Revenue Constraints Will Drive Bitcoin Mining to Sustainability, and more

07/27/2023 0 Comments

1. Revenue Constraints Will Drive Bitcoin Mining to Sustainability

While we have made great strides in shifting the narrative around Bitcoin’s bad environmental image (see this recent surprisingly optimistic report from Christian Stoll, Lena Klaaßen, Ulrich Gallersdörfer and Alexander Neumüller), we have to remember to stay balanced in our messaging.

Bitcoin mining alone won’t save the planet, but it is a valuable tool for managing some of the challenges of the energy transition. More important in the context of climate change is that bitcoin is essential for preserving freedom and liberty when growing climatic pressure to destabilize nations.

Let us start with what bitcoin mining will not be able to do. Bitcoin mining won’t push global warming past two degrees Celsius above pre-industrial levels all on its own. Bitcoin mining, based on CBECI estimates, accounts for roughly 0.14% of total global emissions. This is but a few drops in a bucket of greenhouse gas emissions.

In reality, even if we banned bitcoin mining today, humanity would still be well on track to surpass 1.5 degrees Celsius of warming in the next decade. Not only that but there is a good chance that the two degrees target will also be missed due to a lack of strong governmental action to reduce society’s reliance on fossil fuels.

Bitcoin mining will not be the sole catalyst that increases the rise in exponential growth in renewable energy. Nor will it push us over the finish line for meeting our decarbonization goals. At the Bitcoin Policy Institute, we are busy trying to quantify exactly what effect it will have, but we suspect that network dynamics being what they are, bitcoin’s role as a renewables catalyst will not always be equal in all scenarios.

We should not expect bitcoin mining to have the easiest time setting up on wasted gas sites like landfills, orphaned wells or oil and gas fields. There is way too much anecdotal evidence that suggests many of these wasted methane sites are well out of the reach of bitcoin miners. This means that we should not expect bitcoin miners to mitigate all methane emissions from landfills and the oil and gas industries.

I am not saying bitcoin miners cannot mine with wasted methane – there are several energy startups trying to do just this. But let us be clear, they are going to have a hard time surviving the tight profit margins that bitcoin miners face when the market is not in the middle of a bull run. They are going to need additional revenue streams if they want to stay viable in the long term.

Do not misunderstand me, bitcoin mining is doing good! It is agile, highly modular and has minimal requirements for uptime. Bitcoin has unique properties that make it good at supporting revenue for renewable energy projects right now. Miners active in demand response programs are helping minimize strain on the electrical grid during severe weather emergencies. There are bitcoin mining companies that are selling their waste heat to greenhouses or working on using it for municipal heating.

Some miners are mitigating methane emissions in the oil and gas industry and there are a few trying to prove the business case for landfill and agricultural waste gasses. The tighter the profit margins, the more inventive bitcoin miners will have to be. This means that mining revenue might end up being a secondary thought in a larger energy operation. Would it be so bad if mining becomes another boring tool in our clean energy operations?

After all, did we really expect Bitcoin to solve climate change with emissions reductions alone? Bitcoin’s greatest impact on climate change will not come from mining but from the network’s original raison d’etre.

Climate change will and is destabilizing society with its unpredictable but increasingly probable effects on our food production, water resources, and infrastructure. People often turn to the political strongman in times of deep uncertainty. If Bitcoin does save the planet, it will be through its preservation of economic liberty and with that, human rights. Now that is a narrative that I can sing from the highest towers.

2. Bitcoin whale exchange inflow share hits 1-year high — over 40%

In the latest edition of its weekly newsletter, “The Week On-Chain,” analytics firm Glassnode shows that contrary to popular belief, opportunistic entities are the most active whales.

The birth of the Bitcoin “short-term holder” whale

Since BTC price action returned to $30,000, a shift has taken place among Bitcoin traders.

As Glassnode shows, so-called short-term holders (STHs) — investors holding coins for a maximum of 155 days — have become significantly more common. As it turns out, the largest-volume investor cohort, the whales, is also composed of large numbers of STHs.

“Short-Term Holder Dominance across Exchange Inflows has exploded to 82%, which is now drastically above the long-term range over the last five years (typically 55% to 65%),” Glassnode states.

Interest in trading short-timeframe moves on BTC/USD was already evident before May. Since the FTX meltdown in late 2022, speculators have been increasingly eager to tap volatility both up and down. The results have been mixed: Realized profits and losses have routinely spiked in line with volatile price moves.

“If we look at the degree of Profit/Loss realized by Short-Term Holder volume flowing into exchanges, it becomes evident that these newer investors are trading local market conditions,” Glassnode continues.

Whales show “elevated inflow bias” to exchanges

Closer to the present, whales have ramped up exchange activity, at one point in July accounting for 41% of total inflows.

“Analysis of the Whale Netflow to Exchanges can be used as a proxy for their influence on the supply and demand balance,” The Week On-Chain comments on the topic.

As Cointelegraph reported, whales are not the only forces at work when it comes to BTC sales.

