You have probably heard one or both of the following takes on the topic of Bitcoin and its impact on the environment:
Bitcoin uses more energy than Argentina, Sweden, and Malaysia. It is an environmental disaster in the making that will only get worse over time. Bitcoin’s success will amplify many of the negative impacts that humans have on the environment.
Bitcoin is the key catalyst for a green energy future. Properties unique to Bitcoin enable its primary energy consumption to employ renewable sources like wind, solar, and hydroelectric in a more profitable manner than existing energy demands. This will incentivize more innovation into green energy and improve our carbon footprint globally.
Sound familiar? What’s interesting is that these are both right. These are also both wrong. The reality of the “green bitcoin” debate is that both sides of the argument misunderstand Bitcoin and, thus, necessarily misunderstand its interaction with the environment.
The negative side (“Bitcoin is bad for the environment”) is right to claim that Bitcoin, as it is popularly understood and in its current state, is an incredibly inefficient use of energy. They are also correct that its inefficiency will only increase over time.
The positive side (“Bitcoin is good for the environment”) is right to claim that idiosyncratic elements of Bitcoin’s energy consumption make the economics of renewable energy much more compelling and will likely spur innovation that will positively impact energy use on a global scale.
Interestingly, the negative and positive sides are wrong in a similar way; the outcome of a flawed shared assumption. Both of these camps are discussing Bitcoin as if it is the same thing as the currently popular network BTC. Discussion today on CNBC, the NYT, or other outlets often use “Bitcoin” and “BTC” interchangeably. They are not. BTC is an implementation of Bitcoin and is the most popular today as measured by market capitalization or spot price. However, other implementations exist. One in particular we think is more likely to exist over the ensuing decades is traded under the ticker symbol BSV. This version of Bitcoin is the most popular implementation today when measured by transaction volume and transaction efficiency - key metrics that should be the focus of discussion on how Bitcoin will affect the environment on a long term basis.
What’s incredible about doing a find/replace in the environmental discussion and swapping BSV for BTC is that the cost/benefit transforms entirely. In this rare instance, environmentally conscious technologists can have their cake and eat it too.
At Unbounded Capital, we believe that the environmental legacy of BSV will play a meaningful role in incentivizing the shift to green energy.
The contrast between BTC and BSV is stark.
BTC is, in many respects, the world's most inefficient database. It can only process 5-7 transactions per second and at an enormous cost. Worse yet, it is on a roadmap to become much less efficient over time. BSV is currently among the most efficient transaction processing networks and is positioned to become the world’s most efficient over time. The BSV network at peak has processed over 50,000, more than double Visa’s capacity of 22,000. BSV transaction processing capacity and efficiency today already rivals legacy networks like Visa and will leave these legacy giants in the dust by simply scaling through known methods with existing hardware. If BSV is able to augment or replace these legacy networks, it could have the effect of reducing the environmental costs of every other network used in our transaction dominated world.
Better yet, as the BSV implementation of Bitcoin scales, this efficiency will increase rather than decrease, and the applications that use this newfound efficiency will be able to help incentivize businesses and consumers to produce greener outcomes. Imagine never before possible B2B applications which could help optimize electricity provision and prevent disasters like the PG&E brownouts in California and assist in altering customer behavior to use a higher percentage of renewable energy through real time data reducing coal consumption during peak electricity consumption hours. Or imagine B2C applications like efficient and transparent supply chain data which unlocks a new wave of consumer applications which help buyers make greener choices based on data they can be sure is accurate which at the same time rewards producers making use of sustainable practices.
There is a longer and more quantitative argument to be made about the energy use of BTC, BSV, and our current non-blockchain transaction systems which you can find in our free and concurrently published e-book available for download here. Let’s get into it!
How could understanding “Bitcoin” to mean BSV yield such different outcomes than reading it interchangeably with BTC?
Put simply, BSV is building towards a vision of Bitcoin that optimizes for efficiency and does so in the same way that most networks and systems achieve efficiency: by embracing and incentivizing innovation and economies of scale. BTC is not pursuing an efficient Bitcoin. In fact, BTC is actively attempting to prevent that outcome since it requires economies of scale. Economies of scale necessitate large data centers and server farms. This is a non-starter for BTC. The BTC view of Bitcoin is one that optimizes for a niche vision of security by way of decentralization. Decentralization, as understood in BTC, is mutually exclusive to economies of scale and thus this vision of Bitcoin is orders of magnitude less efficient than BSV. This point, on its own, is not controversial. Proponents from both camps would agree with this representation.
The value proposition for BSV is the popular understanding of efficiency: process as many transactions as possible, virtually instantly, and at an extremely low cost.
The value proposition for BTC is their less-popular understanding of security: create a “digital gold” value store which is impossible to be confiscated by the US (or similar) government.
See our free e-book for the full calculation based on Visa’s most recent 10-K
With the desired outcome of these respective implementations in mind, it's not surprising that the green bitcoin debate is upended by the swap. Concerns over BTCs enormous cost per transaction are immediately soothed when BSV’s efficient network takes its place. Today the BTC network is only able to process ~7 transactions per second (tps), each at a median cost which has ranged from a low of ~$0.20 to a high of ~$28.39 over the last several months. The BSV network has performed over 50,000 tps, each at a median cost ranging between a low of ~ $0.00009 to a high of ~$0.0005 over the same period. Because BTC caps the amount of data their network can process per hour at 6 MB (roughly equivalent to the amount of data used for 2-3 iphone photos) they have less supply of space for transactions than demand for transactions which creates a fee market where users try to outbid others for space on the network. BSV has no such cap, leaving determinations of supply for transaction space up to the market. In recent weeks this has resulted in one hour windows where several gigabytes of data was processed. BTC can only process gigabytes of transactions over a period of weeks. BTC advocates may be quick to put forth the “lightning network” as the solution to this limited transaction capacity.
