In the last article we touched upon how money came into being and its journey from seashells to gold and then fiat. We addressed some of the more common questions about what Bitcoin is, how transactions are processed, who miners are and how secure the network is. In today's article, we look to cover some questions on the seemingly negative impact Bitcoin has, why some governments are against it and what the possible solutions could be. Let's dive in!
Bitcoin mining does consume a lot of energy, about 114 twh/year, which is roughly as much as UAE. However, the profitability of mining largely depends on the price of electricity making renewables all the more attractive. 56% of BTC is mined using renewables with countries like El Salvador (use volcanic energy to mine BTC) and Iceland leading the way. Mining also serves as an option to be a carbon sink for oilfields using all the excess methane produced which would otherwise be released into the atmosphere. This is why a lot of mining companies are moving to Texas after China's recent ban. While yes, in a perfect world you would want 100% of it to be renewable, the industry is working towards this. In comparison, the banking and gold industry consume double the amount of electricity at over 200 twh/year.
In short, no. Bitcoin works on a model where the machine with the highest computing power gets the opportunity to process a block of transactions, in turn winning some amount of freshly mined Bitcoin. This model is called Proof-of-Work (explained earlier). Most of the other cryptos work on a model called Proof-of-Stake. Here, the amount of crypto you give back and lock with the network (stake), increases your probability of getting the chance to process a block of transactions. There are a lot of other factors that determine this as well but it will need another article! Staking does not depend on computing power so there is no need for high amounts of electricity. Ethereum is the only other crypto using the Proof-of-Work model but they are going to migrate to Proof-of-Stake by mid 2022.
In order to mine Bitcoin, you require mining units called ASIC's (Application-Specific Integrated Circuit). These circuits are specially built to mine only Bitcoin. The average lifespan varies from 3-5 years which is a longer duration than most of our smartphones. Humans generate 40 million tonnes of e-waste every year and Bitcoin makes up only 0.075% of that. A rounding error. There is also a thriving second hand marketplace for used miners where they are repaired and reused for much longer. In a society where electronics are binned in 1.5 years at average, this is a welcome change. No activity can be undertaken without generating waste. The benefits of this technology far out-weigh the impact of the e-waste generated by it.
Most crypto exchanges enforce strict Anti-Money Laundering Laws and KYC norms for users that want to withdraw amounts greater than 1 BTC. This severly limits people from remaining anonymous. Further, the blockchain data is all public so in case the authorities want to track a specific wallet, they can easily do so, unlike cash. The amount of money laundered annually averages $2 trillion. Last year only $2 billion was laundered using crypto or 0.1%. I think authorities should focus on the other 99.9% rather than stifle all the innovation and growth of a technology that makes up 0.1%.
Yes, the first mass use of Bitcoin as a medium of exchange was on Silk Road, a website where you could buy and sell drugs. This happened way back in 2011 and puportedly ended in 2013 with the arrest of its founder - Ross Ulbricht. This was a time when Bitcoin was known only to the cypherpunks and technology enthusiats. Unfortunately illicit activies are always attracted to newer technologies first but they get flushed out as adoption increases and systems get more robust. Ever since then, there has not been any large scale case of crypto being used for drug trafficking. With or without crypto, drugs will continue to be peddled and consumed. Again is it worth destroying an industry contributing $2 trillion to the world economy because a small percentage of it is used for illicit activities ? Food for thought.
The only governments looking to ban crypto are ones scared with the growth and utility of it. They are worried that citizens will ditch their fiat currency to transact only in crypto forgetting that the value of crypto is not only to be used as a medium of exchange. Goverments are scared that the decentralised nature of this technology will loosen their grip and control over the financial system. Crypto is complicated and like early detractors of the internet, they too will soon see the utility. Crypto and blockchain technology is here to stay and countries that are not quick to embrace it will be left behind similar to countries that were late to adopt the internet.
Crypto still has a ways to go in terms of making the techology easy and accessible. Like the internet in the 90s, the UI will continue to improve. Adoption of this techonlogy is a lot faster than the internet and we can already see mainstream companies pivoting their entire business models to get in on the action.
We hope this series has helped address some of the common questions and reservations you had about crypto. In the next series, we will look at some of the basic technologies used to make cryptocurrencies work.
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