The Breakdown - Bitcoin Mining Council: A “Green” Advance for BTC or a Trojan Horse for Centralization?

Episode Date: May 26, 2021

Yesterday, Michael Saylor and Elon Musk surprised the Bitcoin community when they announced a new “green” mining initiative that would see many of North America’s leading mining operators come together to develop common energy reporting standards as well as advocate for greener mining worldwide.  In this episode, NLW breaks down the community’s response, which ranged from enthusiastic to downright aghast. He discusses why there are such big differences in how people are interpreting the initiative and what their reasons for supporting or questioning it say about Bitcoin as a network. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

While I don't think a direct New York agreement comparison is accurate at this stage, I think people are right to have extreme skepticism around any group that starts to speak for Bitcoin, represents themselves as the leaders of Bitcoin, or whom others in power view as the leaders of Bitcoin even if they don't wish to be represented that way. And that is a key piece of this, especially when you bring a neutron star black hole type personality like Elon Musk. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.a.o and BitStamp and produced and distributed by CoinDess.

What's going on, guys? It is Tuesday, May 25th, and man, oh man, never a dull day around here. Here we are, you know, just debating the nature of Chinese political actions and the implications for Bitcoin hash power globally when, like the Kool-Aid man, Elon comes kicking back down the Bitcoin door. At 3.42 p.m. Eastern Time yesterday, he tweeted, spoke with North American Bitcoin miners. They committed to publish current and planned renewable usage and to ask miners worldwide to do so, potentially promising. Michael Saylor followed this up with, Yesterday, I was pleased to host a meeting between Elon Musk and the leading Bitcoin miners in North America. The miners have agreed to form the Bitcoin Mining Council to promote

energy usage, transparency, and accelerate sustainably initiatives worldwide. Exacts from Argo blockchain, blockcap, core scientific, galaxy digital, hive blockchain, HUD8 mining, marathon, and riot blockchain were present, and decided to establish an organization to standardize energy reporting, pursue industry ESG goals, and educate and grow the marketplace. Now, the markets initially seemed to like this. Bitcoin jumped about $1,500 at the time of the news. Bitcoin Twitter, on the other hand, was more divided. In fact, it explosion. loaded with debate. So much so that I tweeted, quote, and just like that, the ESG mining conversation became the new Bitcoin Civil War. It seems bombastic, but I actually think the seeds are there.

But in order to perhaps take the tone down a few notches and try to ensure that that isn't the case, let's explore both sides of this. First, let's try to get a clearer picture of what this mining council actually is. Basically, this group of miners got together to talk about greener mining. It's not hard to see how or why this came about. Bitcoin has long dealt with energy concerns, and those have redoubled in a huge way this cycle. It is easy and not totally inaccurate to blame a big part of this on Elon. Getting Tesla in and then pulling it out was nearly guaranteed to shine an absolute megawattage light on Bitcoin environmental concerns.

That said, given the broader political climate, it might have happened anyway. Mainstream business leaders like Black Rocks Larry Fink are focused intently on climate change action through business. The new U.S. administration has also made it clear that business and the economy are going to be a venue for pushing climate-related issues. So what did this group actually talk about? To my knowledge, there was no statement or notes released or anything like that. So in terms of understanding the conversation, we just have to piece it together from what the sources have said. We have that tweet I read above from Michael Saylor. Then CoinDesk interviewed Peter Wall, the CEO of Argo blockchain, which is a publicly traded firm. He said, apparently over and over, that

The only two things the group was focused on were, one, energy transparency, i.e. better disclosures of which energy sources were being used. And two, improving sustainable mining practices, i.e. trying to get miners to mine with greener energy. Quote, what we want to do is make sure valid ESG concerns about people mining Bitcoin with coal are being addressed. At this point, it's not going any further than that. So as you can see, we don't have a ton of information. Because of that, a lot of the intensity of the discussion is based around theoreticals and implications. I still think it's worth having the discussion, though, even in the absence of great information. So what I want to do now is lay out a really wide breadth of arguments that I've seen people make

to give you guys the tools to think about it yourself and figure out what your conclusions are or what questions you have. So let's start with the view that this is a good thing. This view is going to be based on one of a couple points. First, that Bitcoin genuinely has an energy consumption problem that should be addressed. There are, in fact, bitquiners out there who think that, one, Bitcoin is worth the energy consumption, even carbon-intensive energy consumption like coal, because of the benefits it brings to society, because they believe it's less energy-intensive than the fiat system, etc. While also, too, wanting Bitcoin to move as much to renewables and cleaner energy sources as

