Solanews editorial team op-ed
As early as April 2022 several media outlets started writing at challenges ahead for bitcoin miners, bracing for soaring energy prices caused by the war in Ukraine combined with a declining bitcoin market price in US dollars.
In one of those articles, published 30th April 2022, we could read: “The cost of fuelling mining operations has gone up 100% (…) while the return dropped by 25% when valued in dollars.”
Publicly listed Bitcoin miners such as $RIOT have already lost 99% of their value since their ATH (all-time high) and some have recommended to sell them before “they are expected to tumble further.”
But we are not concerned (nor advising) about the financial strategies around bitcoin mining companies’ stock prices, we want to look at what this means for the power structure at the helm of the cryptocurrency world. As Proof of Work needs a competitive mining ecosystem to thrive, with a growing computational power over time, bitcoin mining is extremely dependent on two key sectors which are at critical stages today: the microprocessor industry which is facing both technical and political challenges, and the energy sector which is affected by geopolitical events with deep repercussions for business and individual users.
One of the world’s largest and most valuable semiconductor foundries is TSMC or Taiwan Semiconductor Manufacturing Company which places it in a delicate geopolitical position between China and the US, both in high demand for the unique advanced TSMC technology. In a move demonstrating how strategic the US considers the semiconductor industry, its legislative body has recently passed the ‘CHIPS for America Act & FABS Act’. There is a tightening supply of cutting edge microchips and a rapid increase of energy prices occurring at the same time, all this combined with a lower Bitcoin market price (just below USD20,000 at this time). This makes bitcoin mining unprofitable – at different price levels based on the miners’ costs – and possibly unsustainable for many bitcoin miners if these conditions prevail over time.
The energy crisis, especially concerning in Europe, also puts pressure on political powers to rein in energy-consuming activities. It could move certain nations to call for a right-out ban of crypto mining in order to reduce overall power consumption and free resources up for other users. Even at the private company levels, restricting measures have been taken, such as Germany-based hosting service Hetzner‘s recent decision, although in this particular case we cannot be sure if the motivation is of a legal or environmental nature.
Since the Tornado Cash crypto mixer service sanctions, the crypto community (including bitcoin maximalists) has been vocal about the perceived loss of Ethereum network’s censorship resistance capacity as a US agency showed it can sanction a smart contract and any related users, although that is an issue that could be challenged in the future. However, bitcoin miners operations are at risk of being banned, as China did in May 2021. At that time many bitcoin miners in China moved their equipment to neighbouring countries and some as far as Texas, a state which has attracted a large number of bitcoin miners since then.
However, although faring better than the European market, energy prices have increased in the US (“highest 12-month average electricity prices were set in the Midwest, the Mid-Atlantic and in Louisiana” as per the EIA Electricity Monthly Update with data for June 2022) and these prices are unlikely to decrease soon given the energy market disruption coming from Europe where nations are trying to get ready for possible cut-offs from the Russian supply side.
As this crisis looms, the Ethereum ‘merge’ which consists in moving its consensus mechanism from Proof of Work to Proof of Stake does not seem just like a well-timed move to reduce dependency on power-hungry mining but also looks like an imperative to survive in a growingly hostile environment to POW. Ethereum layer 2 Polygon also aims to become carbon negative by 2022.
Since its inception, Solana has been very transparent about its carbon footprint and refers to its network as “a high-performance, low-impact blockchain” which is “designed to scale effectively for global adoption” with an energy use per transaction (in Joules) representing 0.000036% of Bitcoin’s energy use per transaction and 0.00035% of Ethereum’s (POW) energy use per transaction (report published on March 25, 2022) amidst an increase in transaction activity of the Solana chain. The Solana Climate Footprint analysis summary also mentions that an average Solana transaction uses less energy than three Google searches.
What becomes a challenge for some blockchains may become an opportunity for other chains and the energy crisis certainly looks ominous for power-hungry blockchains. In this environment, POS chains will have a clear advantage to move ahead.
Sources:
- https://cryptoslate.com/a-global-energy-crisis-could-directly-affect-bitcoin-miners/
- https://stocknews.com/news/riot-fubo-2-stocks-to-sell-before-they-fall-even-further
- https://solanews.net/tornado-cash-blacklisted-by-us-treasury/
- https://www.eia.gov/electricity/monthly/update/print-version.php
- https://blog.polygon.technology/polygon-is-going-carbon-negative-in-2022-with-a-20-million-pledge/
- https://solana.com/news/solanas-energy-use-report-march-2022
Disclaimer : Nothing written on Solanews.net is meant to be taken as financial advice. We do not advertise for projects or push any narratives. All information on this site is meant to be taken for educational and research purposes only
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