The Bitcoin Dilemma : Weighing the Economic and Environmental Costs and Benefits

There are few innovations that have the potential to revolutionize commerce and have evolved so quickly that there remain significant misunderstandings about their operation, opportunity, and challenges as has Bitcoin in the dozen years since its invention. The potential for banking, transacting, and public recording of important records is profound, but can be displacing if not done with appropriate care, and is downright dangerous if certain pitfalls are not noted and avoided. Among other things, this book proves the existence of a Bitcoin dilemma that challenges the conventional wisdom which mistakenly asserts the incredibly intensive energy consumption in Proof-of-Work cryptocurrency mining will be remedied by more efficient mining machines or sustainable power sources. It shows for the first time within a well-specified economic model of Bitcoin mining that the recent runup in electricity consumption has a simple and inevitable explanation. For a coin with almost completely inelastic supply and steadily increasing demand, the conditions for accelerating electricity demand is consistent with economic theory and may well characterize the future of Bitcoin. The book also demonstrates the counterintuitive result that improvements in mining efficiency, in terms of electricity consumption per terahash of processing power, or decreases in electricity costs as cheaper sustainable energy is diverted to this industry, merely exacerbates the acceleration of energy consumption because of a prisoners dilemma arms-race-to-the-bottom. The book proposes policy solutions to mitigate this Bitcoin dilemma but note that the mobility of industry capacity which needs but a ready supply of electricity and an Internet connection frustrates local regulation and warrants global solutions. The incredible opportunities of this industry will only be realized if our regulators, legislators, entrepreneurs, and general public garner a more complete and objective understanding of this and other Proof-of-Work mining techniques. The book provides this broader perspective based on the authors research as an economist, his position as a director of a large regional bank, his understanding as a technologist and as an environmental and sustainability researcher, and his public policy experience as a mayor who has also written books and articles about public policy and public finance. Colin L. Read teaches Money and Banking and Sustainability at SUNY Plattsburgh. He has written a dozen books on finance and economics, and also served as Mayor of the City of Plattsburgh when his Northern New York community was inundated with Bitcoin miners. His unique story is just the beginning. Preface 5 About This Book 8 Introduction 10 Contents 16 About the Author 18 List of Figures 19 Part I The Cypherpunk Bible 20 1 In the Beginning 23 The First Digital Coins 27 A New Electronic Cash System That’s Fully Peer-to-Peer 29 2 The Creator 31 The Computer Science Equivalent of a Nobel Prize 32 The World’s Most Mysterious Multi-Billionaire 34 3 The Disciples 37 The Peer-to-Peer Movement 38 The Blockchain 40 A Reinvention of Global Commerce and Communications 43 4 The Genesis Block 46 The Genesis Block 47 The Difficulty Threshold 49 Private Wallets Augment the Public Ledger 51 Rewards to Miners that Maintain the Blockchain 51 Part II Cryptocurrency Corporatization 54 5 A New Testament 59 Early Mining Technology 61 The GPU and FPGA Mining Revolution 64 The ASIC Revolution 66 ASIC’s Continuous Improvement and the Beginning of the Corporate Era 67 6 Public Ledgers, Private Wallets, and Crypto Vulnerabilities 71 The Various Methods of Authentication 72 Private Keys 74 The Weakest Link 76 Other Vulnerabilities 79 A Balance Between Security and Innovation 82 7 Bitcoin Goes Corporate 85 ASICs Spawn the Corporatization of Bitcoin 89 The Current State of ASIC Mining 91 8 The Fundamental Flaw of Bitcoin 93 The Assumptions 95 The Model 100 The Theory Is Put to the Test 105 9 The Bitcoin Dilemma 110 Part III Cryptocurrency Consequences 115 10 Towns and Cities Against Noise and Power Hogs 120 The Problem 122 The Local Solution 124 11 No More Duffel Bags Full of Cash 126 An Accounting of Illegality 127 The Level of Illegal Activity Through Bitcoin 130 12 States and Bitcoin 133 A Role for State Regulators 134 13 National Policy and Bitcoin 140 China’s Experience 141 Global Regulatory Considerations 143 14 The Rise of Ethereum and Hobby Mining 148 The Last Vestiges of GPU Mining 148 Corporate Mining in Altcoins 151 The End of GPU and Hobby Mining 154 Part IV Born-Again Crypto Bros and the Gospel of Profits 157 15 A Hard Fork in the Bitcoin Philosophy 164 16 The First Crypto Bros Millionaires 171 Fortune Favors the Young? 172 The Baby and the Bathwater 175 Consumer Protections for Unsophisticated Investors? 176 Conspicuous Consumption Fueled by Bitcoin Profits 178 17 The Coin du Jour: The Rise of Initial Coin Offerings 182 Can Bitcoin Be Tweaked? 186 Non-Fungible Tokens: The New Plaything of Crypto Millionaires 187 Stablecoins to the Rescue 188 A Tether to the Dollar 191 The Next Step: Crypto Banks 192 18 Decentralized Finance 194 Decentralized Finance Apps Abound 196 Decentralized Finance Risks 197 Can’t Have Their Crypto and Eat It Too 199 If You Can’t Beat ‘Em, Join ‘Em 202 19 The Market Prognosis for Bitcoin 205 Where Will Bitcoin Prices Go? 205 Part V Cryptocurrency and the Environment 210 20 Carbon Footprints 217 21 Greenwashing in the Bitcoin Industry 223 Smoke and Mirrors 225 Carbon Credits 226 22 Infighting in the Crypto Bros Family 234 Local Solutions 237 The Industry Pivot 239 Part VI The Rewriting of the Cryptocurrency Bible 246 23 Central Banks Get into the Act 251 Global Central Bank Digital Currency Designs 252 A United States Digital Coin 253 24 The Disruption of the Fractional Banking System 258 The Money Creation Process 259 Bank Liquidity 261 Central Bank Manipulation of the Money Supply 262 Economic Fine-Tuning 264 Dangers to Banks Too-Small-To-Be-Protected 265 25 Shock and Awe and a Call for Regulatory Action 267 A Regulatory Fight on All Fronts 268 Regulatory Agency Interventions 270 26 Bitcoin’s Global Reach 273 The Nature of Monetary Value 274 Sound Monetary Policy 276 El Salvador Goes Bitcoin 276 The Need for Global Coordination 279 27 Conclusion 281 Epilogue 286 Appendix 289 Code Changes in the City of Plattsburgh in Response to Cryptocurrency Mining 289 Glossary 295 References 308 Index 319