possible, these are not contrary or mutually exclusive positions for them. For this group, the council could be a force for actually moving miners in a direction they would like to see. The second viewpoint that might tend to see the Bitcoin Mining Council is a good thing are those that believe that whatever the reality of the energy mix actually is, Bitcoin has a PR and perception problem around energy that needs to be addressed. This group sees the constant attacks on Bitcoin's energy consumption as an actual problem for the industry. That could be for a number of different reasons. It could be because they want more institutions to buy in so number go up. It could be because

they're fearful that sustained questions around energy consumption could lead governments to target and crack down on Bitcoin. This group believes that the PR and perception issue around energy is real. So take it together, those who think Bitcoin has an energy problem, and those who think Bitcoin has an energy PR problem, those who think both, for them, the Bitcoin Mining Council might seem like a positive step. There is also a certain temporal context to this. We're in the middle of what appears to be a crackdown on Bitcoin mining in China. Even before the latest round of comments, Bitcoin mining has been pushed out of Inner Mongolia. Now it appears that there could be a larger Bitcoin mining ban, or at least some set of new policies. What we don't know exactly

how this will play out, what we do know is that miners in China are taking it seriously. We know they sold a bunch of Bitcoin to have more capital to make their next set of moves. We know that many are selling big blocks of mining machines. We know that many are scouting locations in Kazakhstan, Siberia, even Africa. As that all happens, there is an opportunity to shift more of that hash power to North America and to shift more of the hash power to renewables. The timing, in other words, does not feel coincidental. It feels like a strike while the iron is hot kind of moment. Still within the Bitcoin Mining Council as a Good Thing column, there is another take that environmental concerns would likely, at some point, manifest themselves in some new type of U.S. regulation.

It's not hard to imagine this given how large environmental issues loom. So in this view, this group is front-running those issues by doing things like voluntary disclosures and already actively pushing for cleaner energy sources. Finally, there is a question of coordination. This, as we'll see, is one of the major concerns for folks who are concerned about the Bitcoin Mining Council. The folks who see the BMC as a net good thing from what I've noticed on Twitter tend to argue that, one, given the rancorousness of the FUD, given the high government battles that the FUD might entail,

combating it actually needs some amount of coordination, and two, that of all the possible coordinators, Sailor is about as good an actor as possible. So let's leave the This Is a Good Thing side there. And now let's discuss the other side. And oh boy, is there a lot of it. For this one, instead of trying to posit some grand unifying theory, I'm just going to articulate the concerns group by group that I've seen.

In other words, it's very possible that some people have one but not other of these views. They're not a package deal. However, that said, the first three are closely related. The first, this is a bad thing argument that I'll mention is this. ESG is against market freedom. This is a critique with the entire enterprise of ESG business itself, not just the Bitcoin Mining Council. Marty Bent wrote in his daily yesterday, quote, Bitcoin is good.

It consumes a lot of energy. This is okay. The illogical moralization of electricity use is anti-human and anti-capitalistic. The ESG movement is nothing more than an empty virtue signal that enables a mass misallocation of capital that favors virtue signallers who masquerade tradeoffs like the use of mass amounts of coal and slave labor to produce solar panels and wind turbines. Marty, as you can see, is pulling no punches. Alan Farrington on May 10th wrote a reminder that energy use is not evil. quote, even aside from the marginal benefits to intermittent renewables, methane flaring, etc., the truly remarkable thing is that so many allegedly serious people have been conditioned to think

that energy consumption is bad. Energy consumption is synonymous with human flourishing. Increased energy consumption per capita per year is correlated with and obviously causally linked to, improvements in extreme poverty, child mortality, undernourishment, sanitation, education, and life expectancy, i.e. not GDP growth or other meaningless number go-up metrics. That is, every conceivable non-economic measure of the avoidance of human suffering. Closely related to this is the notion that simply by engaging in the debate on the terms of the ESGers, Bitcoiners have lost the plot. In other words, this is an argument that by saying the greening of Bitcoin matters,

we're giving credence to the idea that something like coal-powered Bitcoin mining might not be worth it. Looking for the best way to unlock your crypto's liquidity? nexo.io is exactly what you need. borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io.

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The third part of this set, in other words, has to do with redundancy. By this argument, market forces are already. driving Bitcoin towards renewables in cleaner energy. And what's more, they've already done so. With 39% of Bitcoin mining being done on renewable energy, it's a much larger percentage than most other industries and is higher than the overall average composition globally by quite a bit. Instead of creating councils that call out energy as a problem this group thinks, we should be pointing to how market incentives are making Bitcoin a comparatively green industry, albeit one that uses a lot of energy for an important purpose.