But, at Unbounded Capital we find this proposal technically and economically infeasible, particularly if we assume the point of view of BTC investors who claim that decentralization is its key value proposition - for a deeper dive on this topic we recommend this blog post.
Not only is the transaction throughput and efficiency of BSV clearly superior to BTC, it's also better than legacy transaction processing networks like Visa. Have you ever read a headline inquiring into how much energy the Visa network is using relative to Argentina? Probably not. There is less curiosity around this number than there is around Bitcoin’s relative energy use. Implicit in this question is a value judgment. We don’t question Visa’s total energy use because we understand its value. If the Visa network was turned off tomorrow it's true that a certain number of kilowatts-hours would be saved, but many of us would have a difficult time checking out at the grocery store. Is Visa’s energy use worth the cost? When it comes to the extremely inefficient BTC, wondering about this ratio makes more sense. The headline is asking: is BTC’s niche understanding of security worth all of that energy? For many onlookers, Unbounded Capital included, the answer is a resounding no.
So what if the question was asked about BSV?
At scale, BSV will also be much more efficient than Visa.
BSV, like Visa, is much more efficient than BTC. In a scenario where this played out, the economic incentive of companies like Visa would be to adopt BSV as both a cost saving measure and green alternative.
Today this is not the case so BSV uses much less electricity than Visa. But if, and when, BSV’s energy use rivals Visa’s it will be because of significant user growth, perhaps catalyzed by companies of that size adopting it for their businesses.
Thus, when the time comes for the headline “BSV uses more energy than Argentina”, the BSV network will be acting as a net energy saver since it replaced the existing best options with an efficiency upgrade. In this scenario, I’d guess those most concerned with Bitcoin’s energy usage would accept the ecofriendly upgrade. Counterintuitively, when Bitcoin optimizes for efficiency (as it is with BSV) rather than decentralization (as it is with BTC) the “Bitcoin Uses More Energy Than Argentina” headline is a cause for celebration from environmentally conscious readers rather than dismay.
Well, now we have our cake. Let’s eat it too. Many of the arguments put forward in favor of Bitcoin’s green impact by BTC proponents are actually quite sound. One of the most compelling pieces of content on this topic was Stone Ridge’s 2020 Shareholder Letter. In it, they argue for “distributed energy”. In short, the problem of energy has never really been production, but instead transportation. Filling the uninhabited remote regions of the earth with solar panels, wind farms, and hydroelectric plants, would generate enormous amounts of energy BUT then it would need to be transported to population centers where energy is consumed. If generation is far from the consumption, energy is lost and the economics, as well as the total green footprint, stop making sense.
With Bitcoin mining demanding large amounts of energy but not needing to be situated near population centers, this radically changes. Now, the remote power plant can be surrounded by Bitcoin miners which consume the energy in a profitable way. This renders otherwise economically inaccessible energy sources into fruitful ones which increases investment into their development as well as research for improvement. Renewable energy production and the all-important batteries which accompany them can receive a massive boost from the existence of Bitcoin’s energy demands. Like NASA inventing Velcro for astronauts in the space station which eventually finds its way on children's shoes on Earth, the fruits of the innovation in renewables and batteries will extend to the broader economy to benefit everyone.
What the BTC proponents miss, however, is that this positive externality of Bitcoin energy demand still be a net negative if the energy that is being demanded is used for wildly inefficient transactions.
But with BSV, it’s as if Visa’s per transaction energy requirements were diminished, the energy demands were more likely to be sourced by renewables, and Visa was investing heavily into the rapid development of renewables just to improve their bottom line. Win, win, win.
An efficient transaction processing network is great for payments. Augmenting or replacing Visa, Mastercard, PayPal, SWIFT, ACH, and others with a supercharged BSV would be great. But there are so many other non-financial transaction processing networks that underpin so much of our digital world that could be upgraded. Another byproduct of the different ethos between BSV and BTC is the respective embrace and rejection of using it as a general purpose ledger. BSV wants every kind of data transaction to take place on its network. BTC wants only digital gold transfers, with all else being looked at as spam and strictly verboten. Because of this ethos and the efficiency of BSV, applications are beginning to use the network which can encourage much greener outcomes. We expect this trend to continue into the future with applications leveraging BSV’s efficiency and novel properties to drive the lion's share of innovation. Unbounded Capital’s focus is investing in these companies working to build the future of a better and more efficient internet.
Conclusion
Bitcoin’s environmental impact is a difficult conversation to parse, particularly when there are so many prominent voices with contradictory views on the topic. Unbounded Capital’s point of view, however, is rather simple. We think that:
Bitcoin’s ability to incentivize distributed green energy will revolutionize the renewable energy sector
Bitcoin’s ability to process transactions at a far lower per transaction cost will play a key role in transitioning existing systems towards greener processes built on Bitcoin
Bitcoin’s role as an incredibly efficient, transparent, and high integrity public ledger which can process micropayments will generate new business models that can foster greener B2B and B2C businesses
Bitcoin can only achieve these benefits when optimized for efficiency by scaling
The only implementation of Bitcoin or blockchain building toward this vision is Bitcoin SV.
For in-depth data, charts and information on the different energy usage of BTC and BSV and how it relates to ESG investing, our e-book on the topic is available for download here.
For elaboration on the technical differences between BSV, BTC, and other blockchain networks, refer to our previous e-book, also free and available for download here.