#20 On energy consumption, bears and CBDCs
We are not really afraid of the bears, so we'll instead be devoting our main topic to crypto's energy consumption. And then we'll cover bears.
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Crypto’s energy consumption in context
Energy consumption is a legitimate concern in our times, and it is one of the most frequent criticisms that crypto in general, and Bitcoin more specifically, attract. But when that criticism arrives, it begs the question of whether people making these judgments are flinging sensationalist headlines, have a political agenda, or on the contrary, have an informed opinion.
It is out of the question that Bitcoin consumes significant amounts of energy. This is due to the Proof of Work consensus mechanism that requires computers worldwide running software to validate the blockchain. Proof of Work guarantees decentralization, trust, and security for Bitcoin transactions. And, incidentally, Bitcoin is not the only network that uses Proof of Work: Ethereum, the second most crucial blockchain globally, relies on Proof of Work too for validation, although it’s in its 2022 roadmap to move on to another, more sustainable, process.
A recent Cambridge University analysis concluded Bitcoin consumes more energy in a year than Argentina. That same analysis suggested that if Bitcoin were a country, it would be in the top 30 energy-consuming countries in the world. The Hard Truth About Bitcoin's Energy Consumption
“Argentina” is very likely to be the only KPI you will remember in a week, and nobody can deny it sends a powerful message.
Two counterarguments should provide nuance to the discussion at this point:
The first one is that energy consumption and carbon footprint are two different things, and it is carbon footprint that should worry us more. The environmental impact of high energy consumption is reduced if the energy source is renewable. The debate gets a little more complicated because it’s not just about how many “Argentinas” Bitcoin consumes, but where do these “Argentinas” come from. And the answer to that is elusive and temporary because Bitcoin mining moves quickly across the world, and it’s hard to tell the energy mix behind it. But we’ll get on that in a moment.
The second one is that this measure of energy consumption should also get a little more context. The Proof of Work mechanism behind Bitcoin and Ethereum is how these networks convert energy to value. That value is measured in safe transactions of funds or information, which, translated into the physical world, encompass the work of many different companies. What Bitcoin can do in a minute could require the intervention of banks, credit card companies, other financial intermediaries, and maybe even armed forces to maintain and safeguard all operations. And all their staff, equipment, servers, buildings, etcetera, consume energy too.
Why worry about an industry that consumes approximately 0.55 percent of global electricity production? After all, energy associated with Bitcoin mining is roughly equivalent to the energy consumption of zinc mining and refinery, and less than the energy associated with the extraction of either copper or gold. It consumes the rough equivalent of the energy associated with running domestic tumble driers in the U.S. alone, and one fifth the energy used for domestic refrigeration. Bitcoin Mining Is America's Most Misunderstood Industry | Opinion
There are good reasons to believe in crypto as a catalyst for change in terms of the energy mix. First, as a high energy consumption industry, crypto is unique in that it does not depend that much on location. As the Chinese exodus of 2021 proved, mining can pack up and move quite quickly. This flexibility allows it to settle down in places where it can benefit from a win-win relationship - like places where there’s an excess of production that makes consumption cheaper.
That electricity often happens to come from renewable sources—hydropower, geothermal heat, and natural gas—that would otherwise go to waste, due to poor central planning leaving them disconnected from distribution networks.
There might be a 50-megawatt plant running outside a village with only 15 megawatts of demand, or a hydropower plant which has nowhere to send its electricity once the lights in the neighboring city go out. And, because electricity is impractical and expensive to transport over long distances, it cannot easily be transmitted to the nearest demand. The truth about Bitcoin’s green new deal
To be fair, critics of this argument say that this flexibility has a dark side: renewable energy works in long-term timeframes to become profitable, and crypto is not the most faithful partner.
Geography professor Nick Lally, (...) argued in a 2019 study that the Bitcoin mining industry often "functions in a parasitical relationship to existing infrastructure while failing to contribute to its building or maintenance". The Truth About Bitcoin's Green New Deal
There are more aggressive stances. The moral argument against crypto does not encompass what it achieves. In Meltem Demirors’ words, “Christmas lights are a horrible use of energy, yet there is no energy police telling people to turn them off.” It’s also painful to watch certain politicians hopping off private jets to question what Bitcoin does with energy.
