This is an opinion columnist for Mickey Koss, a West Point graduate with a bachelor’s degree in economics. He spent four years in the infantry before moving on to the Finance Corps.
I recently heard fears, uncertainties and doubts that the transaction fees on the bitcoin network cannot support miners and thus remain safe once the block subsidy gets too low and/or disappears. It got me thinking about how the incentives would play out.
Aside from the obvious observation that they don’t assume growth in network usage and perpetually low fees on the base chain, I think there are two key underlying assumptions to keep in mind:
- Mining hardware determined to exist in its current form as stand-alone, single-use computers.
- Mining companies will continue to exist in their current form as large independent companies that must always seek profitability or close their doors.
Mining Hardware: One Man’s Trash Is Another Man’s Treasure
The name of the game here is to use garbage. In their current form, electrical heating elements generate heat through the use of resistors. Resistors resist, modify the “flow” of electricity, and dissipate electrical energy as heat. It automatically uses poor electrical conductors to generate heat. It seems pretty useless 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 all furnaces and water heaters will use ASIC chips as the heating element instead of the traditional electrical resistance types that exist today.
MintGreen in Canada is already doing this on a fairly large scale. They use the waste heat from the miners to heat local businesses like breweries, sea salt distilleries, and even greenhouses.
This completely changes the math of home mining profitability. When dual-purpose applications are used and heat designated as wasteful is harnessed, applications no longer need to be commendable in the traditional sense.
The use of the latest generation of ASIC chips for heating purposes is neither 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 to upgrade 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 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: baseload, peak and intermediate load generation. The base load supply generated the minimum amount of electricity to meet the minimum level of demand on the system. Peak load generation is used to meet periods of peak 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 changes in demand, bridging the gap between base load and peak load.
If we have variable capacity available, it means that at least part 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 also must subsidize the cost of all the 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 demand for electricity and its recharge, not only by region, but also by season. If power plants produce too much electricity, they can actually damage the grid and cause a blackout.
There are some techniques for storing excess energy, such as pumped-storage hydropower, but all have limitations, such as access to water, space, and battery technology. Simply put, once the battery is full, there is nowhere to go for power, which eventually leads to a blackout. This is also why intermittent sources like wind and solar will probably never be the only source of power 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 have to be commendable
Currently, we deal with mining companies as independent companies, buying power in the markets from electricity companies. If the price of bitcoin 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 instead of an independent business?
Premier Service: Elimination of Variable Load Power Sources
In my humble opinion, the only way forward for a sustainable energy system is one based on nuclear power. Nuclear power, however, is a base-load power generator; you can’t really go up and down. The electricity supplied must be consumed or literally wasted by sending it to the ground. So what do we use for variable demand?
My answer is bitcoin.
Instead of building capacity in various ways, 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 out the demand curve for electricity? It flips the paradigm. Not only are we getting a massive source of clean and sustainable energy, but we are also using all of our capacity all the time. The only variable is the amount of hash rate the power plant produces throughout the day.
In the meantime, bitcoin can be used to utilize the entire power generation capacity of the network. This will increase the income of electricity companies, provide 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 commendable in the traditional sense; it simply has to offset the opportunity cost of not producing any electricity.
Additionally, the increased usage means consumers no longer subsidize unused capacity on their monthly bills. Imagine freezes or even cuts in electricity rates. At a minimum, electricity rates would not have to rise as quickly. What is good for the goose is good for the pots.
If your goal is a clean, sustainable, resilient, reliable and affordable power grid, Bitcoin is the way to go.
Second service: air purifier
Wastes like natural gas and methane have been nothing but a high cost to businesses for quite some time. All of this is beginning to change at an accelerating rate.
Whether the gases are produced by the decomposition of buried waste in a landfill, oil fodder, or the feces of livestock and people, these gases can now be harnessed and monetized by using generators to mine bitcoins.
It’s already happening.
ExxonMobil is just one of the companies starting to do so. Natural gas is a by-product of forage and oil extraction. In many cases, it was simply not economical to bring the gas to market, forcing producers to flare it or, worse yet, vent the gas directly into the atmosphere. Now the waste gas can be piped into a generator and used to mine bitcoins. This leads companies to be more careful with these waste gases, as they have become a revenue-generating asset rather than a nuisance cost for companies.
Landfills also face the same incentives. When the waste breaks down below the surface, it produces methane gas. These gases, like the oil producers, were often flared or vented. With bitcoin mining, methane is now an asset for these companies, driving them to become better stewards and thus use 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 generate. 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 laudable. Mining simply has to offset the opportunity cost of not mining. In situations where gas cannot be traded, anything is better than nothing. I think I see a world where gas flaring and venting is a thing of the past.
No benefits? No problem
Satoshi Nakamoto had to think differently to achieve the creation of a completely different network of money and value. We must now think differently not only to ensure the survival of the network, but also to ensure that human flourishing continues for the foreseeable future.
Power isn’t scarce and it shouldn’t be. Bitcoin is the incentive the world needs to innovate and ensure the availability of cheap, clean energy for all. Bitcoin is human flourishing.
This is a guest post by Mickey Koss. The opinions expressed are entirely my own and do not necessarily relate to those of BTC Inc. or Bitcoin Magazine.