Bitcoin: capitalism 2.0
Bitcoin, the most popular cryptocurrency so far, was designed to provide: “(…) an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”1 . This seemingly revolutionary capability, though, suffers from two specific drawbacks, both rooted in the very technology underpinning Bitcoin:
- it doesn’t account for the increasing amount of energy needed to validate transactions using the proof-of-work method
- it makes Bitcoin (and every other proof-of-work currency) a purely extractive, deeply capitalist anti-commons system.
These problems are intimately connected and mutually reinforce each other, as is becoming more and more evident: in a paper published in 2013 Karl J. O’Dwyer and David Malone estimated the energy consumption of the Bitcoin network to match that of Ireland for the same year2, while more recent estimates assume Bitcoin’s network energy consumption to reach the a staggering 14.600MW by the year 20203. What this means is that proof-of-work networks such as Bitcoin are bound to display a strong tendency to centralization, in spite of Nakamoto’s claims: bigger mining pools beget bigger hardware, which in turn calls for bigger investments (ie. private capital), thus putting the old capitalist aristocracy back in control.
Massive energy consumption, disregard of externalities (mainly pollution) and a strong tendency towards centralization make Bitcoin a less-than-ideal choice if we really want to kickstart a commons economy.
In search for alternatives
Over the course of several years I grew more and more interested in the field of energy-based cryptocurrencies and, eventually, I came across the SolarCoin project. Born in 2011, SolarCoin was developed as a clean, sustainable alternative to the Bitcoin network. It was designed from the ground up to not only provide a viable currency model, but also to incentivise the production of clean energy. The more I read about the project though, the more I became aware of limitations and contradictions that seemed to have gone unnoticed to the original developers, some of which make SolarCoin resemble Bitcoin way more than is necessary.
The natural next step was, for me, to begin thinking about a new approach to energy-based cryptocurrencies, one that would (potentially) overcome the main shortcomings in SolarCoin. Here’s a quick recap of what I came up with.
Proof-of-work: a recipe for centralization
” (…) SolarCoin is backed by two forms of proof of work. One is the traditional cryptographic proof of work associated with digital currency. The other proof of work is a Solar Renewable Energy Certificate (SREC) that has been generated and 3rd party verified“.
To address this point I designed my project around a slight variant of the proof-of-stake algorithm, in which nodes do not compete for transaction verification rights by virtue of their currency reserves but by contributing energy to the network itself. The nodes with the highest output over a given time frame (eg. 24 hours) get to validate transactions first, then are put on hold until either one of the following becomes true:
- the timeframe is over
- all the other nodes in the network validate a transaction before the time frame is over
Using a proof-of-stake algorithm is paramount to dismantle the tendency of proof-of-work cryptocurrencies to centralization. By significantly decreasing the complexity (and thus the energy) needed to validate a transaction, proof-of-stake makes purchasing powerful and expensive hardware unnecessary, thus averting the risk old capital could hijack the network and centralize it.
Prevent capital hoarding
“Each SolarCoin represents the generation of 1MWh of solar electricity, and the cryptocurrency can be used to pay for goods or services from individuals and businesses that accept it.“
A fixed exchange rate means that the most coins will go the biggest node, regardless of the size of the network: entities with high capital reserves will be able to equip themselves with the best hardware and snatch coin after coin. Also, the 1MWh exchange rate seems targeted squarely at industry-grade energy production networks, which is, again, a boon for capitalist aristocracy.
My proposal does away with this by introducing the concept of “production target“. Each network will automatically determine its unique production target through a series of steps:
- using the nearest rank method, all the nodes in the network will be grouped in ten groups based on their energy output
- for each group, the average energy output will be calculated
- each group will be assigned a multipier based on its position in the ranking so that the lowest energy groups get the highest multiplier
- the weighted mean of all the outputs is calculated and becomes the production target for the network
Here’s a quick example. Imagine a network composed of three nodes:
- node a which outputs 1KW/h
- node b which outputs 1.5KW/h
- node c which outputs 10KW/h
In a fixed-rate scenario (eg. 1 coin = 1KW/h), node c would quickly become the highest earning node by getting 10 coins every 24 hours.
In the production target scenario, on the other hand, the network’s rate would dynamically adapt to disincentive capital hoarding: using the proposed method the rate would become 1 coin = 2,667KW/h, thus allowing node c to only get 3,750 coins every 24 hours.
