MYTHBUST: THE ENERGETICS OF BLOCKCHAIN AND CRYPTOCURRIENCIES
Blockchain is often talked as the future of the backbone of all transactions but an energy guzzler for mining and storage of blocks of data at multiple locations. It is worthwhile to look into the details of energy usage in traditional transactions vis-à-vis blockchain based transactions to bust this myth.
The dictionary definition of energetics is “The properties of something in terms of energy.”
As we are specializing in the field of blockchain technology, we felt that there is need for a clarification for the thinking public about the recent discussions on the high cost of energy based ecological impact of blockchains, esp. cryptocurrencies.
A bit of background will help in clarifying our study.
As any economist will tell you, it is the per capita energy consumption divide that is a very accurate measure of disparity amongst nations. Popular conception is that the higher the per-capita energy consumption, the higher the ecological (negative) impact of that nation. However, this may not be as simple as it appears. Nations like Iceland who have very high per-capita energy usage are actually reducing the ecological negative impact. Iceland has tremendous potential, and deployment of, renewable energy like geothermal, wind and tidal. While it being a cold weather nation, has high per-capita energy demand esp. in winter, it meets the same by renewable energy. It also offers its unique circumstance of cold weather and high energy availability to play host to multiple data centres and computer farms for the energy guzzling high powered processors that need to be in a cool temperature while requiring high energy availability for all the processing activity. So, high per capita energy usage in Iceland is not reflective of an environmental problem.
Another background knowledge piece in the puzzle is the combined concepts of ‘opportunity cost’ and comparative advantages. As the world economies shifted (about 70 years ago) from the gold standard for currency value to Fiat money, there was an expectation that the value of the metal would crash. This did not happen. There is a huge cost of mining, processing, transportation, storing and transacting in the metal, but the world has not devalued it in any significant way. Ever. When we look at the promise of blockchain (and cryptocurrencies) through the lens of the environment cost or cost of energy, we should also consider the opportunity cost of not adopting this paradigm shift.
The cost of a single Rupee in the present context, when considered with a “life-cycle cost calculator” would be needing to account for the following cost heads:
· The monetary policy apparatus which in its wisdom decides if that Rupee note should be printed.
· The printing cost of the Rupee along with all the costs associated with avoidance of counterfeit possibilities. These would also need to take into account the costs (including the environmental costs) of the pulping, paper, security ink, fibres, security thread, the processing inputs like chemicals, electricity, security establishment, security printing infrastructure, maintenance costs of the same, and many others.
· The accounting and reconciliation costs of the Rupee(s) printed.
· The logistics costs of the Rupee including packaging, secure transport, reconciliation, secure storage and then the whole chain repeating till it is issued to a user of the Rupee.
· Then there are the very large (and mostly hidden) costs to the banking and record keeping of that Rupee for its lifetime. Every single time it is deposited in a bank, or is used to make payment, there are costs to account for, reconcile, audit and record the same.
· Finally the soiled notes are withdrawn and sent for secure destruction and pulping.
All these are costs that are also reflecting on the ecological footprint of that Rupee.
Now look at the cost of printing bank notes in India. Going by the normal costs of printing bank notes as paid by RBI to procure it from government presses is more than Rs.12000 crore every year. Average age of currency note is less than one year. Hence cost of printing may be conveniently assumed to be around Rs.12000 crore per annum. This does not include logistics, security, distribution and handling costs of bank notes and its disposal. It is likely that the cost of the rupee as a transaction platform, as is currently borne by RBI and the banking system, is rather high. In this context cost of other modes of transactions may be seen and appreciated.
Now, let us move to the way blockchains (and cryptocurrencies) work and consider the full aspect of their environmental costs.
Blockchains are designed on mathematical algorithms that provide unique and immutable records of transactions. It is virtually impossible to counterfeit or in any way falsify the blockchain records. The transactions of blockchain (and cryptocurrencies) do not require any central clearing house or agency to act as an intermediary. That is the biggest strength of this technology, however same is working as constraints for the time being as countries are not comfortable with any arrangement where state does not have the centralised or overriding powers and control. Since it does not require centralised clearing, it creates a very large positive impact on the ecological cost of any transaction done through them. For example, imagine all the large computer database central servers and big airconditioned facilities and all the commuting costs of the workers who need to come there to work and the costs of the cyber and physical security that you would need for even a medium sized economy. All these are now unnecessary when you move to blockchain. You would not need intermediaries on the parts of the transaction entities. No more Letter of Credit issuing banks, no more document verifying agencies, no more ‘corresponding banks’, no more ‘forex back office branch’, no more local branch, no more audit costs. This is a partial list only.
So, you will ask, “what about the huge cost of mining bitcoins”? This is a valid question. Think of this as you would think of establishing a solar power farm. There is a very large upfront cost of setting it up, however, the costs of generating per unit of power after that investment is very low when compared with the alternatives. It is this focus of keeping the real costs of the alternatives or business-as-usual scenario which must not be lost when doing a discussion on the costs of blockchain (and crypto currencies). Let’s take the case of cost of oil. The cost of exploration, extraction, shipping, storage, distribution, etc. were all projected to constantly increase. There were economic models as late as 2012 which projected the cost of per barrel of oil to be in excess of USD 210/- by 2020. There have be breakthroughs in all the aspects of the oil economy. USA has become a net exporter. Last year the price of oil became negative. So, while considering the cost of the most famous of blockchain, the bitcoin, it is said that the costs are huge esp. in the environmental impact. Authors feel that there is a closer look needed at the basis of this statement. Is it fully factoring the increasing R&D and delivery of ever faster computer processors[1], is it factoring the possibility of setting the ‘mining’ operations in locations like Iceland and the energy rich locations in central Asia which do not have any large energy consumption requirements locally, of even having these mining operations in areas like Ladakh in India where there is abundance of solar power potential and a very cool climate.
A valid argument may also be made in reference to the ‘job losses’ that may occur due to introduction of blockchain. You would not need so many audits, so many clerks, so many reconciling agents, etc. Here again, while we do have a simple answer, we suggest that the similar type of structural economic impacts as caused by the IT revolution[2] may happen and the economy shall respond to this. A whole new class of efficient business transactions can actually reduce so many inefficiencies and reduce costs of delivery. Activities which do not add value would lose their relevance and get replaced with the activities which are necessary.
There are many aspects to the environmental costs of the blockchain economy that needs to be studied. Having a look with the “energetics” based approach may demystify and guide the policy makers.
[1] A good aside would be read up on “Moore’s Law” and the price of solar PV panels to see how technology impacts prices by lowering them
[2] There was a famous statement in the Parliament when, in 1985, the policy for IT revolution and telecom reforms was being discussed “We are a nation that should produce potato chips and not computer chips as we have many farmers and very few rich people who need computers”. We can learn to pivot the job economy as was done by Nokia (a tractor maker) or as is being done by UAE which is repositioning itself as a tourism hub.
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