But hypocrisy is more an argument against politicians than in favor of blockchain energy consumption. So the final defense for crypto lies in the fact that it is a transparent, open sector, subject to scrutiny and change and constantly striving for efficiency, while it delivers a potentially revolutionary value proposition.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. Price action | Afraid of the big bad bear?
Bull or bear that is the question. Identifying where one stands while in the middle of the price rollercoaster can differentiate between earning or losing big money. But, TL;DR: there is no way to predict markets, especially if you look at crypto. Markets are infinitely complex systems of interconnected elements. If someone tells you they know what’s going to happen or can even explain what is happening, they are lying.
Are we in the middle of a bull market now? We don’t honestly know. But these are some of the things we do know.
We fell 50% from the latest all-time highs in November 2021. The general macro conditions could probably explain this: inflation rate news together with the political measures announced, as well as the global instability sparked by the Russian-Ukrainian conflict. Bitcoin’s correlation with traditional markets is going through all-time highs after many years of being a hedge and behaving independently from them. Until now, most bear markets could be explained by inside events: hacks, indictments, mining issues... But the current strong correlation with traditional markets has brought the consequences of risk-off behavior to cryptoassets.
Whether this is indicative of a bear market, only time can tell. However, the traditional definition of bear markets seems complicated to apply to crypto:
A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Investopedia
A 20% drop or rise is not that newsworthy in a market as volatile as crypto. And “widespread pessimism and negative investor sentiment” seems like a hard thing to evaluate. However, on-chain metrics allow crypto analysts to infer investor behavior inside of crypto, and, watching those, we have reasons to remain calm. The latest record outflows of coins to private wallets (it is generally understood that investors move their funds into exchanges when they think of selling and out of them when they plan to HODL). But, as we are seeing today, “offline” investor sentiment is becoming increasingly important in price evolution. Moreover, as regulation and politics kick in and institutional investment enters the space, crypto will create new links with new ecosystems that affect its performance.
2. Cryproassets | Grayscale’s 25
Grayscale is the leading company in digital asset investing and one of the biggest public holders of Bitcoin. Their fund Grayscale’s Bitcoin Trust is one of the most popular entryways to crypto for institutional investors.
Recently, Grayscale published their “Asset Under Consideration” list. Grayscale offers single asset products like the Bitcoin Trust mentioned above or bundled funds like their DeFi fund. Some of these 25 new assets could end up becoming part of either of those types of products in the future.
It (the list) requires significant review and consideration and is subject to our internal controls, custody arrangements, and regulatory considerations, among other things. Assets Under Consideration and Current Products
A closer look into these assets reveals that the firm has a clear focus on scalability: many of the projects and assets under consideration are Layer 1 solutions of very different types: from Ethereum killers (the young - such as Terra- and the old - like Tezos-) to more Bitcoin-based extensions. DeFi is also well represented, and so is gaming, with relevant projects such as Axie infinity, Yield Guild Games, or The Sandbox.
3. NFTs | Crypto’s on-ramp
When is it a good time to stop saying that NFTs are crypto’s next best thing? In the recent bearish times that have affected crypto, NFTs have shown an independent behavior, proving that the correlation between Bitcoin’s price action and NFT consumption looks like the correlation between the stock market and the purchase of sneakers.
January has been a good month for NFTs. OpenSea made record sales, despite facing heavy criticism for a unilateral style of decision making, not very appreciated in Web 3 times.
Facebook and Instagram may help you create and sell NFTs, YouTube CEO Hints at NFT Integration in Letter to Creators, and Twitter begins rolling out access to NFT profile pictures: these are recent news showing how Web 2 is looking to incorporate Web 3 technologies.
But there’s more: Walmart Files 7 US Patents Examining Potential Monetization of NFTs, Metaverse. Walmart offering NFTs and their token could become one of the most robust pieces of evidence of NFTs onboarding power we’ve seen.
