Bitcoin Mining and the Case for More Energy
By: Bitcoin
Tags: Future, Bitcoin Mining, Energy, Bitcoin, Nuclear

Energy: The Foundations

“Energy is the only universal currency” — Vaclav Smil, Energy and Civilization

Earlier we stated that energy is the foundation of existence. This is not hyperbole; at the beginning of time — what some have called “The Big Bang” — our entire universe was a dense ball of energy.

In the billions of years since, the significance of energy has not diminished. Even today, all matter contains energy; this insight lies at the heart of Einstein’s famous equation, E=MC². But energy takes many other forms as well: the movement of your hand (kinetic energy), the calories in the food you eat (chemical energy), the light from the sun (electromagnetic energy), the heat from the kettle (thermal energy)…the list goes on, but the underlying concept is the same. Energy is the ability to do work, regardless of the type of work involved[1].

But not all energy is created equal.

The first two laws of thermodynamics tell us that while energy is conserved, it flows towards equilibrium. A hot body (high energy) connected to a cold one (low energy) will eventually give off its heat until the two are the same temperature (equilibrium). And in this approach toward equilibrium, order is lost. As waste heat is created, entropy increases.

Entropy tells us how the energy of a system is distributed among its parts. Over meaningful time horizons, the entropy of any system will increase. To reduce entropy within some part of the system, entropy must be increased elsewhere. States of order and complexity are lower entropy than states of disorder. The creation and preservation of structure requires a decrease in entropy locally, resulting in an increase in entropy elsewhere.

Though entropy is often viewed negatively, life itself depends on it. Life compresses energy into low-entropy states and pays for it by emitting energy with much higher entropy elsewhere. You ingest resources from the environment (air, food, water) to preserve your internal order and create structure (amino acids, tissue, etc.), and in doing so, you increase entropy in your immediate surroundings.

When considering energy, there are other factors beyond entropy that are relevant as well — density and efficiency in particular. Some forms of energy are more dense than others. Likewise, extracting energy from some low-entropy sources is more efficient than others (this holds true in physics as well as economics).

This inequality between various forms of energy is all the more pronounced in practice. Heat is considered waste in many industrial processes (entropy in its most literal sense). Other ambient, low-density forms of energy may be abundant on earth, but are quite hard to utilize. Today, it would seem foolish to burn grass for energy on an industrial scale. Meanwhile, humans scour the planet for rare minerals to build expensive batteries in hopes that they might offer us a few hours of densely packed energy when we need it most.

It is not just “energy” we care about, but energetic order. We want our energy in a distilled form. We want energy that is easy to command and transport wherever we need it. And we want energy that can be used for anything.

“It is energetic order that’s scarce, and the order in energy that’s expensive” — Peter Huber & Mark Mills, Bottomless Well

The story of our “energy consumption” is really the story of humanity’s Sisyphean effort to create and preserve order, harnessing ever greater amounts of energy to support life by reducing entropy locally and shedding more entropy elsewhere.

In this light, the terms “energy production” or “generation” are misleading. The energy is conserved, but its order is not; the energy is distilled so that it can be more functional, more concentrated, and more easily controlled. A watt that can be delivered on demand through a tiny wire is far more valuable than a watt of organic matter or ambient heat. Power plants do not “create” energy; they merely convert it into a useful form. Thus, our “energy footprint” is determined by our ability to facilitate these conversions, limited only by the laws of physics, current technology, and economic realities. And a massive portion of this footprint is used to distill energy into its most fungible form: electricity.

The Age of the Electron

Electricity is the most distilled form of energy. It is highly dense; electricity allows for a single transmission line to carry enough energy to power a small country. It is also highly versatile; electricity can power cars, household appliances, many industrial processes, and perhaps most notably, the entire apparatus of information technology that’s allowing you to read these words.

In terms of energetic order, electricity is king. For this reason, technology continues to select for electricity as its primary source of energy. As this trend continues, our economy is becoming increasingly dependent on this form of energy (various climate change policies are only accelerating this electrification).

Developed nations take ubiquitous electricity for granted. Meanwhile, intermittent power can be one of the biggest burdens for developing nations to overcome in their quest for economic growth.

