How Bitcoin can force the transition to renewable energy

Bitcoin has a reputation for using a lot of energy. That’s by design. Since Bitcoin is a Peer-to-Peer digital currency, it needs some way to prevent users from sending the same coins to multiple recipients. This is the double-spending problem.

To solve this, the Bitcoin protcol asks a group of computers called miners to solve a math problem. A simplified version of the problem looks like this:

$$ \text{OneWayFunction}(T + n) < d $$

Where T contains the transaction and n is a number that gets incremented by the miner. The number d is called the difficulty, and the network adjusts this number so that the rate of mining stays constant. You can see below that the rate of transactions per minute is almost a perfect straight line. This perfect order exists, despite the network being an anarchic open source experiment.

What about the ‘one way function’? Think of it like a device that you can plug numbers into and quickly get a number out, but it cannot be inverted. So if you find a solution, everyone can quickly verify that your solution is correct, but they couldn’t easily find that same solution.

The way this solves the double-spending problem is that each miner is mining a batch of transactions, and won’t accept double spends in their batch. The first miner to find a solution will win a reward (some bitcoin). Then the rest of the miners can all decide whether to accept the block or reject it. If they reject the block, then they need to re-mine that block and the next one, which compounds the difficulty. The sheer energy and luck required to solve one block is enough of reason for all miners to just accept the first one and move on.

To tie this competition back to energy usage, if new miners join the network, then network responds by increasing the difficulty, d. The amount that d is increased will keep that transaction count line perfectly straight.

If miners drop out of the network, then the network decreases d, so that the problem becomes easier to solve, and that line is kept straight.

As the price of bitcoin rises, more miners join, which increases d, which increases the energy that needs to be expended to win a mining reward.

What this means in practice is that the bitcoin network just keeps using more and more energy.

Right now the whole bitcoin network uses more energy than the entire nation of Kazakhstan. Currently, 39% of crypto mining energy is renewable (According to a September 2020 report from the Cambridge Centre for Alternative Finance).

This is a great time to get into a new memo from Square and ARK Invest, called Bitcoin is Key to an Abundant, Clean Energy Future. In it, they argue that Bitcoin mining can drive the development of solar and wind, because it can be an energy buyer of last resort.

For example, if you build a solar farm in the desert, but are waiting the lines to be laid, those panels are just sitting there doing nothing. However, if you had an internet connection, you could have the panels powering bitcoin mining rigs and generating revenue for the owners of the solar farm.

Another example is renewable intermittency. If the sun is shining or the wind is blowing, but electricity demand is low, utilities some times pay people to take the free electricity from them. A simpler way to solve that problem is to use the excess energy to mine bitcoins.

Okay, it makes the owners of the panels more money, but how does that drive technological progress forward? Because of industrial learning curves driving down production costs.

The chart below shows how the average cost of producing a PV (PhotoVoltaic) module goes down exponentially as the total number of modules increases. This is because the people in the companies who produce the panels learn how to improve the process, and continue to innovate in order to increase the profitability of the whole operation. If there’s more demand for solar panels, even if those panels are just used to mine bitcoin, then that increased demand will speed up the cost collapse process show on the learning curve.

One good idea the memo explores is building excess solar and wind capacity in places like Texas, and having the extra capacity mining Bitcoin until there’s a huge demand shock, at which point you can just shut down the mining rig and redirect the electricity to homes in need.

In the future, after this process has continued pushing the cost of producing new panels down, solar and wind will be even more competitive with fossil fuels, at which point electricity consumers will choose them instead.