Bitcoin consumes a lot of electricity. The same goes for electric cars, space travel, and civilization in general, but few things burn energy so shamelessly.
To reassure critics, Elon Musk and Michael Saylor announced late last month that bitcoin miners in North America had agreed to the Bitcoin mining Council, an organization that would promote energy transparency and sustainable mining practices.
An honorable effort, but one that has generated a lot of criticism. Participants in a decentralized currency are rather skeptical about cooperation efforts, which is just a politically correct term for collusion. To them, Bitcoin mining advice sounds a lot like OPEC, or worse, the Federal Reserve.
The idea of Bitcoin mining was originally presented as a “one-CPU-one-vote” where individuals around the world could run the Bitcoin software and participate in the recording of transactions. Mining is essentially a lottery where computing power is proportional to the chance of winning the right to pick up a new block.
However, as with most things, Bitcoin mining benefits from economies of scale. Large companies can invest in bespoke silicon chips or pool computing resources to amortize the revenues from mining. As a result, a small number of companies dominate the vast majority of Bitcoin mining. When crypto mining is carried out in huge data centers with specialized hardware, a single CPU has no chance.
For governments, the concentration of mining power has several advantages. If a miner gains over 50% of the computing power on the network to become the majority hash rate, he can selectively censor participants by refusing to include their transactions in new blocks. This means that, for example, well-known ransomware operators can be prevented from spending their bitcoins.
Earlier this year, Marathon Digital Holdings, one of the largest Bitcoin mining companies in North America and a member of the newly formed Mining Council, announced that it was fully compliant with US protocols, including anti-money laundering practices and the Office of Foreign Asset , will be compliant with control standards. As a result, Marathon’s mining pools began to exclude non-compliant transactions from their mining blocks.
In theory, economically sound Bitcoin miners outside of North America could pick up the dropped transactions and move them to the next block, collecting transaction fees in the process. However, a clashing council might choose to ignore subsequent blocks that do not obey their rules. The software protocol dictates that users must always follow the longest chain, so that a group with a majority hash power will eventually overtake all offshoots.
There is a saying that Bitcoin is for enemies. The protocol not only accommodates mutually hostile participants; it lives on mutual enmity.
Bitcoin’s only value proposition is its ability to withstand human arbitration, made possible by the fact that participants cannot collaborate and make changes to the software. If Russia, Iran, and North Korea add significant hash power to the network, it is unlikely that US banking regulations will ever be enforced through the Bitcoin protocol.
Last weekend, the Bitcoin network was preparing for a software upgrade to improve privacy. Although Marathon’s mining pool had attracted attention from its initial refusal to signal support, its CEO changed course under pressure from the Bitcoin community. The company released a statement announcing that the company’s mining pools would stop filtering future transactions.
However, the lack of regulatory compliance will not last. Joe Biden’s administration is reportedly already debating “guard rails.” While North American bitcoin miners have wanted to follow the principles of censorship resistance, the formation of a council is an enticing goal for regulators. congress will have warm bodies to bear testimony and to slap the tongue.
Without the pressure of legal tender laws, Bitcoin’s value stems from a shared belief in its resistance to censorship. In the past, the prospect of centralized mining was enough to deter participants. In 2014, a bitcoin mining pool briefly gained 51% of total hashing power, resulting in a worldwide sell-off.
Even if it had been possible to profitably exploit the majority of hash power, the possibility of destroying the illusion of decentralized trust motivated the operators of the pool to withdraw. The company issued a statement promising to keep future performance below 40% and urged others to do the same.
Now that Bitcoin has received institutional support, participants are no longer so rash to go to the exits because of a loss of decentralization. Instead, investors will be leaning on Bitcoin’s potential for subsidizing clean energy and adhering to sustainability as its main source of value. Bitcoin purists have to decide whether the price hike is worth it.