Bitcoin to the Rescue

El Salvador will issue a Bitcoin Bond with the ticker symbol EBB1. Half of the money (500 million dollars) will be used to buy and hold bitcoins, the other half for infrastructure investments, with geothermal energy from a volcano and bitcoin mining the main focus.

Investors in the bond will get the option of permanent residence in the soon to be founded “Bitcoin City”. There will be no taxes there, especially no capital gains tax, which may be of interest to hodlers.

El Salvador is first to the market with such a Bitcoin Bond. The point I want to make here: Nobody needed to develop a new technology to issue it. They could just plug into the existing Bitcoin network to enable this innovation.

I think the same may be true for the problem of global warming. That just hit hard in the United States, with a historic hurricane leaving whole towns destroyed. It may be time to take this threat seriously and deploy a solution that works.

Can Bitcoin come to the rescue? Is the solution already there and it is only a question to intelligently use Bitcoin?

Of course it is already easy to see that Bitcoin mining will contribute to the solution, as opposed to contributing to the problem. That is because mining needs to use the cheapest energy. The cheapest energy already is renewable. It follows that miners will use renewable energy and that deployment of renewable energy will be faster in a world that has Bitcoin as a reliable source of demand that can be switched on and off easily anywhere on the planet. It is just like a world wide feed-in tariff.

El Salvador will use some of their volcano energy from the Bitcoin Bonds to mine bitcoins, which will give them an easy option to export that energy to the world.

That is the easy part.

Now for the interesting question. Can Bitcoin already be used to fairly distribute the right to mine fossil fuels?

Those rights are not distributed fairly to begin with. Some countries like Saudi Arabia and the United States won in the lottery and got huge resources. Others like Japan drew a zero and can’t drill for oil in the first place.

The best way to make sure that CO2 emissions from fossil fuel don’t happen is to leave the stuff in the ground. OPEC has tried to help for a couple of decades. So all we need is an efficient cap on production set by OPEC or some other entity.

When setting that cap, it is also easy to see that Bitcoin serves as a model for radical reduction. Have a long term plan for drilling the remaining treasure. Maybe just use the Bitcoin model of halving production every couple of years.

Can Bitcoin do that already or is is necessary to develop some new technology?

I think it can. The only remaining problem is that of how to deploy the solution.

I will start with first principles. One is that we don’t wait for new technology. This is a moral and legal problem, not one of developing some new altcoin.

One of the most famous and important aspects of Bitcoin is the limit on production. Only 21 million coins ever.

Of course it would be trivial to change that number and have more coins. The only thing that prevents that from happening is that people don’t want such a change. That is not a question of software technology, but a moral and legal question.

In exactly the same way one could imagine a world where there are limits on production of fossil fuel and those limits are backed by the will of humanity to have them. The question of how to administrate those limits and how to distribute the production rights fairly would not be a question of software development.

Let’s start with oil as a sample case. There is already OPEC. Imagine OPEC deciding on a production schedule for the next hundred years, based on radical production reduction. For simplicity make that halving production every four years.

Once that is in place and working, the question of who gets to use that energy for what purpose would be left to the market. Just like it is today.

Obviously prices would be going up massively. That might be popular with oil producers and holders of reserves.

But how to distribute the production rights fairly?

With Bitcoin, it is just a big lottery. Mining is a lottery. Each hash is a ticket, and who wins is just a game of chance. Just like the original distribution of oil resources between countries.

One could imagine issuing some new altcoin for this purpose. Let the mining of that altcoin decide on who gets to produce what oil.

That however would go against the principle of using only the existing Bitcoin network, just like El Salvador just plugged into that for their Bond project.

This has been done before when allocating emission rights under the EU Emission Trade System. That just looked at historic emissions. In the same way, the original allocation of production rights may just be based on historic production shares.

Can that be done just with Bitcoin?

For example, have the UN issue some colored coins in appropriate number. Distribute those to producing countries according to their market share.

Then require them to send those coins to a burn address as proof of production rights. Have a metric on how much must be burned per 1000 barrels.

Lets just start with a simple example. Production in 2020 was down because of the corona crisis. There were 88,391 thousand barrels per day produced, which works out to 32.351,106 over 366 days. So if you set the rate to one satoshi per 100 barrels, all of the world production would easily fit into one single colored coin.

The United States had the biggest share of that at 19.51 million barrel per day, which translates to 19,510 thousand per day, or 7,140,660 thousand over 366 days. So the United States would get that amount of satoshis from the colored coin and be required to burn such amount for proof of production rights. It would be their job to fairly distribute those production rights between individual producers.

After the next halving, they would only receive 3,570,330, assuming that production numbers not change before the date relevant for the halving decision.

Bitcoin would bring a couple of things to the table in this scenario. For one, it is impossible to hack Bitcoin or to change transaction records. Since there will still be plenty of ways to attack the connection between actual production and proof of production rights, it will be useful not having to worry about the safety of the base layer.

It is also useful that the blockchain is a public ledger, so everybody could easily check if the numbers add up and who actually reported what.

Also sending colored coins to a burning address would be proof of destroying them. And that would be a good symbolic fit to the fact that producing one barrel of oil destroys one barrel of the remaining planetary reserves.

That is all for the moment. This was just a simple thought experiment on the question if Bitcoin can already solve the problem without any further software development.

There may be some problems left in actually pulling this off, but those are legal and moral questions.

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

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