Mining pool Poolin hit the headlines with its transactions destined for Binance, while miners potentially hedging profits also contributed to sell-side activity.

3. Bitcoin could be in danger as quantum computing advances

IBM, Google, and other companies are racing to create the fastest quantum computer, a device that could completely change today’s cryptography. Secure communications, banking, and cryptocurrencies rely on robust encryption for their safety and security.

One crude way to measure the power of a quantum system is the number of qubits or quantum-mechanical elements entangled in superposition. Each additional qubit exponentially increases the potential processing power of the quantum system.

Google recently announced its quantum computer with 70 operational qubits. In a matter of minutes, this system can accomplish a task that would take traditional supercomputers tens of years to complete.

IBM plans to offer 433-qubit quantum systems in the near future and to unveil the world’s first universal quantum computer, with more than 1,000 qubits, this year. Also, the company expects to produce a quantum computer with more than 4,000 qubits by 2025.

Quantum computers will undoubtedly benefit society in many ways. But these rapid developments should be worrying for crypto bros.

Already, two algorithms exist which could be utilized against Bitcoin. The main question ­­is – how long will it take quantum computers to achieve the computing power for that?

The answers vary wildly, from a few hundred to billions of qubits. Qubits are not created equally, as the quantum states necessary for computation are fragile and susceptible to interference. That makes scaling quantum computers a substantial technical challenge.

However, many agree that even a few thousand would be enough to play some tricks on Bitcoin holders, and this will be achievable within the current decade.

Is the blockchain at risk?

The most significant threat to Bitcoin would be the compromise of cryptographic hashes, affecting blockchain integrity and mining.

Let’s say a vastly superior quantum computer suddenly appears as a fellow miner, produces 2,016 empty blocks in 1 minute, and then disappears just as suddenly.

That would increase Bitcoin mining difficulty by 20,160 times. All the traditional miners in the world would then have to work for 140 days instead of 10 minutes to find the hash value of a single block. Not a single Bitcoin transaction could go through in the blockchain during this time.

Thereafter it would need 140 more days for a second block, 140 more days for the third, and so on. If everything remained this way, it would take 773 hundred years to solve all 2016 blocks and readjust the mining difficulty to normal levels.

The holy grail of Bitcoin mining is finding a hash value with an adequate number of zeroes. Miners do just that. They repeat the hash function billions of times to get different 256-bit numbers and then check if the number is low enough. If it is, they’re rewarded with newly generated bitcoins for creating a new block. If not, they repeat the process over and over.

The network adjusts the difficulty to generate a single block every 10 minutes. If the network’s computation power increases, the hash value that the miners need to find becomes smaller. Bitcoin’s mining difficulty is updated every 2,016 blocks.

Quantum computers may utilize Grover’s algorithm for such an attack, but they’ll still need to perform a large number of operations. This quantum algorithm offers a quadratic improvement in speed compared to the classical counterparts. Yet, if an exact hash value is required, quantum computers would still need to run 2^128 operations in the worst case, while traditional computers would take much longer with 2^256 operations.

While Grover’s algorithm poses a risk to cryptographic hashing, it’s not alone. Shor’s algorithm can crack the encryption used to protect individual wallets. It is used to efficiently factor large numbers, a task too complex for traditional computers.

How many qubits are needed?

To attack SHA-2 functions with 256-bit states, using Grover’s algorithm, 2593 qubits would be required, according to Richard Preston’s paper.

But that does not tell the whole story. Those qubits should achieve frequencies as fast as their computer counterparts. And even then, more quantum computers should work in parallel to compete with the millions of traditional ASICs.

Moreover, the qubits are subjected to environmental noise that degrades or destroys their state over time. Any errors introduced by noise must be fixed using quantum error correction, which requires more qubits. For example, eight physical qubits could compose only a single “logical” qubit to bring error rates to an acceptable level.

And there is also a need for more memory and more qubits specifically for Bitcoin because mining includes more data in the SHA functions.

According to calculations, an honest quantum Bitcoin miner would need around 10,000 qubits quantum computer without considering quantum noise. That should be enough to fit the transaction data into a block and calculate hash values.

Is Shor’s alternative more promising? While the scenario of waking up and finding your wallet empty is terrifying, trying to guess a private address is also a tremendous task, even for a quantum computer.

Shor’s algorithm can factor large prime numbers and solve the problems that protect your keys.

If the public key is known, “an attacker with a quantum computer of about 1500 qubits can solve it,” researchers at the Centre for Cryptocurrency Research and Engineering of Imperial College London write.

Then the attacker would be indistinguishable from the original owner, as he could sign transactions.

If a Quantum computer is fast enough, an attacker could use it to perform live transaction hijacking. Once a public key is revealed in a pending transaction, a malicious actor could steal the bitcoins before the transaction is finalized. Even that may not be needed, as many public addresses are, well, public.

A fork may be needed to make Bitcoin more resistant to quantum attacks. I.e., 20 million qubits at worst would be required to break a 2048-bit RSA encryption, commonly used nowadays for protection, such as credit card data.