There is no shortage of alarmism over the rising costs of mining cryptoassets, most famously Bitcoin but also thousands of others. But there is another way of looking at the problem: mining could provide the answer to rising problems in Internet economics, social media, and the commodification of information toward actual profitability. The height of ironies, one of the world’s leading “progressive” (i.e. left-wing) websites is pioneering the new direction.
But let’s begin at the problem that isn’t. A typical case is a recent article in the New York Times: “Is Bitcoin A Waste of Electricity, or Something Worse?.” That’s a heck of a way to set up a news article! It’s like “Is Bob torturing or actually killing his cat?” You are left with the distinct impression that, regardless, Bob is doing something very wrong. So it is the NYT’s coverage of cryptomining. It would appear that there is absolutely no redeeming value to mining for cryptocurrency. It serves no positive purpose at all.
The article quotes the former head of research at the New York Fed. “It appears that much of our evolving digital infrastructure is devoted to activities, like the proliferation of cybercoins, that are worse than frivolous.”
The elevator response is as follows. Computers run the blockchain, the distributed ledger that is the real source of value. Mining is a metaphor. What this computer power is actually doing is confirming transactions. The CPU power used for this is effectively purchased by the protocol by granting ownership to new tokens. The creation of new tokens takes place on a strict schedule. The allocations need to adapt based on how many nodes are working the system. The difficulty level of the mining algorithms has to increase to allocate new ownership rights. All of which is to say, the power used to mine – and the growing amounts of it – are absolutely essential to making the system work.
Our friend at the Fed seems oblivious to this. What I find interesting is how all this kvetching about the costs of mining is a blast from the past. The classic criticism against the gold standard is that it was too costly. Why are these guys wasting resources to suit up, dig into mountains, desperately seeking a finite resource, and slogging the results all the way to the Treasury Department?
This is all just silly, said the critics. We know how to make money: you print it. It’s far cheaper to print than mine. A paper standard will save a tremendous amount of resources that can go to other purposes.
There is a plausibility to the claim. We do know how to make money substitutes that appear to work just as well as what we used to call money. The costs of mining operations are huge and discovering new deposits has to be funded. It involves speculation and drains financial and time resources, all to find the thing we already know how to make (more or less) with paper and ink.
Keynes Contra Gold
J.M. Keynes agreed with the critics of the gold standard. He wrote a monograph in 1923 (“A Tract on Monetary Reform”) that condemned governments for depreciating currency, warned of monetary instability after the war, and then…dropped a bomb at the close of the book. He said that the gold standard is too inflexible for modern times. It has to go. Indeed it is a “barbarous relic” that should be replaced by a money wholly managed by the central bank.
Thousands of economists for decades followed Keynes’s view, each of which imagines himself to be the central bank chief, ready to impose his own vision of what monetary power can accomplish.
Gold belongs to the past, not to an age of scientific central planning, or so went the refrain. The old-fashioned gold standard, with its limits and discipline and self-managing logic, just has to be destroyed. And so it was, for many decades, until 1971 when all that was left of it was demolished.
There is a reason that Bitcoin is being called Digital Gold. It was structured to operate the same way as the classical gold standard minus the sponsorship of government. It requires no centralized management. You have to expend resources to become the first owner of the initial resource. There is a finite supply of the specie payment. Payments are finally settled when made. Bitcoin is the gold standard ported over to the digital age.
In gold mining, as the price of the metal rises, the inspiration for finding and mining more deposits rises, along with the profits of the mining industry itself. It is just the same in Bitcoin. During the mad runup in price of 2017, miner revenue went through the roof. It has settled back down again with the price drop from December 2017.
Now we are seeing the same argument against the gold Standard used against Bitcoin. It is said to be wasting massive energy. “The amount of energy used by computers ‘mining’ bitcoin so far this year is greater than the annual usage of almost 160 countries,” says the Business Insider.
Salon rails against the trend:
But what they might not have accounted for is how much of an energy suck the computer network behind bitcoin could one day become. Simply put, Bitcoin is slowing the effort to achieve a rapid transition away from fossil fuels. What’s more, this is just the beginning. Given its rapidly growing climate footprint, bitcoin is a malignant development, and it’s getting worse.
At current prices, mining is worth it, perhaps not for individuals but for whole mining pools. But what about the social and environmental costs? This is what concerns Salon.
Worth the Cost
To search for an answer, let’s revisit the case of the costs of the gold standard. In 1983, Roger Garrison wrote an article on the topic. He points out that all costs are really opportunity costs: the thing you give up in order to get what you want. The gold standard is rightly contrasted with the paper standard that replaced it. What are the costs of the paper standard? This is the fair question if we are going to assess whether the gold standard is somehow worth it.
