June 2021, the Chinese Communist Party banned bitcoin mining. Miners swiftly move to energy-rich Kazakhstan, making Central Asia the second-largest cryptocurrency mining region.
However, in just a few months, the Kazakhstan government shuts down data centers, blaming crypto miners for the electricity shortages.
According to Netblocks, a cyber security and internet governance watchdog, Kazakhstan’s national internet connectivity was just 5% of its ordinary levels since January 7. Miners were already cut off from the internet, and it has been impossible for them to impose much burden on the electricity load.
Estimates from Kazakhstan’s ministry of energy show electricity demand increased by 8 percent since the beginning of 2021. It is a significant increase but unlikely to cause the hike in retail LPG price. In fact, the sudden rise in LPG retail price was a direct result of removing the price cap. It is another prime example of how one misguided economic policy leads to another. Cryptocurrency miners were the scapegoats for the past mistakes committed by politicians and bureaucrats.
When the Chinese Communist Party banned cryptocurrency mining in June 2021, the authority also cited the burden on electricity load as a reason. Nevertheless, the great Chinese power crunch occurred in Q3 2021, only after almost all crypto mining activities were moved to other countries, such as the United States and Kazakhstan.
Even in developed nations where technological advancements are usually welcomed, mainstream media and interest groups often depict cryptocurrency mining as energy-consuming and bad for the environment. In October 2021, more than 70 environmental groups put pressure on the leaders in the House and Senate, demanding an oversight hearing on cryptocurrency mining. The hearing eventually took place on Jan 20, with people even more misinformed about the true nature of the issue.
What is cryptocurrency mining? Why does it consume so much electricity energy?
Cryptocurrencies and the transactions exist as records on distributed public ledgers called blockchains. New transactions take place, the records are written into blocks which, in theory, will remain perpetually and can never be altered. Computers, in technical parlance, validation nodes, earns newly created cryptocurrencies by providing services such as recording the transactions. “Mining” is merely a metaphor for how validation nodes create and capture value to people using cryptocurrencies.
Blockchains differ from traditional centralized databases; the records are stored as perfect replicas on different nodes on the network. A decentralized network does not belong to anybody and cannot be controlled by any single authority. It is no wonder governments, especially authoritarian governments, abhor the idea of decentralized networks beyond their reach and control. China and eight other smaller authoritarian regimes have imposed a complete ban on cryptocurrency. Russia might be the next.
Without a central authority to issue commands, blockchains rely on algorithms to regulate the behavior of the validation nodes. Validation nodes perform two essential functions on blockchains. The first is to ensure that different validators are keeping identical copies of the same record. The second is to prevent malicious acts of fraud such as double-spending from taking place when new transactions are recorded.
In the case of bitcoin, the blockchain prevents fraud through “Proof of Work”; a design that requires the validation nodes to perform a cryptographic operation is called “double SHA-256 hashing”.
A new block recording all the transactions will be written to the blockchain every ten minutes. Validation nodes compete against each other to be the first to come up with the right hashing for the new block. The winner will receive 6.25 BTC in return for the service rendered.
The hashing process, as mentioned above, is probabilistic. No one knows in advance which validation node will come up with the right hashing. In theory, one can only manipulate or corrupt the blockchain by controlling all the nodes. However, such an act is so costly, making it unprofitable.
Hashing is a clever way and a necessary step to maintain the impartiality and integrity of the blockchain. However, mass media often mistake the process as clusters of water-cooled supercomputers consuming enormous amounts of energy to solve hard maths for no particular reason. Computer scientist Ken Shirriff demonstrated hashing could be done with pen and paper. All it takes is a little time and patience.
In the early days, bitcoins were “mined” at home or even on mobile phones, when only very few validation nodes existed. By design, the hashing of bitcoin blocks becomes more difficult when there are more validation nodes. When the competition of “mining” bitcoin grew more intense since 2015, specialized chips and “rigs” were manufactured and deployed en masse, especially in China.
The popularity of bitcoin was no coincidence as the Chinese government entered another round of massive fiscal and monetary expansion beginning in late 2015. However, since then, the market has become more sophisticated. Competing blockchains introduced and experimented with different paradigms such as “Proof of Stake” or “Proof of History.” Cryptocurrency is an evolving market but arguably is a relatively mature and competitive one.
Governments are also trying to conjure their version of digital currencies, fashionably referred to as CBDC. Unfortunately, no substantial technical white-paper has been published by any of them. There is no way to tell how governments can miraculously run more energy-efficient digital currencies unless they are centrally stored in closed systems.
Decentralized, self-enforcing rule-based cryptocurrencies will continue to gain popularity. The root of the problem lies in governments’ lack of fiscal discipline. When indebted governments collude with central banks to inflate the monetary base and remain solvent on paper, people seek alternative assets to protect their hard-earned money.
Blaming cryptocurrencies for taking up electricity is a lame diversion tactic. Although the operation of cryptocurrencies requires electricity, all the rhetoric ignores the fact that most nodes are becoming more energy-efficient and are strategically located at places where electricity prices are comparatively lowest.
Before the 2021 China blanket ban on cryptocurrency, most Chinese bitcoin operations took place in remote areas, such as Guizhou, where hydroelectric power is available. Many bitcoin operations also obtain electricity supplied in the wholesale market, albeit the practice might be deemed extralegal.
The ban on cryptocurrency in China created an overlooked unintended consequence. Most bitcoin “rigs” have been removed in China since July 2021. After these wholesale demands disappeared, power plants in China immediately incurred operating losses and refused to maintain the peak load to cope with industrial demand. In Q3 of 2021, China experienced a nationwide power crunch.
The authority and mass media blame the surging coal prices as the make-believe cause of the problem. In reality, the power crunch miraculously dissipated and the market resumed normalcy once the Communist Party allowed power plants to sell at market rate to factories in the wholesale market. It is just simple regulatory economics.
The energy market is peculiar. Electricity is generated and consumed at the same time. Although power plants can deduce from experience how much energy to produce, the estimate can never be perfect. Therefore, power plants often operate in excess capacity if there are unexpected surges in demand.
The excess supplies are not wastage but an essential feature to ensure the stability of any electricity network. Power plants cannot profit from these excess supplies unless there is a dynamic real-time market for electricity. The wholesale market, especially for cryptocurrencies operation, can effectively function as the load-balancer for the electricity network. In the short run, cryptocurrency operations can stabilize supply to customers in the retail market.
It is argued that In the long run, the electricity demand for cryptocurrency operation can be a driving force to cheaper, cleaner, and more sustainable energy. Countries with clean energy sources such as hydroelectric, geothermal, wind, or solar power are often inconveniently located at remote locations. Energies that are not captured, transformed, or utilized will dissipate as waste heat. On the contrary, the profit motive generated by the cryptocurrencies operation will incentivize the private sector to adopt more energy-efficient technologies and use untapped resources. When new energy supplies are coupled with improvements in electricity transmission technology, the accumulated effect can lead to a gradual shift in the energy mix.
Authoritarian regimes do not like cryptocurrency because they hate anything no one can control. But for those of us living in free open societies, we should embrace the possibility of how technology will improve the market and the environment. So, please do not blame the people who support and develop cryptocurrency, and make the world a better place.
Simon Lee