The following was produced by Tearsheet Studios. We worked with crypto brokerage Paxos to create a podcast series about the mainstreaming of crypto, the genesis of Paxos, the rise of stablecoins, and crypto’s energy and environmental impact.
Alongside the mainstreaming of crypto are concerns about the impact of its mining on the environment. While a significant amount of crypto is mined with renewable sources like solar and hydro, much of it still relies on non-renewable, carbon dioxide emitting sources.
For the final episode of this series, we spoke with Paxos’ CEO Charles Cascarilla about the truth behind the concerns, the relationship between economy and energy, and what he learned from building his own crypto mining farm.
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The following excerpts were edited for clarity.
Charles Cascarilla, Paxos: We had done it almost as a hobby when we came across Bitcoin at three or four cents, and so those were early days -- the network was small. We were able to do it on CPUs, then we upgraded to GPUs, then we had motherboards. It was a really fascinating time, and gave me a real ability to understand what was happening, because there were so few people on the network -- so few that with just CPUs, we had had 20% or 25% of the mining capacity.
The idea was to get an understanding of the underlying principle. And I think that gets to a key point: different cryptos are set up in different ways. Some of them use what is called proof of work -- essentially using some energy source to be able to prove algorithms; and some use proof of stake -- which is not necessarily about using a large amount of electricity, but rather holding an asset in order to be able to approve transactions.
Different ways of effectively trying to solve the same problem: how do you have a decentralized system? Which is to say that nobody runs the system itself -- it's run communally. And if it’s run communally, how do you make sure that you have an agreement around what should be in the database? So there's a cryptographic way of doing that. You want to be able to have anybody be able to join you, yet you don't want to have anyone running it; you want to ensure it's always on, and that there's one version that people trust. That’s a very complex thing to do, and actually an unbelievable innovation made possible by figuring out how to use cryptographic algorithms to create a single source of truth over time.
Bitcoin is based on proof of work -- meaning complex math problems are solved by computers to prevent anyone from gaming the system. This relies on energy usage -- tying Bitcoin directly to the environment. And as Bitcoin usage goes up, more and more energy is required to keep up.
Charles Cascarilla: The reason this may be a difficult concept for people is because they ask, ‘Well, are we just wasting energy? Are we all just digging a hole and then filling it back in again, and then digging another hole and filling it back in again? Is that really productive?’
Two questions become very important when trying to answer this. The first: where are we getting our energy from? Is it clean? Is it dirty? Is it coal? Is it renewable? Is it satellites in space (which I'm sure will happen) that are collecting solar energy? Where are we getting our energy from?
And the second: how should we use our energy? Should we use it to dig coal out of the ground? Should we use it to have heated floors in our bathroom? Should we use it to power our cars? Or should we use it to have a decentralized asset and a decentralized financial system? These are important questions that we should ask.
The truth is that our everyday lives rely on incredible amounts of energy -- from our morning coffee to our computers. The reason Bitcoin is standing at the forefront of the environmental threat, perhaps, is because the relationship of server farms to energy consumption is obvious to the eye.
Charles Cascarilla: Everything in the economy is energy -- it's a thermodynamic system: you put energy in, you have useful work, you get something in return, and you get waste.
How do you know whether you want to have a car, or go to college, or go on a vacation, or put on an addition to your house? How do you make these trade-offs? How do you consume something today, or how do you save and consume it in the future? The way to do that in a complex economy is through money, which should just be energy. Because guess what: your car is just energy -- it took a lot of energy to bend all the metal and produce it, but fundamentally, it's just energy and it depreciates over time. So does your house and everything else. Everything is energy.
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Everything which fuels our society -- including fiat money -- depends on the production, extraction, use, and waste of energy. And so it’s important to remember the history of currency, and why it’s always been (and always should be) about energy.
Charles Cascarilla: Money is just a fungible form of energy. I think that's an important distinction of what money really is. Because oftentimes, it's really lost on ‘Money is this magical thing,’ or I've heard it described as ‘A bubble that never pops.’ But it's not really that. Money is energy, just like the rest of the economy. The economy is about taking energy and turning it into useful items; one of the useful items is the transmission mechanism of what you should do in the economy -- money.
That's why you want money to be tied to energy very clearly, because then you know what the trade off is between one thing or another. And historically, money has been energy; that was gold. Gold has held its value because you use a large amount of energy to get it out of the ground and that equals work -- useful work that can be done and can be spent on something else.
We eventually decided we want to replace gold with fiat money. That's fine, we've done that many times in our history, as a civilization. But it has always failed historically, 100% of the time, because it is no longer tied to energy -- it's tied to political process, and that political process, inevitably, is going to be geared towards making political choices, not maintaining its tied energy; and political choices usually favor spending more money than you have. So you no longer tie your money to energy, and eventually it devalues. That's what inflation is.
Confronting crypto’s environmental impact is unavoidably forcing us to ask the same questions around fiat -- will it continue to hold value from an energy perspective?
