Spring is coming for the North American crypto-currency industry. With access to reliable capital markets, cheap energy, a stable political environment, and the growing participation of technological innovators, industrial-scale mining operations are booming in the United States and Canada, competing with Chinese mining pools that now control more than half of the world’s hashish power.
These new companies are aware of the need to minimize the carbon footprint of the mining industry. In March, for example, when Neptune Digital Assets and Link Global announced plans to build a new five-megawatt bitcoin mining facility in Alberta, Canada, Neptune CEO Cale Moodie called it a major global push to develop sustainable bitcoin mining operations [emphasis added] around the world – adding that the project would be powered by solar, wind and natural gas.
Major investments are being made in North American mining infrastructure, said Ethan Vera, co-founder and CFO of Luxor Technologies and Hashrate Index, and Meltem Demirors, chief strategy officer of CoinShares, in a recent blog post to the Journal : More than $200 million has already been pledged in the United States alone. The project has a budget of $30 million for capacity building in land-based mining.
Mining companies are increasingly focusing on the US and North America, says Amy Devin Kim, policy manager at the Digital Chamber of Commerce, and some US states are increasingly willing to support these cryptocurrency mining companies. Kentucky, for example, passed two laws in March that give tax breaks to cryptocurrency miners that the state wants to attract to create jobs and boost the local economy.
North American capital is being freed up, Vera says, adding: Public and private markets are pumping money into bitcoin mining, paving the way for large-scale development in North America.
Why is it taking so long?
Some wonder how and why Western countries have allowed China to play such a leading role in mining cryptocurrencies. According to the Cambridge Centre for Alternative Finance, China accounts for 65% of global BTC production. This figure is only 7.24% for the United States, which is the second largest node, although no one knows for sure what the distribution is worldwide.
Some have set the Chinese share at a lower percentage. For example, a 2020 study commissioned by Fidelity Investments found that 50% of the world’s mining energy capacity will be in China and 14% in the US. Meanwhile, an April 6 paper written by scientists from the Chinese Academy of Sciences, Tsinghua University, Cornell University and the University of Surrey in the journal Nature Communication estimates that China’s share is much larger: As of April 2020, China accounts for over 75% of all bitcoin blockchain transactions in the world.
The paper further explains that certain rural areas of China are considered ideal locations for bitcoin mining due to lower electricity prices and large tracts of virgin land available for the construction of mining pools.
In the beginning, mining held back large investments because of the nature of the Wild West, says Vera, who explains how bitcoin mining has become so geographically spread out. The opacity of the supply chain for ASICs – integrated circuits specifically designed to perform the hash calculations that miners need – and the controllability of mining pools have led to capital being sidelined.
In terms of accountability, he also explained that most miners did not know if they were being underpaid for their hashrate at mining pools. When the coalfields tell them a royalty, it is very difficult to verify that it is the actual royalty. In many cases, the miners blamed the coalfields for underpayment. However, recently the professionalism of the supply chain in mining has clearly improved, Vera adds.
China’s dominance is perhaps best explained at the macro level, said Yu Xiong, associate professor of international affairs at the University of Surrey and director of the department of economic analysis at the Surrey Business School – and one of the authors of the Nature Communications paper. North America faces higher labor and energy costs than China, which leads the way with about 30% of the world’s hydroelectric capacity and a 50% share of coal-fired power generation. Those who have contributed to the development of the mining industry in China, says Xiong Journal.
Chase Lochmiller, CEO and co-founder of Crusoe Energy Systems – a Colorado-based company that uses waste gas from oil wells as fuel for bitcoin mining plants – tells the magazine that more miners are now migrating to North America because of the increased focus on BTC from investors and society at large.
Bitcoin mining criticized by environmentalists
A move to North America could also attract the attention of environmentalists who are challenging Bitcoin’s massive energy consumption – and associated climate-damaging emissions. According to Nature Communications, annual energy consumption in China’s mining industry alone will peak at 296.59 terawatt-hours in 2024, which is more than the total energy consumption of Italy and Saudi Arabia in 2016.
In March, analysts at Bank of America criticized bitcoin mining as environmentally irresponsible, noting that a $50,000 purchase of bitcoins has a carbon footprint of 270 tons, the equivalent of 60 internal combustion engine cars.
