This is an opinion piece by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before moving to the Finance Corps.
I recently heard fears, uncertainties and doubts that transaction fees on the bitcoin network are not able to support miners, and therefore maintain security once the block subsidy becomes too low and/or disappears. It got me thinking about how the incentives might play out.
Besides the obvious observation that they assume no growth in network usage and perpetually low fees on the base chain, I believe there are two key underlying assumptions that need to be considered:
- Mining hardware will continue to exist in its current form as standalone, single-use computers.
- Mining companies will continue to exist in their current form as large stand-alone companies that must constantly seek profitability or close their doors.
Mining Hardware: One Man’s Trash is Another Man’s Treasure
The name of the game here is using trash. In its current form, electric heating elements create heat through the use of resistors. Resistors resist, changing the “flow” of electricity and dissipating electrical energy as heat. You are essentially using poor electrical conductors to create heat. Seems pretty pointless to me.
For miners, their main waste product is heat. Imagine the applications you could create using Bitcoin-specific ASIC chips. I see a future where every furnace and water heater produced will use ASIC chips as the heating element rather than the traditional electrical resistance types that exist today.
MintGreen in Canada is already doing this on a fairly large scale. They use waste heat from miners to heat local businesses like breweries, sea salt distilleries and even greenhouses.
This completely changes the mathematics of home mining profitability. When using dual purpose applications and harnessing heat originally characterized as wasteful, applications no longer need to be profitable in the traditional sense.
Using the latest generation of ASIC chips for heating purposes is not necessarily necessary, nor desirable. Bitcoin mining heating applications, especially at the retail level, simply need to use the same amount of electricity or less than their non-mining competitors. The little bitcoin mined is simply an added benefit for upgrading your system or an incentive for builders to invest in new homes.
Why would you want to buy a house that wastes electricity just by heating it? It’s old school. I want a house that heats and that pays me when I heat it. I want a bitcoin smart home.
Electrical system explained
To understand the second hypothesis, you must first understand how electricity is generated. Electricity generation capacity consists of three main sources of generation: base load, peak and intermediate load generation. The base load power supply generates the minimum amount of electricity to satisfy the minimum level of demand in the system. Peak load generation is used to meet peak periods of demand when demand increases. It’s up and down, which makes it less efficient and more expensive. Intermediate load is also a variable source that responds to variations in demand, bridging the gap between base load and peak load.
If we have variable capacity on hand, it means that at least some of the time we have idle capacity – valuable capital – that is not being used. This means that your electricity costs must not only cover the cost of production, but must also subsidize the cost of all unused but necessary capacity that electricity generators must maintain.
Why so much complexity? Because the demand is not constant. The graph above shows the average electricity demand and its volatility, not only by region, but also by season. If power plants produce too much electricity, it can actually damage the grid, leading to a blackout.
There are a few techniques for storing excess energy, such as pumped-storage hydroelectricity, but they all have limitations such as access to water, space, and battery technology. Simply put, once your battery is full, there is nowhere to go for power, which ultimately leads to a blackout. It’s also why intermittent sources like wind and solar will probably never be the only source of energy for the grid. There simply isn’t enough storage capacity to run the system when the sun isn’t shining or the wind isn’t blowing.
Bitcoin, of course, fixes that.
Miners don’t need to be profitable
At present, we view miners as stand-alone businesses, buying power in markets from power companies. If the bitcoin price goes down and/or costs go up, miners are in a hurry and go bankrupt. It’s a fiercely competitive industry, but what if it wasn’t? What if mining became a service rather than a stand-alone business?
First service: Elimination of variable load energy sources
In my humble opinion, the only path to a truly sustainable energy system is one that relies on nuclear energy. Nuclear power, however, is a base load power generator; you can’t really go up and down. The electricity produced must be consumed or literally wasted by sending it into the ground. So what do we use for variable demand?
My answer is bitcoin.
Instead of building capacity in varying forms – using a bunch of capital for assets that are only used part of the time – why not build a massive baseload of nuclear power and use mining bitcoins as variable demand to smooth the electricity demand curve. It flips the paradigm on its head. Not only are we getting a massive source of clean, sustainable energy, but we’re also using our full capacity all the time. The only variable being the amount of hash rate the powerhouse produces throughout the day.
In the meantime, bitcoin can be used to utilize all the power generation capacity of the network. This will increase the revenues of electricity companies, providing them with more capital to invest and build infrastructure. With the integration of bitcoin mining and power generation, bitcoin mining no longer needs to be profitable in the traditional sense; it simply has to compensate for the opportunity cost of not producing any electricity at all.
Additionally, increased usage means that consumers are no longer subsidizing unused capacity in their monthly bills. Imagine freezes or even cuts in electricity rates. At the very least, electricity rates would not need to rise as quickly. What’s good for the goose is good for the gander.
If a clean, sustainable, resilient, reliable, and affordable power grid is your goal, bitcoin is the way to go.
Second service: purify the air
Wastes like natural gas and methane have been nothing more than a high cost to businesses for quite some time. This is all starting to change at a rapid pace.
Whether the gases are produced by the decomposition of waste buried in a landfill, oil drilling, or the feces of livestock and people, these gases can now be harnessed and monetized through the use of generators to mine bitcoin.
It is already happening.
ExxonMobil is just one of the companies beginning to do so. Natural gas is a by-product of oil drilling and extraction. In many cases, it was simply not economical to bring the gas to market, forcing producers to flare it or, even worse, vent the gas directly to the atmosphere. Now the waste gas can be piped to a generator and used to mine bitcoin. This prompts businesses to be more careful with these waste gases, as they have been turned into a revenue-generating asset rather than a pesky cost to businesses.
Landfills also face the same incentives. When waste decomposes below the surface, it produces methane gas. These gases, like oil producers, were often flared or vented. With bitcoin mining, methane is now an asset to these companies, spurring them to become better stewards, thereby reducing air pollution.
Even human waste can be monetized with bitcoin mining. Wastewater treatment plants typically use anaerobic digesters to break down solids after separating them from most of the water they treat. This process produces, you guessed it, methane.
Much like the power plant examples, bitcoin waste mining creates a situation where miners no longer need to be profitable. Mining simply has to compensate for the opportunity cost of not mining. In situations where the gas cannot be brought to market, anything is better than nothing. I think I see a world where gas flaring and venting is a thing of the past.
No profits? No problem
Satoshi Nakamoto had to think differently to bring about the creation of a whole different web of money and value. We must now think differently to not only ensure the survival of the network, but also to ensure that human flourishing continues for the foreseeable future.
Energy is not scarce and should not be. Bitcoin is the incentive the world needs to become truly innovative to ensure the availability of clean, cheap energy for all. Bitcoin is human flourishing.
This is a guest post by Mickey Koss. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.