June 29, 2018 - Monocle Research Department
South Africa has a long and complicated history with mining that stretches from the heady heyday of the Witwatersrand Gold Rush to the complex industry we see today. Mining was for decades the darling of our economy, but in recent years, it has been regarded by many as a disproportionate thorn in our side. Where companies such as Anglo American and De Beers were once revered as perennial achievers in our economic success, today many consider them an unwelcome reminder of an unequal past and a slow-to-change attitude towards transforming the pillars of trade and industry. And while the traditional mining sector still looms large in South Africa, globally, there is a new type of mining that is captivating the world.
The rollercoaster ride that has been the cryptocurrency boom and bust in the last few years has given the miner a whole new identity. Compared to the soot-covered coal miner of yesteryear, today’s crypto-miner is of an entirely different breed. While the one works under back-breaking and dangerous conditions, often kilometres beneath the earth’s surface, the latter is best represented by an archetypal nerd working out of a garage full of servers with a makeshift cooling system of household fans for their overheating equipment. What started out as a hobby for a few geeky types, has since grown to a scale that is significantly affecting national and global infrastructure. In Iceland, for example, Bitcoin mining will use more electricity than is needed to power the entire population’s homes in 2018. Meanwhile, in Australia, there is a proposal to reboot a decommissioned coal-fired power plant to provide cheap electricity for a datacentre to mine cryptocurrency, providing an ironic twist on the traditional perception of the miner – especially in a world that should be looking to move away from burning fossil fuels for energy.
What this collision between the traditional and contemporary brings to light, is a question of value. What is the value in burning coal to create energy for machines, whose sole task is to complete excessively complicated computational exercises, not to solve vastly important questions that would benefit society, but solely to create complexity for the sake of complexity? It could be convincingly argued that we already have many functioning currencies that operate within a well-established monetary system – there is no need to waste precious resources on what is essentially a fictional and wildly fluctuating digital token. While this may seem like a reasonable view on the matter, crypto-enthusiasts will argue that this process, considered by many a massive waste of time, energy and resources, may in fact be producing one of the most rare and illusive things on the planet. What is produced by crypto-mining, they argue, has largely been lost by our current monetary system – trust.
Without trust in a system, the currencies traditionally used to signify value within that system lose meaning. In years gone by, the issues of trust and value were resolved in the modern monetary system using gold. To address the growing problem of settling international debts in a global economy that was struggling to define a standardised valuation of their various currencies, the Gold Standard was adopted by nearly all developed nations by 1900. In this system, if the US gold price was set at $500 an ounce, for example, a one dollar note would entitle the holder to 1/500th of an ounce of gold held by the government. In this way, governments were obliged to hold enough gold to always be able to pay out the denominated amount promised by the exchange of notes, effectively constraining the number of notes a government could print at any given time.
This realignment of value to physically backed gold stockpiles was, however, severely tested not long after, with the devastation of World War I and the subsequent war reparations, such as the Treaty of Versailles, causing deep and widespread inequalities between nations. This was followed shortly after by the stock market crash of 1929 and World War II just ten years later. Although the Gold Standard existed in some form or another for the next few decades, it saw its official end in 1971, when Richard Nixon rescinded the direct convertibility of US dollars into gold, beginning the era of fiat currency that still exists today.
Only three decades later, a crippling financial crisis swept the globe. And in the midst of that very crisis, on 18 August 2008, the bitcoin.org domain name was registered, followed a month later by the release of a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System, authored by the mysterious Satoshi Nakamoto. The timing of this release was no coincidence, as a tight-knit group of cryptographers, despondent with the failings of the incumbent economic system, sought to bring into the world a transparent and decentralised form of monetary exchange. When many began losing trust in governments and central banks, who had papered over the cracks by printing excessive amounts of cash, radically increasing the money supply as a result, and who showed little sign of adopting a more balanced and nuanced approach, these cryptographers created a “trustless” network of exchange – relying not on centralised entities to authorise and authenticate transactions, but on a peer-to-peer system, underpinned by the undeniable security of cryptography and the proof-of-work concept.
Proof-of-work (PoW) systems are at the very heart of cryptocurrencies like Bitcoin. Because Bitcoin is decentralised, anyone with enough computing power can validate transactions on the blockchain, but the validation of these transactions is subject to the miner proving to the system that they have engaged in a significant amount of computational work in solving for a variable (x) of a specific cryptographic function, represented by y=(H)x, given the output (y) and where (H) represents a cryptographic hash function. The variables of these hash functions are impossible to reverse-engineer, thanks to the design of so-called one-way cryptographic systems that can produce outputs requiring significant computational brute-force to solve, which can necessitate computer execution times of months or years based on current processing power standards. Simply, what all this means is that there is no shortcut in solving for these complex problems, other than putting more processing power behind the task or collaborating with other miners to pool resources.
Looking back then at our comparison to the traditional miner, it is interesting to note that, in 1933, long before the most recent financial crisis or even before the fall of the Gold Standard, Herbert Hoover famously said to Franklin Roosevelt, “We have gold because we cannot trust governments.” The very same sentiment rings true today for those who advocate Bitcoin. Its value – as gold gave the assurance of worth and set the limits for governments to print money – lies in trust. Bitcoin mining necessitates an excessive amount of energy because, like mining gold from the earth, it requires brute force. To mine gold and to mine Bitcoin are comparable in that there are no easy ways to do it. The very act becomes the proof of work that makes the resulting output valuable – far more so, it could be argued, than simply printing fiat currency. It is very telling that an objective as pointless as finding the factors for Bitcoin problems has become such a widespread activity, consuming so much energy to achieve so little, other than to find new ways for us to trust the international monetary system.