sweden. According to the Web site Digiconomist, a single bitcoin transaction uses the same amount of power that the average American household consumes in a month, and is responsible for roughly a million times more carbon emissions than a single Visa transaction. At a time when the world desperately needs to cut carbon emissions, does it make sense to be devoting a Sweden’s worth of electricity to a virtual currency? The answer would seem, pretty clearly, to be no. And, yet, here we are.
She says that as a result, bitcoin mining operations chase cheap energy, moving their servers from place to place. But now they have even started creating their own power plants, converting old coal-fired plants to natural gas for their use, such as the Greenidge Generating Station in Dresden in upstate New York. These plants create greenhouse gases and local communities have rallied to protest against them but local governmental bodies say they are powerless to stop these companies.
Whether this is, in fact, the case is debatable. What’s beyond debate—or should be, at least—is that this is a matter that shouldn’t be left to a local planning board to decide. There’s no way for New York, or the U.S. as a whole, to meet its emissions-reductions goals if old generating stations, rather than being closed, are converted into bitcoin-mining operations. Greenidge may become the first mining firm with a “wholly-owned power plant,” but, unless the state or federal government steps in, it won’t be the last.
Andrew Yang, the former Presidential candidate who’s now running for mayor of New York City, has said that he wants to turn the city into a cryptocurrency-mining hub. It’s hard to imagine a worse idea. The city is already looking at spending billions of dollars to protect itself from sea-level rise; increased emissions are pretty much the last thing it needs. Forward-looking politicians should be thinking about ways not to buoy bitcoin mining but to bury it.
It looks like there is going to be a legal showdown fairly soon between environmentalists concerned about a rapidly growing source of energy use and carbon emissions, and those who are attracted by the anarchic appeal of a currency not controlled by any government.