Does Bitcoin Use An Immoral Amount of Energy?

 

The business of cryptocurrency turns out to be one of the more power-hungry forms of market speculation.  An article in the April 2024 issue of Physics Today says that between 0.6% and 2.3% of the total electricity production in the U. S. goes to cryptocurrency mining farms.  Is this a bad thing, and if so, what can be done about it?

 

A helpful review of the history of cryptocurrency is found in the surprisingly entertaining 2020 book Money:  The True Story of a Made-Up Thing by National Public Radio reporter Jacob Goldstein, who points out that one of the main attractions of physical currency (paper bills and coins) is its anonymity.  No one can tell where a $100 bill has been, and so that's why illegal transactions around the world favor briefcases full of large-denomination bills. 

 

Goldstein describes how after the rise of the Internet, "techno-libertarians" tried to develop a digital equivalent of cash, free of the need for banks and creditors and debtors to keep track of who has transferred what amount of money.  After several "cypherpunks" came up with pieces of what was needed, an anonymous person (or group of persons—no one knows exactly) calling himself Satoshi Nakamoto put it all together in a paper sent to other cypherpunks on Halloween, October 31, 2008. 

 

Goldstein calls the entity which eventually became known as bitcoin "an anonymous(ish), money(ish) thing that buyers and sellers could exchange over the internet without any bank or tech company in the middle."  After a very slow start, including the first-ever purchase paid for with bitcoin in 2010 (someone sent a tech nerd a pizza in exchange for 10,000 bitcoins, which were then worth about a third of a cent each), the criminal element discovered that bitcoin was ideal for international illegal transactions involving illicit drugs.  Bitcoin started to rise in value, and as the code for bitcoin was openly published, imitators started to create their own versions.

 

But as with many network-based phenomena, the first to get in with a usable product tends to dominate, and today bitcoin is responsible for about half the total market in cryptocurrency.  Lately it has been trading at around $72,000 per bitcoin, which would make that 2010 pizza worth $720 million at today's prices. 

 

As Goldstein points out, most items used over the centuries for money have been either relatively difficult to obtain, or else governments have strictly enforced laws to prevent counterfeiting.  Nakamoto chose to make bitcoin intrinsically hard to create by embodying digital puzzles that must be solved before new bitcoins can come into being.  The custody of the master code has now been taken over by a 57-member Bitcoin Mining Council, which has adjusted the difficulty of the puzzles to keep up with advances in computer technology so that nobody has been able to flood the market with bitcoins, at least so far.  And the code is set up so that no more than 21 million bitcoins will ever exist.

 

The price of all these restrictions is that to make a new bitcoin requires huge computer installations, such as the 700-MW-rated-consumption unit in Rockdale, a small community in Central Texas.  In 2023 that much power produced almost 7,000 bitcoins.  The mining analogy is apt, because as the Physics Today article points out, the estimated global energy consumed in cryptocurrency mining is 163 TWh (163 with 12 zeroes behind it), comparable to the estimated 132 TWh consumed worldwide in gold mining.  Both enterprises require a great deal of work to produce a commodity whose price is unstable, and a sudden dip in price can render either a gold mine or a bitcoin mine useless.  But risk-averse people generally don't fool with mining investments in the first place.

 

Cryptocurrency doesn't have to consume huge amounts of power.  One alternative version, Ethereum, changed its algorithm in 2022 to something called "proof of stake," which exchanges puzzle-solving for putting up one's own stock of cryptocurrency as collateral in order to do the necessary digital work to maintain the blockchain process, which by itself is not that burdensome.  Ethereum thus reduced its energy consumption by 99.9%.

 

As an attempt to replace physical cash, bitcoin and its allied cryptocurrency creatures are a failure.  One of the prime features of the U. S. dollar is its relative stability in value as measured by what it will purchase.  Even minor upticks of 5 or 10 percent annually, as we saw in the last few years, lead to fierce political blowback and can endanger whole administrations.  So no one without a very good (and probably illegal) reason to do so is going to use a commodity for routine transactions like bitcoin, whose value bounces around like a kangaroo. 

