I have been asked how I can reconcile my support for crypto/blockchain with my concerns about the climate crisis. So here is a blog post laying this out.

Crypto/blockchain is a fundamental innovation that addresses an important problems facing us in the world today: too much power concentrated in the hands of a few corporations and governments. To be clear, this technology is not a panacea and decentralization contains both good and bad use cases. But it is important and foundational, something that I have been writing about for a long time.

It is correct that proof of work (PoW) consumes a lot of electricity. Before jumping to conclusions from that though we need to consider many different factors.

First, it is unclear that PoW will succeed. Many new systems, including ones we have funded at USV, such as Algorand, use proof of stake (PoS) instead. While still not as efficient as a centralized solution, the overhead here is minimal. Ethereum, which is currently a PoW system is planning to migrate to PoS.

Second, to the extent that Bitcoin has longevity as a PoW system, its security can be leveraged to secure many other systems. The Stacks chain (also a USV investment) does exactly that through a novel mechanism known as proof of transfer (PoX). So if you can do a lot of decentralized things with a single PoW system, that may be worth incurring the electricity overhead.

Third, exactly because electricity is the key factor in the PoW “production function,” miners go to great lengths to get cheap electricity. One of the cheapest forms of electricity are curtailed loads from renewable assets that would otherwise be dropped entirely. Not surprisingly quite a bit of mining avails itself of such electricity which can at times even have a negative price (i.e. you get paid to take it).

Fourth, the demand for electricity is about to go through the roof as we try to electrify everything from cars to home heating. As a first approximation we may need to double our total electricity output. PoW will be a tiny fraction of the additional demand going forward.

Fifth, to the extent that in some places PoW uses fossil fuels it is primarily because those fuels are subsidized by the local government. These subsidies are really the issue. Nobody could successfully mine with unsubsidized fossil fuels, let alone with fossil fuels that have a carbon tax added to them.

Sixth, there are lots of wasteful uses of electricity today (just walk into any New York building in the summer and feel the ridiculous degree of air-conditioning). In large parts that’s because our electricity is currently too cheap relative to the high carbon footprint of our electric grid, which is still dominated by fossil fuel generation assets.

Finally, and this one is a bit speculative but possible, PoW could be used to bootstrap new clean generation assets. How so? Take a community solar project. Today you need to get a lot of people in a community to sign up first and pre-commit before you can finance a new array. It is possible that one could finance and build the array first by using the power for PoW, then start signing up local subscribers to an already operational asset.

So where does all of this leave us? I believe strongly that it would be a huge mistake to shut down a fundamental innovation that has the potential to decentralize power because we are temporarily concerned about its electricity consumption. Instead, we need to eliminate fossil fuel subsidies, pass a carbon tax, and decarbonize our grid aggressively (as an aside, I believe that will require innovations beyond solar and wind, including geothermal and nuclear power).

I have been asked how I can reconcile my support for crypto/blockchain with my concerns about the climate crisis. So here is a blog post laying this out.

Crypto/blockchain is a fundamental innovation that addresses an important problems facing us in the world today: too much power concentrated in the hands of a few corporations and governments. To be clear, this technology is not a panacea and decentralization contains both good and bad use cases. But it is important and foundational, something that I have been writing about for a long time.

It is correct that proof of work (PoW) consumes a lot of electricity. Before jumping to conclusions from that though we need to consider many different factors.

First, it is unclear that PoW will succeed. Many new systems, including ones we have funded at USV, such as Algorand, use proof of stake (PoS) instead. While still not as efficient as a centralized solution, the overhead here is minimal. Ethereum, which is currently a PoW system is planning to migrate to PoS.

Second, to the extent that Bitcoin has longevity as a PoW system, its security can be leveraged to secure many other systems. The Stacks chain (also a USV investment) does exactly that through a novel mechanism known as proof of transfer (PoX). So if you can do a lot of decentralized things with a single PoW system, that may be worth incurring the electricity overhead.

Third, exactly because electricity is the key factor in the PoW “production function,” miners go to great lengths to get cheap electricity. One of the cheapest forms of electricity are curtailed loads from renewable assets that would otherwise be dropped entirely. Not surprisingly quite a bit of mining avails itself of such electricity which can at times even have a negative price (i.e. you get paid to take it).

Fourth, the demand for electricity is about to go through the roof as we try to electrify everything from cars to home heating. As a first approximation we may need to double our total electricity output. PoW will be a tiny fraction of the additional demand going forward.

Fifth, to the extent that in some places PoW uses fossil fuels it is primarily because those fuels are subsidized by the local government. These subsidies are really the issue. Nobody could successfully mine with unsubsidized fossil fuels, let alone with fossil fuels that have a carbon tax added to them.

Sixth, there are lots of wasteful uses of electricity today (just walk into any New York building in the summer and feel the ridiculous degree of air-conditioning). In large parts that’s because our electricity is currently too cheap relative to the high carbon footprint of our electric grid, which is still dominated by fossil fuel generation assets.

Finally, and this one is a bit speculative but possible, PoW could be used to bootstrap new clean generation assets. How so? Take a community solar project. Today you need to get a lot of people in a community to sign up first and pre-commit before you can finance a new array. It is possible that one could finance and build the array first by using the power for PoW, then start signing up local subscribers to an already operational asset.

So where does all of this leave us? I believe strongly that it would be a huge mistake to shut down a fundamental innovation that has the potential to decentralize power because we are temporarily concerned about its electricity consumption. Instead, we need to eliminate fossil fuel subsidies, pass a carbon tax, and decarbonize our grid aggressively (as an aside, I believe that will require innovations beyond solar and wind, including geothermal and nuclear power).