The Breakdown - How Bitcoin Can Support the Green Energy Transition

Episode Date: July 26, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   On this week’s “Long Reads Sunday,” NLW looks at two discussions of the positive role Bitcoin can play in greening the grid.    He reads:  “Need a Use Case for Decentralization? Start with Energy” - Michael Casey   Thread by Level39   - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Vladimir Kazakov/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, July 24th, and that means it's time for Long Reads Sunday. Before we get into that, however, a quick housekeeping note. There are two ways to listen to the Breakdown podcast. You can hear the show every afternoon on the Coin Desk podcast network, which features the breakdown as well as other great Coin Desk shows, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you are listening, if you would

be so kind as to take the time to leave a rating or a review, it makes a huge difference to help new people discover the show, and I really appreciate every time you guys do that. Lastly, a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. All right, so as you guys know, this has been midsummer macro week, a lot of chance to think big, and this LRS frankly continues the trend, although the interview sets are done for now. There has been a lot of context to be thinking about crypto and Bitcoin's energy footprint and how the industry might intersect with energy. First of all, at the beginning of the week, we had the merge narrative really pick up, which is, of course, Ethereum's transition from

proof of work to proof of stake. I discussed on Monday how that could create political risk in the form of if Ethereum can convert to proof of stake, why can't Bitcoin? We also saw last weekend Senator Dick Durbin tweeting about Bitcoin's energy and a group of concerned senators send another letter to the EPA. The point there is that this discussion is clearly coming one way or another. But then later in the week, I had Troy cross on as a guest. Now, Troy argued really, really, really, that not only is Bitcoin not wasteful in the way that it's accused of, but that it actually has massive potential to smooth the transition to a more renewable energy-driven future. So today we're going to follow up with two pieces written in a similar vein.

The first comes from CoinDesk's Michael Casey, who writes, Need a Use case for decentralization? Start with energy. If the crypto industry cares about mainstream adoption, rather than just pumping its bags, it will need to demonstrate socially useful applications for cryptocurrencies and blockchain technology that resonate with the wider population. Let's face it, the recent collapse of major crypto lending institutions and the sell-off in Bitcoin, Ether, and other tokens have confirmed that crypto's main value proposition so far has been the opportunity to speculate on number-go-up expectations. As a model for the market structure of the future, decentralized finance contains the promise of a more

equitable financial system. But the high yields it offered were driven by demand for crypto-borrowing and lending, which in turn depended on there being arbitrage opportunities in the underlying token markets. As expectations for rapid returns in cryptocurrencies wane, activity in those markets will drop, which will lead the arbitrages to retreat and yield farming to cool off. The challenge now is to find real-world use cases that produce lasting, meaningful returns upon which defy yields can be sustained. Our starting point should be to identify non-financial markets whose centralized structure is doing clear harm. Note, decentralizing those markets won't necessarily generate use cases for cryptocurrencies or blockchains, but the arguments for them should be stronger

in these situations. In my mind, there is one industry above all where centralization is a massive problem, one where the costs to society are self-evident and rising. Energy. Energy's centralization costs. Consider the effect of recent disruptions in oil and natural gas markets. The world is so dependent on oil that shifts in its supply, and the resulting swings in prices can determine the health of the global economy, and it's all built around a highly centralized industry, with most of the world's proven crude reserves located in a few authoritarian states, creating dependencies, bottlenecks, and profound political vulnerabilities. In late February, one of those states, Russia invaded Ukraine. It almost immediately incurred Western sanctions on its exports,

which sent prices of West Texas intermediate crude oil skyrocketing by 40 percent to almost $120 a barrel. That sent the cost of gasoline and other oil derivatives soaring, which, when added to the Federal Reserve's interest rate hikes accelerated the world's march into a recession. One measure of that harsh whipsaw effect is a recent reversal in those same crude prices, which this week briefly dipped below $100 as analysts started to predict the plunge in demand. Similarly, the dependence of Germany and other European countries on natural gas from Russia has sent prices for natural gas, as well as its shippable alternative liquid natural gas, up by 700% since last year. Just as bad gas shortages have threatened the viability of much of the