 

Instead, cryptocurrency has found its niche in the spectrum of other commodities traded primarily for speculative purposes.  Most economists consider speculation a basically unproductive activity, because it tends to be a zero-sum game.  If A makes a killing on the stock market, you'll surely find that B, C, and a lot of other letters lost at least that much, unless a lot of leveraging is going on, in which case we get into fractional-reserve banking theory, and that's a whole other column.  A society can tolerate a certain amount of financial speculation, but at least gold mining leaves you with something physical that you can wear or plate electrical contacts with.  When your bitcoin investment turns sour, it's gone into the bit void, never to return.

 

People do all sorts of things with their money, and as long as what they are doing with it is not intrinsically illegal, I don't see a large problem with bitcoin mining compared to all the other nasty things that we have to put up with these days.  Other things being equal, I wish they'd redesign their algorithm to use less power, but it might rock the boat too much and leave every investor with little or nothing.  But hey—it's only bits anyway.

 

Sources:  Jacob Goldstein's Money:  The True Story of a Made-Up Thing by Jacob Goldstein (New York:  Hachette, 2020) is a treasury (so to speak) of little-known facts about money and a pretty good guide to how it works, including the Federal Reserve System.  Physics Today carried the article "Code changes could drastically reduce bitcoin's enormous energy requirements" by David Kramer on pp. 26-29 of the April 2024 issue.

Is Cryptocurrency the Future of Money?

 

The Silicon-Valley firm Nvidia recently got in trouble with the SEC for not disclosing that a good bit of its profits in 2018 were due to sales of their graphics processing units to cryptominers.  Cryptominers verify cryptocurrency transactions in operations that take a vast amount of computing power, real electrical power, and cooling.  One estimate quoted in a recent Associated Press story says that cryptominers making Bitcoin, only one of several types of cryptocurrency, use up 0.2% of the world's electrical supply. 

 

The reason the SEC fined Nvidia $5.5 million was that cryptocurrency, and presumably the cryptomining that goes along with it, is notoriously volatile.  In the SEC's judgment, Nvidia should have told its investors that a lot of their 2018 profits came fron the up-and-down business of cryptomining.

 

For a firm with $26 billion in revenue, $5.5 million is chump change, and most of the damage to Nvidia was already done once the press releases came out.  But the SEC's action bespeaks a larger prevalent attitude that government institutions, at least in the U. S., have toward cryptocurrency.  If a company can get in trouble merely for selling their products to cryptominers and not telling their investors about it, the SEC must be really down on cryptocurrency.

 

And this is not a surprise.  Whoever came up with the idea of Bitcoin in 2008 clearly wanted to leave governments and their meddling with currency behind.  In a sense, cryptocurrency is a libertarian's dream:  nobody controls it and nobody can do Federal-Reserve-type manipulations to it or attempt to tie it to any particular conventional currency.  A unit of cryptocurrency is worth exactly what people will pay for it—no more and no less.

 

In retrospect (Monday-morning quarterbacks are always right), it was almost foreordained that the few lucky people who bought bitcoins and other cryptocurrencies as they were issued ended up making fantastic profits, at least on paper (or bits).  But after the first cryptocurrency-rush days, the crypto market turned into something resembling the futures market for hog bellies,  but without the inconvenience of having to keep a lot of smelly hog bellies around.

 

And unlike hog bellies, cryptocurrency uses a lot of energy, much of which is generated with fossil fuels that increase the globe's burden of carbon dioxide.  That bothers some people more than others, but it is a definite downside to cryptocurrency compared to more conventional media of exchange.

 

Another factor that gives cryptocurrency a somewhat shady reputation is that it has proved very popular with international criminals.  An untraceable, serial-number-free virtual currency is just what the drug dealers and online extortionists like to use, and many of these types will not accept any other kind of money.  (I'm told this—I've never tried to pay a drug dealer myself, either with cryptocurrency or cash.)

 

So with those counts against it, one shouldn't be too surprised that although cryptocurrency has been accepted in certain circles and by at least one government as legal tender (El Salvador), its progress is slow.

 

While some may view the advance of cryptocurrency as progress, in some ways it marks a return to a system that prevailed in the early and mid-19th century in the U. S.  While the U. S. government (and the Confederacy during the Civil War) issued its own currency, many private banks chartered by state governments also issued their own currency.  In a given locality, you might have businesses trading in three or four different kinds of money, and so someone would have to keep an exchange chart stating what their comparative worths were. 