If you wanted to sum up this little package of critiques, they are a rejection on a fundamental level of the idea that Bitcoin actually has an energy problem. Things use energy, what Bitcoin uses energy for is worth it, and market incentives have already driven Bitcoin to use a comparatively high percentage of renewable energy in that important mission. Next on the concerns list, let's talk about the specific properties of Bitcoin that could be compromised. Specifically, let's talk about fungibility. Fungibility is the idea that one Bitcoin is perfectly interchangeable with any other Bitcoin. The same as any paper US dollar is interchangeable with any other US dollar. One of the major concerns around ESG and green mining initiatives is that they might lead to the creation

of different classes of Bitcoin. Shark Tank's Kevin O'Leary, for example, has talked about not wanting any of his Bitcoin to be mined in China. So all of a sudden, we're talking about a scenario where one Bitcoin doesn't equal one Bitcoin. Green Bitcoin could be more valuable because its provenance is known. There are a bunch of reasons this is difficult on a technological level, but it remains a concern. I will say that in his interview with CoinDesk, Peter Wall from Argo insisted that, that this wasn't part of the conversation, saying, quote, discussions with the group so far have been

very clear that one Bitcoin is one Bitcoin and that the fungibility and essential properties of Bitcoin shouldn't be changed. But him saying it is not enough to make everyone feel comfortable. Also yesterday, Michael Saylor tweeted, quote, Marathon is acting decisively to expand its U.S.-based mining capacity in a carbon-neutral fashion. Publicly traded Bitcoin miners like Mara are going to drive standards for excellence for other miners around the world and lead the way on ESG initiatives. The issue here is that Marathon have shown themselves to not necessarily have the same values as many think are implicit in Bitcoin. Specifically, Marathon is the firm that has been promoting the idea of OFAC compliant mining. In other words, mining that censors transactions to addresses

that were blacklisted by financial regulators. The fact that this member of the Bitcoin Mining Council has already taken the step to censor transactions on such a fundamental level has some asking, what's to stop them from also doing things like cleave apart green mine Bitcoin from dirty mine Bitcoin, especially when it might be in their financial interest to do so. This is a firm that is making big announcements about the percentage of their mining that's going to be done with renewables. Is it really much more of a leap to see them wanting the market to price those Bitcoin higher than dirty China coal bitcoins? Now, to walk this back for a second, there are really, really strong incentives for them not to want that sort of balkanization.

It is, I believe, eminently possible to be a miner who wants to mine with the greenest possible sources for both ethical and PR and even stock price reasons, while also still thinking that the fungibility of Bitcoin is sacrosanct. But it gets to the broader concern that is almost assuredly the biggest one for people who found themselves skeptical of the Bitcoin Mining Council announcement. And that has to do with power, with the perception of the cartelization of miners, with the idea of a body meeting behind closed doors to exert influence over markets. With the fear that that influence, however limited it might start, could quickly metastasize into coercion over other parts of the Bitcoin protocol. That this sort of oligarchic approach to

decision-making is a Trojan horse for centralization, and that a sort of centralization creep can happen even without any of the actors involved explicitly trying to rest control from the community. So many people are having PTSD of the New York Agreement, a meeting behind closed doors that tried to increase the block size. For those who weren't around in 2017, a significant number of corporations touching Bitcoin were parting to an agreement that triggered the most intense civil war of Bitcoin's life, ultimately leading to the Bitcoin Cash Fork. The lesson of this was that Bitcoin will not tolerate centralized decision-making from a cartel of corporate interest, no matter how much they say their interests are aligned with Bitcoin as a whole. So many people

who were around for that looked at this announcement and say, how could you not realize what this looks like? Then again, remember, that neither Sailor nor Elon were here at that time, so maybe that isn't that surprising. So what about my take? When it comes to, is Bitcoin energy a problem, either PR or real, I don't believe that the ESG lobby are all a woke mob, although that is a part of it and that part should be fought. I do agree with those who say we shouldn't concede the point that Bitcoin's energy consumption is valuable, a priori, regardless of the fuel used. I think we need to be loud about this point and keep talking about why Bitcoin matters, not just how green the energy its mind with is. Interestingly, I think Joe Wisenthal from Bloomberg got this as well as anyone