Charles Cascarilla: I would say it is a feature, not a bug, to be tied directly to energy. And in the case of Bitcoin, what's interesting is that it is pushing you to move towards more renewables, and it's pushing to use the lowest marginal cost of electricity.
If you just, for instance, look at how much electricity is wasted, Bitcoin is only using 1% of all the wasted electricity in the United States -- a tiny, small fraction of wasted electricity and trapped energy.
But what it's doing is starting to provide something that's very valuable, which is as Michael Saylor correctly says, “A thermodynamically sound asset.” Just like gold, but what's different is that it's digitally native. Eventually, in 100 years, how would you want your reserve assets to look? Probably not based on something that's physical, but on something that is cryptographically knowable. It doesn't necessarily have to be Bitcoin, but there is a reason why money should be tied to energy.
The economy, simply, is a work machine fueled by countless transactions that drive it towards productivity and debt. These countless transactions grinding the gears of the machine are ultimately just human decisions, about resources, created by energy.
Charles Cascarilla: You're abstracted away and so you don't realize that the financial system is meant to help you be able to make the right allocation choices of where energy should go.
When you distort what the economy is, you get all kinds of weird outputs -- you end up with giant debt bubbles, or interest rates that are negative in Europe. It doesn't make any sense. If someone said you can have a house in a year or you can have a house today, and said they will charge you less to take your house in a year -- that would make sense to you, right? Because there's value to time; you want things now, and that has some value. But to have your money be negative means that the value of you postponing your consumption is now negative. It doesn't make any sense -- and so our overlay of the economy doesn't make any sense, because we've lost the energetic principle that is so crucial to understanding how we should live our daily lives.
Many media sources have spoken about the energy consumption of crypto production by way of analogies, commonly equating it to a small country’s energy consumption for an entire year. Are these thought experiments worthwhile or mere poetic exaggerations?
Charles Cascarilla: You can always find some way of sizing something that can make a point. But if you look at the total amount of electricity that we're using, as a global civilization, how much is going into Bitcoin now? It's only 10 basis points, and that secures the network. Why is that a valuable use of energy versus something else? Because it has created a way to have a cryptographically provable understanding of how you want an asset to be moved and used. That's different than what we ever had before.
Are you comparing apples to apples between a cryptosystem and what it takes to maintain a fiat system? There are huge amounts of effort, depending on what you want to count as maintaining a fiat system; there are so many layers of intermediaries, and all the costs that are required there. There's a reason there are trillions and trillions of dollars of market cap in the financial system. In fact, right now it's consuming something around 8.5% of GDP. That's not evidence that we're efficient -- that's actually evidence that we're inefficient. A financial system should, on average over time, use much less than that, probably around 4% or 5%.
So somehow, our financial system is actually becoming more inefficient as a percentage of GDP. If you added up what it costs us every single year to have that inefficient financial system, not just in the US, but globally, you could understand why it makes sense to spend energy on having a decentralized, secure, more accessible system.’ Maybe it should be Bitcoin, maybe it shouldn’t, but you would want to tie it to energy, in my opinion.
It’s true that crypto mining comes with a significant cost of energy, but does this tell the whole story? The maintenance of the fiat system, and its many layers, costs significantly more -- a cost which we haven’t questioned until now.
Charles Cascarilla: If you look at how much money there is, as a percentage of world assets, there's about $60 trillion of global M2 (M2 being a broad measurement of money). There's $700 trillion of assets in the world, and I think there's something like $400 trillion of net worth (by the way, net worth is just stored up energy, that's all it is, we've just figured out a way to store it all). Eventually, if you didn't do anything and kept preventing depreciation, it would end toward zero. So you constantly have to be putting more energy back into the system in order to maintain it -- how do you know where you want to put it? That's what money is for.
When money is untethered from energy, our relationship to its value becomes abstracted. And when we no longer have a clear energy index tied to currency, our use of it becomes distorted.
Charles Cascarilla: That's why we have a giant debt bubble, which we can probably never pay back. And that's why there's, for instance, $70 trillion of debt in the United States -- on a $20 trillion economy.
So we have to think about how we want the system to work in a way that keeps us making the right energy decisions, while staying thermodynamically sound. That's how you leave a better world -- by making the right choices today for the future generations. If you're not making the right choices, you end up with a world that isn't the way it should be or as good as it could be. That's what's at stake when you don't make the right allocation decisions. We have to constantly be thinking: what is the way to make that possible?
What crypto is showing is that there is a better way. It's not just a little bit better, it's a lot better. Is that going to consume energy? Absolutely. Do we want it to consume clean energy? Yes. Should we be afraid that it's consuming energy, especially given that we waste so much energy on so many different other things? Who's going to decide that having heated floors that are always on or having your clock that's always running, or whatever might be in so many different rooms? You add it all up, and the amount of energy we're wasting dwarfs compared to anything going into building this new financial system. Who should be making that call? Well, I think we should allow society and the market to make that call, and determine that there's really value there.