According to the applications, filed Dec. 30, Walmart is exploring the possibility of introducing its customers to a “virtual currency for use by members of an online community…in the field of NFTs” as well as “financial transaction services involving cryptocurrency, NFTs and blockchain technology.” Walmart Files 7 US Patents Examining Potential Monetization of NFTs, Metaverse
4. CBDCs | Governments copying stablecoins
After weeks of hearing about it, the Fed’s white paper on CBDCs (Central Bank Digital Currencies) is out. And, to be honest, its content is slightly underwhelming. The 40-page document is considered more a “conversation starter” than an actual reflection of the Fed’s regulatory position.
The Federal Reserve’s initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified. As noted above, however, the paper is not intended to advance a specific policy outcome and takes no position on the ultimate desirability of a U.S. CBDC. Money and Payments: The U.S.Dollar in the Age of Digital Transformation
Central Bank Digital Currencies are the response from governments to the growing interest in digital assets, especially stablecoins. The stablecoin industry born from DeFi provides users with cheap, global, secure, and convenient transactions. Stablecoins are the blood that flows through an alternative financial system born outside of the limits of government control. The regulatory fever in the final months of 2021 and the flood of news about governments trying out CBCDs seem to hold some relation.
French Central Bank Completes First Stage of Its CBDC Experiments
Jamaica Completes CBDC Pilot, Expects Rollout Later This Year
Bank of Korea Says First Phase of CBDC Test Completed Successfully
It seems like CBDCs won’t happen any time soon. There are too many technical and bureaucratic hurdles, not to mention possible interests in stopping them from occurring (China is an exception here). But if / when they happen, they will bring up a very relevant question about decentralization: is convenience a good enough reason to make people flock to a digital currency, or are the values and benefits of decentralization a competitive advantage of private money?
5. Governance | MakerDAO’s growing pains
Suppose you need a real-life example of what crypto governance looks like in the early 2022s. In that case, MarkerDAO is offering an excellent use case in this story: MakerDAO’s Expulsion of Content Team Stirs Debate About Tougher Governance.
MakerDAO is a pioneering organization in crypto. Born in 2018, they are the issuers of Dai, the first algorithmic stablecoin that maintains its $1 value through the use of digital assets as collateral -as opposed to other more popular stablecoins like Tether’s USDT or Circle’s USDC, which are backed by corresponding fiat assets. Dai is managed through MakerDAO, a decentralized autonomous organization in the hands of the owners of the token MKR.
One of the ways MakerDAO discovered to become an effective organization was by creating Core Units: teams created with written purpose and a roadmap, who were allocated resources. This allows the organization to create independent teams capable of taking decisions autonomously instead of submitting every measure to a vote.
Last week, the Marketing unit in charge of content production was disbanded after a vote decided so by a very slim margin.
The current process’ abruptness has left many members of the DAO looking to modify the process. “There should be some way to signal disagreement by the community with the facilitators’ actions before getting to the offboarding”
MakerDAO is probably one of the most experienced Decentralized Autonomous Organizations in crypto, and their built-in processes are a blueprint to other organizations. Yet, their mechanisms still stir frustration and debate.
That’s how early we are at the DAO stage.
6. Media | Crypto media outlets
Where to start?
That is a general question from people willing to dive into crypto and become familiar with it. There are many answers to that. Many Twitter accounts to follow (forget about Instagram, Facebook, or TikTok), Discords to join, podcasts, and newsletters to subscribe to.
But today, we want to give you the briefest guide to crypto media. The following is a list of media outlets that produce the best news and analysis. They have different balances between speed and depth. We suggest you check them out and pick your favorites.
Cointelegraph. News at the speed of light, hyperactive Twitter, and many newsletters. Available in 9 languages.
Coindesk. Part of the Digital Currency Group (owners of Grayscale Bitcoin Trust or Coinbase, among many other companies)
The Block. News outlet with paid services for advanced analysis and reports.
The Defiant. Great crypto journalism + podcast + video.
Decrypt. Founded in 2018, funded by Consensys, and evolving into a DAO. Media with deep-rooted crypto values.
Blockworks. Great writers, good political analysis, excellent newsletter summaries.
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