This approach is meant to incentivise homogeneous networks and discourage strong nodes from invading and exploiting small, local networks.
Reward collaboration, not competition
“SolarCoin (…) can be “earned” by solar power producers, can be mined (such as other cryptocurrencies are), or bought through an alternative currency exchange“
A key difference that needs to be highlighted at this point is that in my proposal coins are not awarded for validated transactions but are naturally awarded to each node based on how much energy each node shares within the reference time frame (ie. 1 production target = 1 coin). Energy flows freely from the producers to the grid while new coins are produced on a regular basis. Transaction validations are still rewarded with a better exchange rate (eg. 1 production target = 1.005 coins after a successful validation).
“The maximum issuance of SolarCoin is said to be about 98.1 billion“
My proposal doesn’t have hard limits on the number of coins produced. Instead, it relies on energy consumption to determine the amount of rewards to distribute: the amount of minted coins will decrease to a minimum agreed value as energy production and energy consumption reach balance (eg. 1 production target = 1 coin – (output/consumption) + x; where x is the agreed value, which will prevent the reward flow from stopping once there’s a 1:1 output-to-consumption ratio). This approach has two advantages:
- higher rewards in the bootstrapping phase will act as incentive for all those willing to become active nodes
- once networks reach stability, the coin emission will be so little that its value will be naturally high due to scarcity
It is by now well understood in the P2P community that we can’t build a decentralized, commons-based society relying on economic models developed for and by the capitalist world. While dismantling the extractive, exploitative practices that capitalism has put in place over the course of the past centuries, we can’t forget about currency and the way it’s an active part of the current state of affairs. In a world of intrinsically worthless currencies SolarCoin was a step in the right direction, yet compromised by the extractive nature of the proof-of-work algorithm.
Standing on the shoulder of such a giant, though, I believe I managed to address some of the limitations affecting the current generation of energy-based cryptocurrencies. I firmly believe the proposed solutions can foster the development of a decentralized, energy-based economy built around a network of networks, fueled by a truly sustainable currency that will no longer rely on extractive practices for its existence.
node c which outputs 10KW/h
In a fixed-rate scenario (eg. 1 coin = 1KW/h), node c would quickly become the highest earning node by getting 10 coins every HOUR.
Have you considered using formal methods to verify the system? If that interests you consider TLA+ (Lamport) as a tool.
Thanks for this insightful article. I’ve thought of similar but using social proof of work/stake (e.g. volunteer work, projects/code, etc.). I didn’t think it through in this level of detail but seeing this inspires me to try!
SolarCoin uses Proof of Stake Time algo, its not a PoW coin. The work is referred to as a means to explain that the coins are not free, you must do the work of installing and maintaining a solar PV system.
I dont understand why you feel more coins go to bigger nodes, coins are issued based primarily on solar PV output, this is not relevant to the node stake amount, but the amount of energy generated.
Incentivising smaller producers with relatively more coins, does push energy generation to the edge rather than centralisation, but 1 SLR = 1 MWh is simple.
Hi Michele, I’m a science journalist writing about SolarCoin – I’d like to interview you for my article. Could you please contact me at [email protected] ?
Very interesting article!
Admittedly, I know and understand far too little about cryptocurrencies to have anything intelligible to say about the algorithms themselves, but I have some thoughts on the conceptual level (they also apply to the original SolarCoin concept).
From a conceptual perspective, the goal of promoting clean energy production makes sense to me, but I see the following issues:
1. It is limited to solar energy, neglecting all other renewable energy sources. This could lead to to an over-emphasis on solar energy production even in regions where other sources are more efficient, thus leading to an inefficient use of resources. This could of course be fixed by expanding it to other means certified renewable energy production, once they become viable on smaller scales (to avoid centralization).
2. Should, at some point in the future, the problem of limited energy be solved by technological advances (i.e. sources of renewable energy becoming so efficient that energy production cost becomes negligible), the currency’s value in promoting energy production would be irrelevant.
3. It sounds like it would favor people with the technical skills and knowledge who are able to set up efficient solar energy systems.
That is why – if 1. is fixed – I see this mainly as a short- to mid-term means to promote clean energy production, whereas I believe that using human effort (as Alan Moore suggested above) or time directly as a currency to be more future-proof in the long term, as it is independent of technological advances.