continent's electricity. Besides the war in Ukraine, other vulnerabilities to the energy industry's centralized bottlenecks abound. Remember last year's colonial pipeline shut down? A pipeline supplying 60 million people gave hackers huge leverage with which to extort the company into paying their ransom. It offered the physical equivalent of a single attack vector enabling a classic man-in-the-middle attack. Or consider how Hurricane Maria, after wiping out just a few of the high-voltage transmission lines that transport electricity from Puerto Rico's dirty fuel-oil-dependent generation plants left 90% of the potentially renewables-rich island without power for months in 2017. Vulnerability to outside events such as these, which electricity system designers describe

as a lack of redundancy, is just as big a reason to advocate for renewable energy as the climate crisis. We desperately need to decentralize our energy model. Renewables such as solar, geothermal, and wind are the answer because they are locally sourced and can function at wide ranges of scale, from single-home solar arrays to massive wind farms. Crypto's role. Decentralizing the energy system doesn't necessarily translate into an accompanying need for a decentralized monetary system, or blockchain-based transaction and data recording system. But crypto is a natural fit for such systems, and over the years, people have worked out a variety of ways in which it can be useful. First, if we are going to spread solar, geothermal, and wind

across a wide swath of the world, we face the problem that many of those places are without access to traditional sources of finance to fund the installation. One solution is to invite Bitcoin miners to locate in such areas and have them underwrite the project development. Companies such as grid are at the forefront of building relationships with developers of renewable energy products and miners. A Texas project spearheaded by Block, Tesla, and Blockstream is looking to show that mining and solar can be combined at scale. Meanwhile, smart chips like those that Australia-based Sunnified can be embedded into solar panels to generate provable data that when recorded in a blockchain environment can be convertible into tradable digital assets. The hope is that these kinds of

defy assets can be used by institutional investors looking to satisfy their environmental, social, and governance or ESG mandates. Fostering liquid markets and carbon neutral assets that can help to unlock the trillions of dollars in investment needed to combat climate change. There are still millions of people who believe crypto can be a force for positive change. Let's use this crypto winter to demonstrate that's the case, starting with our dysfunctional energy system. All right, back to NLW here. And if you listen to my interview with Troy Cross, you can probably hear echoes of some of the things that he was talking about. The idea that Bitcoin doesn't just help balance the grid, but creates a mechanism to actually finance new project development is hugely, hugely significant.

Which brings us to our second piece for this LRS, which is actually a thread on Twitter from Level 39, a contributor to Bitcoin magazine. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's N-E-X-O.io. Eager to make more informed decisions around crypto, Chainalysis is here to help.

Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential

with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs.

When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Level 39 writes, as energy grids adopt a greater percentage of intermittent renewables, more power must be absorbed by demand response loads. Prices act as signals to help balance the grid. Bitcoin mining profitably responds like noise cancellation technology. Most people take power grids for granted. You turn on a light switch and it just works.

In order for your local utility to provide reliable power, excess energy always needs to be available. Reliable power grids require redundancies that can be quickly dispatched. Power grids in North America need to maintain a quote-unquote heartbeat of 60 Hertz. This heartbeat can drift when energy supply and demand are mismatched, causing cascading issues and even damaging equipment. Bitcoin can act as a controllable load for primary frequency response or PFR. In the past, grid operators had a relatively easier time balancing the grid when generation

was mostly from fossil fuels. As power grids adopt more intermittent renewables, reliable generation becomes more challenging and unpredictable. To deal with the unreliability of intermittent renewable energy, power grids need dispatchable generation, sources of electricity that can be dispatched on demand at the request of power grid operators according to market needs. Often this means reliable natural gas. Batteries are good deployable dispatchable generation, and we need more of them. However, batteries have limitations. Even the largest batteries, in the world cannot solve all of the challenges of modern grids. We need other solutions, including Bitcoin. Other forms of reliable power generation, such as hydro and nuclear, could be dispatched