when he wrote a few months ago that the Bitcoin energy debate will never be won or lost, because the fundamental dividing line is about who thinks Bitcoin is valuable or not. We can't lose that line of sight, we can't stop trying to explain that fundamental reason that Bitcoin matters, regardless of its energy mix. At the same time, I totally support miners moving more aggressively to greener energy, for whatever combination of reasons, ethics-based and marketing-based that motivates them. North America is currently pretty under-indexed in mining, and I think having more here would be a good thing for the network

and a good thing for North America. I think people who deny that there is any PR problem are failing to price in the cost of the negative environmental press cycle, as well as the potential that that turns into regulatory action. I think front-running it in this way from a regulatory standpoint and trying to win back media cycles is, hold aside any consideration of ethics or beliefs, just good business. Ultimately, the entire game theory of Bitcoin is driven by individuals and businesses acting in their

own self-interest, and ESG in the current North American and European climate is in their interest. I think that direct comparisons to the New York Agreement would be significantly overstating the case. As Nick Carter put it, billionaires' commandeer Bitcoin consensus with shadowy centralized closed-door cabal. Sounds a lot scarier, then. Miners accounting for 10% of hash rate agreed to disclose basic information that many

of them were already disclosing anyway. To Nick's point, this isn't about protocol level changes. I think the limits that they are theoretically putting on this group's mandate are, at least according to the Coin desk piece in Peter Wall of Argo, fine, right? Energy disclosures and advocating for more green energy use. Now, while I don't think a direct New York agreement comparison is accurate at this stage, I think people are right to have extreme skepticism around any group that starts to speak for Bitcoin, represents themselves as the leaders of Bitcoin, or whom others in power view as the leaders of Bitcoin even if they don't wish to be represented that way. And that is a key piece of this. Even if these folks deny their role as leaders,

others outside are now inherently going to look to them, especially when you bring a neutron star black hole type personality like Elon Musk. Indeed, this group in particular should cause some amount of wariness. Elon has shown himself to be a fickle friend at best. He has demonstrated over and over that the only person whose interest he truly has in mind are his own. Giving him this convening power is extremely dubious, especially because it's not like this is a dude in good standing with either regulators or the business world at large. And let's talk about Michael Saylor for a second. Michael has absolutely earned the benefit of the doubt. However, I think even heroic dip-buying sailors shouldn't be given a full trust pass by definition. He has, to some extent, mixed masters.

For all his roguishness, he still has a primary fiduciary responsibility to his shareholders. As he has said, entities he controls have acquired 111,000 Bitcoin. Many of those are with his publicly listed company. Because of that, he has a responsibility to keep the price of Bitcoin high and increasing. If the winds blew in a way that made it seem like a green Bitcoin separated from a non-green Bitcoin would command a premium, would he support it? Or more specifically, more importantly, would he feel compelled like he had to, on that fiduciary responsibility. As I said, Michael's earned the benefit of the doubt on this,

and I'm fairly sure that he would argue that certain principles of the system like fungibility are sacrosanct, and that to compromise them for short-term gain would be the death-nell of the system as a whole. But I bring it up to point out that there isn't any leader in Bitcoin that we shouldn't place the full force of our skepticism on. I think Michael would agree. There's also Marathon, as I mentioned, who have already supported censorship in the form of the OFAC-compliant mining. So let's try to sum up. As boring and as uninflammatory as this position is, what I'm saying is basically this action makes sense in the larger political climate, especially one in which that climate could have a political price. So far, nothing that the Bitcoin Mining Council are doing or

advocating for makes me overly concerned. In fact, I share the base ambition both to get Bitcoin actually greener, as well as to avoid these endless political battles around it, played out via media and played out via the regulatory process. If anything, the questions arise with this new formalization, because ultimately in Bitcoin, it's not just what gets done, but how it gets done that matters. The how is the story of who has the power. There are many things that a private membership group could do that would be broadly supported by the community, but they would still be being meted out by a private membership group. What would happen when that group has personal interests that diverge from the community? Right now, this is an industry-aligned

association that met over a weekend and have now decided to add a layer of formality to present a stronger political front. Let's just do what Bitcoiners do best. Let's hold their feet to the fire and ensure that there's not mandate creep, that there's not centralization creep, and that there is sufficient transparency and openness about the process of it all so that individuals can decide for themselves how supportive or worried they should be. Anyways, guys, turned into a bit of a long one, but obviously this is on the top of everyone's minds right now. So I hope you enjoyed this and let me know what you think. Hit me up on YouTube on Twitter wherever you can find me. And until tomorrow, guys, be safe and take care of each

other. Peace.