 

And volatility was also an inevitable consequence of that system.  Private banks could flood the market with bills or even go broke, rendering the currency they issued worthless.  In a time before the telegraph had penetrated to most parts of the U. S., a store might take in payment a bunch of bills issued by the Pawtucket State Bank of North Carolina, only to learn a few days later that the bank had ceased to exist.

 

Of course, all paper money back then was exchangeable at some rate with gold, which was the main medium of monetary exchange between governments.  There are stories of one company loading a ton or so of gold bullion onto a ship at Port A bound for Port B, and another company loading a ton of gold onto a ship in Port B bound for Port A.  Besides being downright silly, such mechanical exchanges were prone to the hazards of ocean travel.  If one of your ships went down with your gold bullion, you were out of luck.

 

That can't happen with bitcoin, but it can certainly "sink" metaphorically, and has numerous times, wiping out value just as effectively as if it was a pile of gold bars going down to Davy Jones's locker.  As long as cryptocurrency developers insist on staying independent of government control, it seems like volatility will be part of the game.  And that means only people who like to take lots of risks anyway (e. g. drug dealers and online shakedown artists) will accept the risk of volatility for the anonymity and other advantages cryptocurrency has for their business models, if we can call them that.

 

Three years ago, Facebook launched its own version of cryptocurrency, then called Libra.  Originally, they tried to tie it to a basket of currencies, but regulators nixed that idea.  Then it was rebranded as Diem, and tied to the dollar, but reportedly the Federal Reserve pressured the bank involved to cut its ties with the organization, thus dooming it.  If a substantial outfit like Facebook can't launch a modified cryptocurrency that has some promise to maintain a stable value, it looks like nobody else will try any time soon. 

 

So for the foreseeable future, all five minutes of it, cryptocurrency looks like it will remain a fringe enterprise, enjoyed by a few rich risk-takers, disappointing others who buy it at the wrong time, and having a core constituency of users whose characters are dubious, to say the least. 

 

Sources:  The AP story about Nvidia's fine by the SEC appeared in numerous outlets, including the Sacramento Bee at https://www.sacbee.com/news/business/article261167522.html.  A report on the fate of Facebook's Libra can be found at https://www.theverge.com/2022/1/25/22901830/facebook-meta-libra-diem-crypto-project-explores-sale.  I also referred to Wikipedia articles on Nvidia and cryptocurrency.  My blog on Libra when it came out in 2019 is at https://engineeringethicsblog.blogspot.com/2019/06/is-facebooks-libra-cash-in-your-future.html.

Bitcoin-Enabled Ransomware Attack Strikes Baltimore

Last month, the city of Baltimore became the latest target of a ransomware attack.  The city's Microsoft operating systems were held hostage by a group that demanded 13 bitcoins, which at the present rate of exchange is about $100,000.  Despite their inability to repair all the damage after nearly a month, Baltimore administrators refuse to pay the ransom, and instead have asked the federal government for help.  According to some sources, the malware used for the attack was developed at the U. S. government's National Security Agency (NSA), and somehow it leaked and was posted by a group of hackers in 2017. 

Irony is usually found more in literature than in engineering, but this incident is particularly rich in them. 

The first irony is that a cyberweapon presumably developed to be used by the United States against its enemies was stolen, published worldwide, and used instead to attack the infrastructure of a major U. S. city. 

The second irony is that an idea traceable back to 1991, a chain of blocks developed originally just to prevent software timestamps from being tampered with, has turned into a means by which ransoms can be paid with no realistic hope of tracing where the money goes. 

And the third irony is that some eyebrows are being raised by the fact that the city of Baltimore is asking for help from the federal government. 

Let's do a little thought experiment and set the essential ingredients of this incident in an alternate universe which is just like ours, except there's no computer networks and so on.  Suppose a gang of paratroopers landed in Baltimore and made their way to the city offices, holding employees at gunpoint while they absconded with tons of files and records in a heavily armored vehicle.  Then the mayor received a ransom note demanding $100,000 for the return of the records.  Not only would a nationwide manhunt be mounted for these criminals, but the FBI and other federal agencies would get involved as a matter of course. 