But electricity is a particularly tricky commodity to depend on.

Electricity is a distinctly local phenomenon. If there are no transmission wires, it is trapped at the site of generation. This is fundamentally different from the fossil fuels that powered the last ~250 years of global industrial growth, which can be extracted around the world, stored cheaply, and transported wherever there is demand.

But we don’t care. Our demand for electricity is fickle. When we plug our phone charger into an outlet, we demand it be met with fresh electrons.

Unfortunately, however, the supply of electricity is constrained. It takes time to build out new power generation projects and complete the requisite regulatory processes. It also takes money, as electrical generation and transmission infrastructure requires substantial capex. So, potential electricity supply is relatively fixed in the short term.

Yet despite the fickle supply and demand, the electrical grid must be balanced. Grids are effectively massive circuits, so if supply does not match demand, the consequent variations in voltage and frequency can cause blackouts. Phrased differently, unlike every other commodity, electricity must be consumed as it’s produced[2]. Fortunately, at scale, much of the short-term fluctuations in demand cancel each other out. But the balance is still actively managed by grid operators who dispatch different generation sources, storage mechanisms, and curtailment programs to achieve this outcome. One of the more common methods is “load following,” with flexible generation sources like natural gas scaling up and down to meet the variable electricity demand (or, even if demand is constant, to balance the intermittent generation of solar and wind resources).

This is all to say that it is expensive and difficult to reliably purify energy into electricity, and civilization as we know it depends on those precious electrons. But this hasn’t always been the case.

The Case for More Energy

Man’s default state is abject poverty. The natural world is not a hospitable place for humans; our environment is neither stable nor safe for us unless we transform it. The livability of the planet for the average human depends on our ability as a species to develop the environment into resources that protect, nourish, and sustain us.

For most of history, we have been limited to using human and animal labor to do so. Indeed, humanity’s crowning achievements and the comforts of the modern world — extended life expectancy, resource abundance, and material wealth — are enabled in large part by a discovery made in the last ~250 years, one which unlocked another source of labor beyond mere humans and animals: machines.

Machines can amplify existing human productivity (the printing press produced a step-function increase in the volume of information that could be copied to paper per unit of time) or enable new capabilities altogether (MRIs and other medical imaging technologies provide views into internal organs that no amount of human labor alone could).

But machines don’t power themselves. The cheaper and more abundant the fuel for our machines, the more machine labor we have at our disposal to improve our living standards. Consider, for example, the technological progress and quality of life gains made in the centuries following the Industrial Revolution — the period in history during which man discovered that fossil fuels could be used to cost-effectively power machines. Today, based on the average American’s daily energy consumption, a single individual has the equivalent of nearly 600 humans working at his behest[3] (and without violating any human rights). For most of human history, each individual’s productivity was limited to what he could achieve with his own two hands.

Today, we have freed ourselves from that particular constraint. But consequently, we are more dependent on machine labor than ever. This reality was laid bare in the power crisis that befell Texas in February, during which winter storms caused power outages that triggered food and water shortages, critical infrastructure failure, and dozens of fatalities. A few days without energy to power our machines can be a stark reminder of just how fragile modern civilization is. But we will need yet more energy in the future.

In a way, energy is the meta-problem. The most difficult challenges we face as a species become soluble only by converting greater amounts of energy into more highly ordered forms. The cost of transportation becomes trivial. Food preservation through refrigeration can be delivered to every country in the world. The cost of desalination and other water purification processes is vastly reduced, allowing us to solve the water crisis and its downstream health effects. Our global capacity for computation is hindered only by access to silicon, a problem which is itself tractable with more energy. And without these watts, we will struggle to find alternative solutions.

“It is by mastering power itself — the capture and release of energy — that societies master everything else” — Peter Huber & Mark Mills, Bottomless Well

Of course, the unfortunate flipside of this coin is the grim reality that less energy production exacerbates existing problems and creates new ones. It means fewer resources to sustain life: less food, fewer economic opportunities, and higher cost of living. On a long enough timescale, it leads to civilizational decline and all the human suffering that attends it — an acute manifestation of disorder. From a humanist perspective, less energy is never the solution.