The consensus mechanism used to verify bitcoin transactions requires potential developers to compete with each other to solve complex mathematical puzzles. Computers, such as. B. ASICs designed specifically to solve these problems consume an enormous amount of energy. Miners who solve the puzzle form and confirm the next block of transactions and receive a BTC for their efforts.
However, this is a PoW security feature, not a bug, Vera says. If the solvable puzzles, whose answers are called hashes, are too easy to solve, the network is exposed to denial-of-service attacks by hackers.
According to Lohmiller, high energy consumption is not necessarily a bad thing, if you handle it right. Crusoe Energy, for example, has developed a technology that captures natural gas burned in the atmosphere at oil wells and uses this waste gas to power modular data centers [mining units] placed directly above the well.
When drilling rigs are grouped together in this way – as has happened in Colorado, Montana, Wyoming and North Dakota – the result is an overall reduction in CO2 emissions of 71% compared to flaring, reports Lochmiller Magazine. This is a net benefit for the environment and a net benefit for BTC.
The environmental problems associated with mining crypto-currency are easy to solve, says Clark Swanson, CEO of Blockcap, one of North America’s largest bitcoin miners, reports the magazine, adding:
The Bitcoin network is the first use of energy where the source does not have to be close to the end user.
Swanson points out that the bitcoin mining industry is working to make renewable energy the main, and one day perhaps the only, energy source for the bitcoin network. Blockcap already uses electricity that is almost 50% climate neutral. We remain committed to achieving our goal of carbon dioxide neutrality. However, currently most bitcoin mines around the world are not powered by renewable energy sources such as solar, wind or hydroelectric power. According to the Cambridge Centre for Alternative Finance, 39% of Hashing’s total energy consumption comes from renewable sources.
But not everyone is impressed with the recent measures. Alex de Vries, founder of Digiconomist, calls the collocation decision ridiculous and tells the magazine: We don’t have a climate change problem because fossil fuel extraction is not efficient enough. He adds:
Using a byproduct of fossil fuel production still means bitcoin runs on fossil fuels, which only increases the profits of fossil fuel companies.
De Vries acknowledges that solar panels provide green energy and are an improvement over using flared gas, but so far the only significant source of renewable energy powering the Bitcoin network is questionable hydroelectricity, which can only be generated a few months out of the year, such as in China’s Sichuan province, the world’s largest mining center for BTC.
Even if the Bitcoin network ran entirely on renewable energy, De Vries continued, that would not solve all the problems associated with PoW. This network operates with highly specialized equipment that cannot be reused, and the growing demand for ASIC equipment is already disrupting the global semiconductor supply chain. The end result will be a big pile of e-waste, in addition to energy consumption. No amount of green energy can fix that.
The lens may become even more important as the focus of the mining industry shifts from China to North America, where regulators and environmentalists may be more sensitive than Chinese regulators to the industry’s energy consumption and carbon footprint.
In addition to energy and environmental concerns, others see major security risks in bitcoin’s consensus mechanism. Consider that half of the network’s hashrate is physically located in China, says De Vries. This is a serious security risk.
A similar proposal was made by Chris Larsen, co-founder of Ripple, in an article published in The Hill in August 2020. He wrote: At least 65% of cryptocurrency mining is concentrated in China, meaning the Chinese government has the majority to control these protocols and can effectively block or reverse transactions.
In the same vein, former acting US comptroller Brian Brooks noted in November 2020 that China has captured more than 51% of the mining capacity on the Bitcoin blockchain, meaning that the very first internet of money … is now essentially owned by China. So as a country we are now facing the problem of the geostrategic competitiveness that we have: Does the United States want to take over the Internet 2.0 like they took over the Internet 1.0?
Warnings about a 51 percent attack on the Bitcoin network from China or other countries appear fairly regularly on Cryptoverse, but the risk is largely theoretical, developer Jameson Lopp writes in an August 2020 blog post. Despite its frightening name, such an attack would have limited effectiveness and would probably not disrupt network operations for more than a short time.