The alleged price-adjustment costs of a gold standard are identified by comparing the gold standard as it actually operates with a paper standard as it ideally operates. Such comparisons never provide a sound basis for choosing between alternative institutional arrangements. The comparison assumes away all the relevant costs of a paper standard. If paper standards were administered by angelic monetary authorities whose sole objective was to minimize money-induced disequilibrium, the choice between a gold standard and a paper standard would be much less consequential than it actually is. But actual paper standards have price-adjustment costs too. And as history teaches, the magnitude and costliness of upward price adjustments under a paper standard dwarf the magnitude and costliness of downward price adjustments under a gold standard.
The true costs of the paper standard would have to take into account (1) the costs imposed on society by different political factions in their attempts to gain control of the printing press, (2) the costs imposed by special-interest groups in their attempts to persuade the controller of the printing press to misuse its authority (print more money) for the benefit of the special interests, (3) the costs in the form of inflation-induced misallocations of resources that occur throughout the economy as a result of the monetary authority succumbing to the political pressures of the special interests, and (4) the costs incurred by businessmen in their attempts to predict what the monetary authority will do in the future and to hedge against likely, but uncertain, consequences of monetary irresponsibility.
So the costs of the paper standard include the inflation risk, political opportunism, the explosion of government debt, the vast expansion of government power, the building of cartelized money and financial institutions, the politicization of money, the destruction of savings and investment (in light of zero-percent interest rates) and the rise of endless boom-bust cycles.
The experience with Bitcoin underscores other costs. Bitcoin works on a trustless basis that ideally requires no established credit or identity. That makes Bitcoin far more inclusive of unbanked populations. There is zero chance for identity fraud. There is no chance of someone acting like you to spend your money. To prevent this for national money and existing payment systems, the banking industry spends as much as $11 billion, which is five cents on every one hundred dollars spent.
Even then, the fiat system is a disaster for your personal finances. You spend your money in an unusual way, you are nearly guaranteed to get a pushback from your credit card company. Even then, every few years, your cards are declared stolen and you have to get a new one and change the numbers on every online merchant website. If you have done this for 10 or 15 years, there is a huge paper trail of defunct credit cards on your websites.
In addition to payment-systems problems, there are the problems of the nationalized money system, which is so loose and confusing that no one knows for sure if we are in a boom or a bust or something in between or both. The uncertainty of Fed policy has reached epic proportions, and makes the confidence expressed by Keynes seem laughable in retrospect.
Also, that mining Bitcoin is costly is not some arbitrary imposition. It’s a fallacy to believe that the electrical costs are a waste. There is work to do to confirm transactions and operate the protocol. This will be true until someone can come up with some other system.
Put it all together, the gargantuan costs of the nationalized paper-money system, and compare it to the updated version of the gold standard, which is cryptocurrency, and the costs of mining Bitcoin don’t seem so high after all. The acquisition of any resource worth having involves a cost. Paper money is nearly costless to produce, and destroyed so much for so many centuries. All the complaints about the costs of Bitcoin mining should be considered in that light.
Mining Is an Opportunity
How can mining be used as an opportunity for a website to earn money as a replacement for ad revenue? You might think it would be a free-market website that would first experiment with this. Incredibly, the pioneer here is...Salon, the very website quoted above. Rather than fighting mining, they have figured out how to use it to their advantage.
The trick goes like this. The site gains revenue from ads but ad blocker has hurt the stream. If the site detects that you are using ad blocker software, it prompts you to turn it off. But then it gives you another option. You can volunteer some of your CPU power to help them engage in crypto mining!
And what are they mining? A coin called Monero. It is doing very well actually. It has a $5.8 billion market cap. It was once associated with dark markets due to its anonymizing properties but it is going more mainstream now. It turns out to be very profitable to mine. Salon gets a portion of the revenue. I find myself in awe of the ingenuity here. Once you state the idea, it is obvious, like all brilliant ideas.
What if other sites did this? What if this strategy points the way toward flipping the economics of website use, from ad-driven to use-controlled? What if users become real partners with websites for content creation and consumption? Right now, news is getting ever harder to access, with more and more sites installing paywalls. It is starting to get frustrating. By having users volunteer the CPU power to mining, websites could find that they will earn more from mining than from subscriptions or ads. This could change everything.
Do you see what is happening here? Everyone says that crypto mining is a terrible waste. It might turn out to be the very thing to save the Internet. We just need the process of creativity to kick in to show us new ways that we aren’t currently thinking about. The market needs to reveal to us new truths.
The criticism of the gold standard was entirely misguided. Abolishing it led to astonishing levels of debt, government growth, depression and recession, war, and loss of freedom. Let’s please not go the same way with cryptocurrency. It is a beautiful innovation. Everything wonderful in life comes at a cost. The key is to turn the cost into opportunity.
I never thought I would say this but Salon is pointing the way.