A common objection to this brand of energy maximalism is that efficiency improvements can and should obviate the need for more energy. Why can’t we just do more with less? The short answer is: because we never do. Jevons’ paradox holds that gains in efficiency with which a resource is used only lead to increased demand for that resource. More efficient automobiles led to more driving, not less gasoline. In the case of energy, more efficient generation technologies serve to increase energy consumption rather than curb it. Energy begets more energy; much of the energy we consume today is in the service of discovering, extracting, and developing more energy resources for tomorrow.

All this to say, there is no optimistic version of the future in which humanity does not use significantly more energy than it does today.

To the extent we discover new, cheaper ways to energize machines, human quality of life will improve, as we gain ever more mastery over our physical surroundings. This process need not be limited to the environment on Planet Earth; given access to energy that is sufficiently affordable and abundant, humanity could use machines to transform the environments of other planets to support human life. This is a vision that animates us and one we believe is worthy of vigorous pursuit.

Money and Energy

“Money is energy. Bitcoin is the first crypto monetary energy network, capable of collecting all the world’s liquid energy, storing it over time without power loss, and channeling it across space with negligible impedance.” — Michael Saylor

Money allows one to command resources. If energy is the capacity to do work, then the ability to command resources is itself a form of potential energy. Indeed, money and energy have always been linked.

In his seminal essay, Shelling Out, Nick Szabo identifies “unforgeable costliness” as an essential property of various proto-monies throughout history. Throughout the ages, the likelihood of a good being used as a means to facilitate wealth transfers has been in part a function of the difficulty with which one could produce or obtain additional units of said good. That is, to be selected as a money on the free market, a good must be costly to produce in terms of time or energy.

“Wampum” — clam shells — carried value among inland Native Americans in the 17th century largely because one could only collect them near ocean shores, requiring considerable exertion to travel to the coast and back. Rai stones were large, disk-like rocks that were for centuries used as a primitive form of money by the inhabitants of the Yap islands in Micronesia. Weighing as much as four tons, Rai stones were not native to the Yap Islands; importing additional stones necessitated great expenditure of energy. And of course, the commodity monies of more recent history — gold foremost among them — all entail energy-intensive production processes owing to their lack of abundance in the earth’s crust.

Luminaries including Henry Ford, Thomas Edison, and Buckminster Fuller have at various points championed the idea of a currency literally backed by energy (though we remain skeptical of the wisdom and practicability of such proposals). Even the U.S. dollar — a fiat currency whose marginal cost of production approaches zero — is in some sense “backed” by energy today. For decades, the world’s largest producer of oil has agreed to settle all of its sales in U.S. dollars in exchange for U.S. military protection, an arrangement that has come to be known as the petrodollar system.

In Bitcoin, Satoshi made the relationship between energy and money explicit. Bitcoin’s proof-of-work is a synthetic recreation of Szabo’s “unforgeable costliness;” new bitcoins are issued to miners, who provably consume energy. To this day, proof-of-work remains the only way we know how to verify in a digital system that energy has been expended in the meatspace.

Recently, Michael Saylor has popularized the notion of money as a technology for transporting energy across time and space. We agree with his assessment of Bitcoin as “the most efficient energy network in the history of the world.” As Saylor put it, “the challenge of humanity is, ‘how do I store and transmit energy across time and space and domain?’”

With its fixed supply and digital nature, Bitcoin does not suffer from the same “transmission losses” that plague the monetary energy networks of old. Storing one’s monetary energy in gold involves significant carrying costs and leakage in the form of transaction costs, should one ever seek to transmit that energy across space. And while the U.S. dollar and other fiat currencies improve on gold’s salability across space, they perform poorly as a vessel for transporting monetary energy across time.

Enter Bitcoin Mining

Bitcoin can be understood as a distributed machine that automates the issuance of scarce monetary units and the settlement of financial transactions. The system achieves these ends by demanding that certain network participants — namely, miners — provably consume electricity, which allows the network to order transactions and assure final settlement in the absence of a trusted third party. Perhaps more profoundly, this proof-of-work creates a connection between the physical and digital worlds that cannot be falsified. The nonce used to create a valid block is the residue of a physical process which must consume energy.