But simply because the records and functions involved are on computers and not physical documents, attitudes and actions are vastly different here.  Now, admittedly some blame can be attached to those responsible for running Baltimore's IT systems.  Microsoft evidently does a fairly good job of sending out patches and updates in response to new viruses and malware, but these patches have to be implemented in a systematic and organized way.  And in the case of Baltimore's systems, this was not done.  In the world of our thought experiment, this amounts to not having enough armed guards surrounding your municipal buildings to fight off the attackers. 

While a certain amount of security is to be expected, nobody wants to have to do the equivalent of breaking into Ft. Knox in order to pay your city water bill. 

While I am not usually in favor of greater centralization of power and resources, in this case I think it is only fair for the federal government to help out Baltimore in their hour of need.  For one thing, the NSA never should have let its malware escape in the first place.  It would seem to be a fairly straightforward investigation to discover who was responsible.  But the NSA's workings are deliberately opaque and poorly supervised even by Congress, who pays the bills, and that sort of setup is an open invitation to laxity and inefficiency.  Perhaps this leak represents only 0.001% of everything that NSA has developed, most of which is still secret.  But in situations like this, even one leak can be too many.

As for bitcoins being used for ransomware payment, it makes a certain amount of perverse sense that a form of currency inspired by hyper-libertarianism is used mainly for two things nowadays:  speculation and illegal transactions.  It is an ill wind that blows nobody good, and bitcoins have benefited some people.  I may have mentioned a student of mine who managed to buy some bitcoins only a few years after they came out in 2009.  I don't know exactly what she paid, but by the time she graduated I think she had been able to pay for her entire college education with her profit in bitcoins. 

But is this advantage worth the social cost of having a virtually foolproof way of laundering money?  I leave that for the reader to decide.  It doesn't matter now, because bitcoins and their offspring are a permanent part of the cyberlandscape now. 

Perhaps the most troubling aspect of the Baltimore situation is the complete anonymity of the attackers, who could be, and probably are, anywhere in the world outside of the United States.  Prior to the Internet, the most significant threat the U. S. endured from outside its borders was the threat of intercontinental ballistic missiles carrying nuclear warheads, and billions of dollars were spent in an arms race that is in some ways still with us.  But now that anyone with sufficient skills can mount attacks on specific geographic entities in the heartland of the U. S. from halfway around the world, we still act as though it's just some sort of defect in a strictly local pile of computer networks, and treat the attackers much like an act of God—something that's always going to happen sooner or later, so you might as well just buy insurance and be ready when it happens.

Maybe that's the best approach.  Baltimore, as it turns out, did not have cyberinsurance, but the bond underwriters will soon see to that  So in the future we will go armed not with guards, but with insurance policies to buy experts who come in and fix our computer systems, just like roofers replaced my roof after a recent hailstorm this spring.  Complexity begets complexity, and if Baltimore and other cities consistently refuse to pay ransomware demands, perhaps the criminals will devise some other way to make ill-gotten gains.  I can hardly wait to see what they'll do next.  (That's irony, by the way.)

Sources:  I referred to articles at https://phys.org/news/2019-05-baltimore-ransom-cyberattack.html and the website Governing.com at https://www.governing.com/topics/public-justice-safety/gov-cyber-attack-security-ransomware-baltimore-bitcoin.html, as well as the Wikipedia articles "blockchain" and "bitcoin." 

End Of the Silk Road

Last Friday, Ross Ulbricht received a sentence of life in prison in a New York City federal courtroom.  His crime was drug dealing on a massive scale through a "dark-web" Internet site called Silk Road.  Prosecutors showed how Ulbricht, a libertarian with a master's degree in material science, brokered drug deals worth millions and got paid in the online currency called bitcoin.  In October of 2013, the FBI caught him as he was administering the site from a San Francisco library.  He was convicted in February of this year and sentenced last week.  His lawyers say they will appeal.