This point has to be hammered home when we talk about the environment: everything costs energy. Crypto production is simply another cost in a constellation of industries -- almost all of which operate on a far greater production, use, and waste of energy.
Charles Cascarilla: It’s a tiny fraction of it -- we spend more energy digging gold out of the ground than mining crypto, and I have yet to hear anyone say we shouldn’t have gold. Sometimes it is incorrectly thought of as a per transaction basis, and people say, ‘Well, look how much money this is taking each time you do a transaction on the Bitcoin network.’ But the use of energy in the Bitcoin network is actually about maintaining the security of all of the assets on it -- it's not about just processing a transaction.
There are certainly blockchains where you can have transactions done at a fractional cost, and that is a good thing. What you're seeing in the case of Bitcoin is that it's building a reserve asset that you can base a system off of. You're creating a way to begin to understand the system differently. When you look at the scope of how much energy is being spent on it, you're really talking about something that is so fractional and marginal, even now, that it's not going to scale with the number of transactions; what it's going to scale with is the value it represents.
Shifting to the global lens, for years the Chinese government has pushed against the crypto industry. Early last month came the biggest pushback, as China’s central bank shut down a major crypto firm, and warned all institutions against providing virtual currency services. But could this actually be a positive?
Charles Cascarilla: Globally, over 50% of the mining capacity was in China, and add to that other elements of activity related to Bitcoin in crypto that have been basically tightened by the government to such an extent that it's getting firms to leave. That's showing us something -- the values of the government in China -- and how they compare to values in other parts of the world.
What's made America great over time, and certainly many other countries, is having an open society and ability to be able to make choices financially. That gets to fundamentals of freedom of expression, the ability to have freedom in the political process, and freedom in markets to make economic choices. It doesn’t mean you shouldn't have regulation, but these are the fundamental principles.
That is something that crypto is fundamentally allowing. So it wouldn't be surprising that that's not something all governments like. And if you look at who allows it and who doesn't allow it, it really amazingly follows open societies versus more closed societies.
While it's painful to be in a situation where large countries, and in this case one of the largest, has decided that they're going to really tighten oversight, on the other hand I think it can actually fundamentally be a positive; because it will underscore, first of all, what this community is about. Secondly, it will allow those activities to move to jurisdictions that are going to be more stable to support it.
There are great reasons why this will be successful in the long term. There will always be hiccups along the way, it's never gonna be a straight line, and it's always going to be about having to overcome whatever the next challenge is in the process towards mainstream adoption. But we are always thinking: what does mainstream adoption look like? How do you get there over time? That's always going to be tied to a political economy, especially as you get larger. That's part of the debate around what energy represents.
As a decision maker and opinion maker in the industry, Cascarilla holds a firmly contrarian thesis: that crypto is actually better for the environment.
Charles Cascarilla: This does seem a little bit counterintuitive -- why is something that consumes energy good for the environment? Because it forces out uses of energy with high cost and actually provides, in some sense, a subsidy for the clean energy sources and trapped energy sources.
A lot of mining activity commonly happens around renewables, like hydro power. Hydro power is always on (as long as you have enough rain), but people aren't always using electricity. Once electricity is created, it's very hard to store (even though Elan Musk is working on great battery technology). It gets produced and it has to get used or it gets wasted.
While Bitcoin mining can be wherever an energy source is -- it doesn't need high bandwidth, it just needs energy. You can go to marginal projects for renewable sourcing that could go from marginal to profitable, because there's another way of being able to use that energy which otherwise would have been wasted.
By some estimates, (of course, this is very hard to calculate, and it's constantly shifting, especially with the changes in China), 70% of the electricity usage in the Bitcoin network comes from renewables. It's not easy to ascertain that, but that seems to be a pretty good estimate. It's actually pushing the industry to use lower cost renewables. I think that's actually a real positive over time -- almost 2x more renewable level, in what the Bitcoin network is using versus the other aspects of society.
Closing off, I asked Cascarilla about the current trends of crypto companies going green, and what he foresees for the future of crypto’s energy sourcing and environmental impact.
Charles Cascarilla: There are plenty of examples of firms talking about buying carbon offsets. There’s a move to having tokenized carbon credits, which I think will be fantastic. And that is an important way of saying: where do we want to get our energy from? And how do you want to use the energy?
Moving towards being greener, as an industry, is around saying: where do you wanna get your energy from?
Of course, there's a lot that has to go into fully replacing fossil fuels -- how do you maintain always-on levels? You need to maintain some base load, and you need to be able to do it from highly dense forms of energy. You'll need to be able to purchase carbon offsets, and have to come up with new ways of doing things, and look at other types of renewables, between nuclear power, fusion, and other things that could come along that can shift the energy makeup of what we're using as a society.
I can imagine, for instance, a world not too far from now, where essentially you have mining satellites that are just purely using solar power; not crowding out anything on the surface of the planet, and it's able to operate in an always-on fashion like that. There is going to be a constant push to push the limit, because it's tying money to energy in a really clear way, and it's creating incentives to make sure that it is tied to the cheapest form of energy, which is renewables.