During such an attack, the attacker would not be able to randomly steal bitcoins from someone else, Lopp explains, and the attackers would only be able to spend their own coins twice. Moreover, hackers could not invalidate transactions or change consensus rules. These limitations, Lopp continued, make cryptocurrency exchanges probably the juiciest target for 51% of attacks. But even these more limited attacks have many drawbacks, not least the fact that any stock market with enough liquidity to be attacked is likely to have withdrawal restrictions. Lopp adds that the threat from China, however limited, will continue to diminish over time:
In the very long term, I think semiconductor smelters outside of Asia will start producing more crushed stone, and countries with even cheaper energy sources will continue to industrialize, creating more competition for mine operators looking for new locations. China’s dominance in the mining sector is unlikely to last; I expect this theoretical attack to become increasingly unlikely.
According to Kevin Dowd, professor of finance and economics at Durham University in the UK, it is not environmentalists, hackers or even hegemonic nation states that will ultimately derail the PoW mining model, but the fundamental laws of economics.
According to Dowd, bitcoin mining has the industrial structure of a natural monopoly, meaning that the cheapest production comes from a single producer. According to Daoud Magazine, there are inherent tendencies to centralization that will ultimately undermine its value proposition. This problem of excessive centralization will not go away even if most of BTC production is moved from China to North America, he says.
Is the PoW consensus doomed?
So the PoW protocol has an expiration date? Indeed, Ethereum, the second-largest cryptocurrency by market capitalization, is shifting to a stateful proof-of-consensus mechanism that should lead to a significant reduction in energy consumption and carbon footprint – and if all goes well, an increase in speed as well. Is this the future of blockchain technology?
Evidence of work is the only proven consensus mechanism, Vera says. Proving a forgery can work, but it’s still an experiment. His company is convinced that bitcoin will forever be tied to the PoW consensus – and will only get better with time.
I see the value of both consensus mechanisms, Lohmiller tells the magazine. The scale of investment required to mine BTC deters cyber attacks, while PoS is still in its infancy and being implemented. Swanson added that the PoW consensus protocol has successfully prevented and claimed all attacks on the network in Bitcoin’s 12 years of existence:
Although the demo protocol is more efficient in terms of power consumption and computational speed, it has inherent weaknesses that make it unsuitable as a long-term Bitcoin protocol.
When asked if mining is Bitcoin’s Achilles’ heel, Kim said: I disagree. There are ways to encourage appropriate energy use. Bitcoin mining in its current form may be wasteful, but other things waste a lot of energy and emit a lot of carbon, including the US military. Ecology alone may not be a sufficient reason to stop extracting PoE.
First, we need better data, Kim says. How much environmental damage is actually caused? We should also look at the benefits of the Bitcoin network, which could enable the secure transfer of value around the world and bring millions of unbanked people into the global financial system for the first time – two potential benefits, for example. The environment is a problem, but it’s important to look beyond the climate, Kim said.
A new focus for BTC production?
Can we expect bitcoin mining to shift significantly from China to North America in the coming years? With higher energy and labor costs and stricter regulations, Xiong doubts North America will catch up with China anytime soon. But perhaps other countries can compete with China with more renewable energy and lower operating costs, he tells the magazine.
According to Lohmiller, the US is growing aggressively as a mining nation, thanks in part to the professionalization of the industry. But not all of these Chinese mining companies will disappear overnight – unless there is sweeping regulation. Lochmiller, for example, predicts that in three years China will still claim 40-50% of the world’s BTC production, with perhaps 30% from North America, 20% from Europe and the remaining 10% from other countries.
As for the future configuration of the mining industry, I’d like to see it reversed, says Kim, with 65% for the US and 7% for China – although that’s probably not that unlikely. The fact is that the US needs comprehensive policies, both at the state and federal level, to attract and retain innovative crypto and blockchain companies.
Kim adds: We want it to work, just like before the internet and Silicon Valley. Already, states like Kentucky and Texas and cities like Miami recognize that blockchain is the future: So I think we will see progress on the mining front over the next three years.
According to Vera, North America is poised for rapid growth with robust capital markets, energy infrastructure and a highly developed political environment. I expect North America to gain another 10% of the global hashrate market share next year.
It is clear that the North American mining industry must consider the environmental costs of growth as it moves forward. A continued transition to renewable and carbon-neutral energy sources is essential to capture a share of mining, Vera said. If bitcoin becomes mainstream, this aspect [environmental impact] will continue to be a major argument against bitcoin.
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