to back up the grid. However, their resources would sit wasted and unused when they were on standby. For example, nuclear reactors are not flexible and can take hours to come online. Bitcoin mining can turn an inflexible nuclear power plant into dispatchable generation by absorbing the standby power when no one else needs it and instantly turning down when the grid needs to the grid. the power. No other technology can match this rapid responsiveness. Modern energy supply and demand are constantly fluctuating. Grid operators will increasingly use price signals to make industries and devices smart so that they consume power when grid has excess energy and turn down when the grid has too little. While smart devices will become more prevalent, very few industries can be as smart

or as quick as Bitcoin mining. For example, a steel plant cannot just shut down its melt shop for more than a few hours. The steel would harden before it can be rolled. Bitcoin miners buy their energy in advance and use insurance products that allow them to hedge price fluctuations. If the cost of energy gets too high, they get paid to turn off their machines. When there is excess power on the grid, prices can go negative, meaning demand is so low that the grid operator is willing to pay customers to take the excess energy. As renewable penetration increases, the frequency of negative prices is increasing. Wild claims in the media of supposed mountains of Bitcoin e-waste are totally unfounded.

The truth is that old machines are desirable in places where renewables are in excess, and prices can go negative. Bitcoin's usefulness as a technology to monetize energy merges perfectly with demand response on modern smart grids. Price signals from grid operators are instantly sensed by Bitcoin miners, making them like noise-canceling technology for energy grids. Bitcoin mining also incentivizes energy innovation. Pilot test plants that are thwarted by economies of scale can be monetized in ways that

were not previously possible, unlocking new. forms of renewable energy for humanity. An example of this is O-Tech. Innovators are working to unlock the thermal energy of the oceans to bring clean, base load power to one billion people. This is only possible with Bitcoin's ability to monetize stranded energy. Bitcoin mining is a technology that unlocks new forms of energy and moves elsewhere, as humanity learns to use those new sources of energy.

Life on Earth itself could not have flourished without pioneer species that did this for all living things. Just 175 years ago, crude oil was a curiosity. It was a nuisance for landowners, something that fouled up salt mines near Oil Creek, Pennsylvania. It had no economic usefulness other than as a suboptimal medicinal. Today, it is almost impossible to imagine life without oil. It's used in everything from clothing, plastics, roads, and even manufacturing renewable technology. It was not until oil was drilled and properly studied that innovators figured out it could be refined, stored, and put to a wide variety of uses.

We are at a similar point in history with Bitcoin. We are only just beginning to understand it. It's particularly disappointing that so many of Bitcoin's critics willfully ignore its benefits. Look closer and you will find that many critics are paid to spread misinformation about Bitcoin and thwart open payments rails. Politicians who claim to be progressive are spending their time creating moral panic over an industry that is too tiny to have any meaningful impact on the climate, while ignoring the necessity of the technology to supporting modern energy grids. Bitcoin's open payment rails are the only vital.

viable chance humanity has for preserving cash-like payments in a digital world that can support minority user rights in a global and neutral manner. Time and again, naysayers have wrongly dismissed nascent technology to their own peril. It's important to learn about Bitcoin mining with an open mind and to consider its ability to work in harmony with modern uses of energy. Bitcoin will humble those who dismiss it. Take the time to learn to ask questions to better understand this complex technology. We are still early in Bitcoin's moment of discovery. Now, more than ever, is the time to explore it. Awesome thread level 39.

And I just wanted to add that if you're wondering what the upshot of a bear market is, it's the time and space to have discussions like this, to write threads like this, to read threads like this. I do think that to some extent, the shift in the narrative around Bitcoin energy is just going to take enough examples of companies and firms doing things really differently and proving how useful it is in these contexts, in this transition to a very different type of energy mix before the narrative inevitably starts to follow.

That, I believe, is going to be a pretty exciting transition to watch. For now, I want to say thanks again to my sponsors, nexus.io, chain aliasis and FDX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.