Ulbricht had some interesting things to say after hearing his sentence.  What he said shows that he is an extreme case of what can happen when an educational system gets so compartmentalized that it can produce people with massively developed technical abilities along with huge blind spots in their moral views.  Ulbricht apparently saw the drug laws of the various countries in which the Silk Road customers lived as intrusions upon the supreme value in his moral universe, which was freedom.  He rationalized that because these laws stood in the way of those who wished to use drugs, he was actually striking a blow for freedom every time someone used his site to buy illegal drugs.  And of course, he got a tidy profit from the transaction too. 

According to prosecutors, Ulbricht believed so strongly in his right to spread his kind of freedom, that he paid FBI undercover agents to assassinate someone who threatened to make public a list of his customers.  The glaring contradiction between Ulbricht's espousal of freedom and his attempt to take the life of a fellow human being apparently never occurred to him, at least not until he had lots of time to think about his actions in jail.  According to a New York Times report, Ulbricht reflected after he was sentenced that "the laws of nature are much like the laws of man. . . . Gravity doesn't care if you agree with it—if you jump off a cliff you are still going to get hurt.  And even though I didn't agree with the law, I still have been convicted of a crime and must be punished.  I understand that now and I respect the law and authority now."

We will never know for sure if a different educational experience could have stopped Ulbricht from doing what he did.  He grew up in Austin, Texas, graduating from high school there in 2002, and must have picked up some of the sky's-the-limit entrepreneurial atmosphere of the place, because before he went over to the dark side, he operated an online used-book site that donated some of its proceeds to charity.  But the inner compass, conscience, moral fiber, or whatever you want to call it, that keeps the vast majority of ordinary people on the good side of the law most of the time, was missing in his makeup and education.  For all I know, he may have taken an ethics or philosophy course in college, but in his case, it obviously didn't take.

Ulbricht used technologies that were designed at least in part to promote freedom.  Bitcoins are a form of digital currency that is designed to be untraceable, and Silk Road used Tor, a subset of the Web that the U. S. Navy developed to allow secret communication with, for example, freedom fighters in totalitarian countries.  But as Ulbricht himself has learned, freedom is not an absolute virtue, taking precedence over all others.  If you try to act as though it trumps all other values, you can end up in jail.

Ulbricht committed the same sort of error that many fringe sects do:  they take one virtue and put it on a pedestal above all others.   While some might argue with his comparison between the laws of man and the laws of nature, Ulbricht got that one absolutely right.  The moral law is just as objective and real as the law of gravity.  Ulbricht erred in seizing upon one part of that law—the goodness of freedom—to the neglect of the rest, including the Golden Rule:  do unto others as you would have them do unto you.  If he'd been the person threatening to reveal the names of customers, I don't think he would have liked it if someone put out a contract on him. 

This kind of moral reasoning is not rocket science.  But Ross Ulbricht's case shows that a highly intelligent person can get all the way through a complex educational system in the U. S. without being able to bring himself to reason morally in a way that most twelve-year-olds can.

All that human law can do is to try to model the moral law, whose ultimate source is God.  To the extent that it does so, it can serve as a teacher, though sometimes its lessons are painful to learn, as Ross Ulbricht has found.  A high priority in libertarian circles these days is liberalization of drug laws, and some states such as Colorado have already found that the effects of practical legalization of marijuana are not all good.  While drugs, like the Internet, can be used either for good or harm, I think Ulbricht now has a different view of human laws after his experiences than he did in his more innocent libertarian days.  Yes, some people will abuse drugs no matter what kind of laws are passed.  But if people are taught, both in school and by the laws, that some things are right and other things are wrong, maybe more of them can choose the right paths.  And we won't see as many Ross Ulbrichts running Silk Roads in the future.

Sources:  The news of Ross Ulbricht's conviction was carried by many news outlets such as the New York Times on May 30, 2015 at http://www.nytimes.com/2015/05/30/nyregion/ross-ulbricht-creator-of-silk-road-website-is-sentenced-to-life-in-prison.html.  I also referred to a New Yorker online article by Joshua Kopstein posted on Oct. 3, 2013 at http://www.newyorker.com/tech/elements/how-the-ebay-of-illegal-drugs-came-undone.  I blogged on Ulbricht's Silk Road on Jan. 20, 2014.  For more on the absolute nature of the moral law, see C. S. Lewis's The Abolition of Man, available in numerous print editions and online at https://archive.org/details/TheAbolitionOfMan_229.