Like other machines, Bitcoin is a productivity-enhancing technology. In the centuries to come, Satoshi’s invention will save incalculable human time in two ways. First and foremost, Bitcoin offers savers protection against large-scale time-theft perpetrated by central bankers and their inflationary monetary regimes. Second, Bitcoin liberates resources that would otherwise be spent in the primitive practice of actively managing the money supply — much in the same way other technological advancements throughout history have allowed us to discard mundane tasks in favor of more productive pursuits. You will seldom encounter someone scrubbing clothes by hand in a home with a washing machine.

To fully understand its relation to the energy sector, we must first grasp the economics of bitcoin mining. At its most fundamental level, bitcoin mining requires nothing more than specialized hardware, electricity, and an internet connection. It can be done anywhere in the world at any time of day. Miners’ revenues are unknown, but their costs are usually fixed. And the primary cost is energy. This incentivizes bitcoin miners to find the cheapest power possible, and they scour the earth to do so. As a result, miners typically use power that would otherwise be wasted — or, as coined by Nic Carter, “nonrival energy.”

Phrased differently, bitcoin mining is a permissionless energy sink. Anyone, anywhere in the world can generate revenue by plugging mining machines into an electricity source. This sink is also highly flexible with respect to both time and space. Bitcoin miners can turn their machines on and off without any obligations to customers and can operate in almost any physical envelope.

For the energy sector, bitcoin mining provides a constant demand for energy and a revenue floor, allowing us to monetize energy that would otherwise go to waste. Energetic order is such a precious resource, it would be a shame to let it go unused.

“Do not waste any energy, make it useful.” — Wilhelm Ostwald, Nobel Prize for Chemistry (1909)

We already see this taking place in the wild, with bitcoin miners helping to balance the intermittent electricity supply of renewables or capturing natural gas that would otherwise be vented or flared. But even more than just utilizing existing wasted energy resources, bitcoin mining will incentivize new generation far in excess of our current capabilities.

The Future of Energy and Bitcoin Mining

Bitcoin mining directly incentivizes new and more efficient forms of energy generation by offering a “bounty” to anyone, anywhere, at any time, who finds a cheaper way to produce energy at scale. This direct financial incentive for more efficient generation and the newfound viability of previously uneconomical sources of energy will cause a general decline in the price of energy worldwide.

We may well see bitcoin mining operations bootstrap new human settlements into existence. Whereas in the past, generation was only economically viable in locales that were relatively close to the ultimate site of consumption (i.e., population centers), bitcoin mining allows us to develop power generation infrastructure in remote, energy-rich locations and monetize it via the Bitcoin network. After recovering the initial capital cost, the mining profits can be used to fund additional infrastructure build-out to support residential or commercial human settlements that will benefit from the cheap, abundant energy resources.

Economic incentives will impel bitcoin mining to completely saturate the energy sector in the coming decades. The gradual convergence of these two sectors has already begun, and will continue from both directions. Energy producers will monetize surplus power that would otherwise be sold at low or negative rates to the grid (or wasted altogether) by selling it to the Bitcoin network. And bitcoin miners will vertically integrate, owning their own power generation and infrastructure to improve their margins and thereby their competitiveness. It stands to reason, then, that in the future, the most efficient miners will also be energy producers.

At what point will we reach full saturation? Dhruv Bansal of Unchained Capital submits his theoretical “Nakamoto Conjecture” as a plausible answer to this question. Bansal predicts an equilibrium at which the marginal revenue earned from mining bitcoin equals the marginal revenue earned from selling power to the electrical grid. Mining beyond this threshold would be economically irrational for energy producers, since selling power to the grid would be more lucrative. Below this threshold, there remains an economic incentive for producers to continue mining.

Thus Bitcoin’s energy consumption as a share of global energy production will continue to increase as market participants arbitrage this difference. Bansal refers to this share as the Nakamoto Ratio — the fraction of global energy production that is dedicated to securing the monetary base.