Proof of Decarbonization
Can blockchains help us solve the environmental crisis?
It is a funny world in which we live — and a highly interesting one at that, many things, for millions of people, have improved tremendously over the past several decades — whilst we have also uncovered major challenges with potentially devastating consequences.
This article aims to open the floor to a discussion of a strategy which I believe the globalized world may use to address its major challenges into the future, starting with the problem of Climate Change.
Increased Carbon is arguably the biggest long-term problem
Of the many environmental challenges that must be overcome in the 21st century, the sheer amount of Carbon/CO2 in Earth’s atmosphere is probably the most glaring one.
Since the industrial revolution began in the 1700s, humans have been steadily pulling carbon from deep underground — carbon that has not recently been part of the earth’s carbon cycle— and putting it into the earth’s carbon cycle.
The result is an increased amount of carbon in our atmosphere and oceans, and since the 1700s, the atmospheric CO2 concentration has increased by nearly 49% — this is probably the most important long-lived “forcing function” of climate change.
As is seen in the graph, the Carbon parts per million has been skating around and below the 300 level for the past 800 thousand years — only recently have we jumped up into the 400s. This — mainly — is what all the fuss is about, as the increased greenhouse effect resulting in large part from this increased carbon is what is responsible for increased temperatures, AKA ‘global warming’.
Negative externalities going unaccounted for
One of the best videos I have ever seen on Climate Change is this speech by Elon Musk, where he breaks down the problem simply in only 12 minutes.
I would highly recommend giving this a watch if you haven’t already.
One of the most interesting parts of the talk is when Mr. Musk raises the problem of the ‘hidden subsidy’ on all carbon-producing activity, where we have an untaxed negative externality (the effects of emitting carbon into the atmosphere on our future) that is not properly accounted for in the present — this results in undue economic incentives to do carbon-emitting activity, which of course leads to more carbon-emitting activity being done.
This negative externality can be equated to a hidden carbon subsidy of over $5 trillion dollars per year.
In his book ‘How to Avoid a Climate Disaster’, Bill Gates breaks up the problem of Climate Change — translating it into actionable areas in which we can use existing technologies to avoid catastrophe.
But Mr. Gates also has a clear message: Our goal needs to be to get to zero emissions by 2050. And the answer lies in technology.
So, to properly define the goal here, let us agree that it is to
I think we may be able to do this by tying our monetary system to the negative externality that is the hidden-carbon subsidy, but first let’s discuss money.
What exactly is money?
Money is one of those things which on the surface appears to be relatively simple but is in fact a rather complex phenomenon—some functions that help us to define what money is are given below.
- Money is a medium of exchange — it allows people to obtain what they need to live.
- Money is a measure of value or unit of account, and so a measure of sacrifice — through a free-market economy, money distributes the complex task of assigning value to goods & services. This value represents the relative sacrifice, on average, an actor is willing to put in for a given good or service.
- Money is a store of value — it allows people to store the ‘potential’ to purchase a good or service, through the proxy of money, over time.
Money has traditionally been made from “ornamental stuff” — rather than “necessary stuff”
The reason for this is buried in the difference between things that are necessary commodities (necessary stuff) and things that are ornamental — the fundamental difference between these two things is that the necessary stuff is satiable — we can ‘have enough’ of it — whilst the ornamental stuff is not, it is ‘insatiable’.
It is true that we would generally place necessary stuff above ornamental stuff, at least until we have enough of the necessary stuff. After this point, having more ‘necessary stuff’ is no longer necessary or that useful — unless of course it is to trade for ornamental stuff. Economists would say that the ornamental stuff is ‘elastic’, whilst the useful stuff is ‘inelastic’.
The reason is that ornamental stuff is ‘easier to get rid of’ & therefore generally “harder” as a currency
Throughout history, it is a constant that what local populations use as money — is usually a function of how easy it is to ‘get rid of’ that thing, in exchange for other things.
Tobacco was used as money in early colonial Virginia, furs in Canada, and rice in the Carolina’s — why? It was because those things were sought after outside of the local populations in which they were used as money. Tobacco was an important export — it was the medium by which English goods (for which Virginians at the time needed) could be obtained. The material from which money is made may have function — this merely makes it more sure that the money be passed on as there would surely always be someone willing to exchange it for goods or services.
All of this shows that money is not something that is valued for itself — rather, it is valued based on what it can be exchanged for, its value is it’s purchasing power. If — as is the case with the US Dollar today — it can be exchanged for pretty much anything else, as long as this is true, it’s demand will always outweigh it’s supply. The US dollar’s value is based on the faith in the credit of the United States’ government.
The ‘hardness’ of a currency is a property describing the extent to which it is reliable and retains it’s purchasing power over time. In general ‘ornamental stuff’ is “harder” as a currency that other materials.
‘Soft’ currencies are sensitive, easily ‘inflatable’ & so tend to fluctuate erratically — notably because their supply proves more variable over time, due usually to evolving technologies or improved trade connections. As an example — seashells were once used as a currency in parts of Africa, but when Indian traders arrived and wouldn’t trade their goods for them (seashells were abundant in India) — the shells were no longer as easy to ‘get rid of’ and proved to be rather a ‘soft’ currency.
Gold, conversely, has proven to be rather a hard currency historically; this was partially due to the fact that it retained instrinsic value to most people over the ages (it doesn’t tarnish, looks nice as jewelery etc) and partially due to the fact that — as it became more scarce — it’s supply became increasingly stable.
But imagine that the entire world still used gold as a currency, and some lucky fellow found a jackpot equal to the entire world’s supply — and then introduced it into the market, what would happen? The answer is that gold would then be worth half as much, and would have proven to be ‘softer’ than initially thought.
A Brief History of Modern Money
In the aftermath of WWII the world was a mess, and Europe was a catastrophic wreck & desperately needed to rebuild.
But the United States was all but a mess. They were the toughest kid on the playground at this time and, after the war — in Bretton Woods, 1944 —a new global order was established, based largely on John Maynard Keynes’ ideas.
The Gold Standard
“We have gold because we cannot trust governments” — US President Herbert Hoover in 1933
Pretty much throughout the late modern period, from 1834 until 1973, quite recently, relatively speaking—and true to this ‘ornamental history’ of money, the US dollar was backed by gold.
This meant that you as a citizen of the United States, could go to the government and exchange your ‘dollars’ for real gold.
One could (and many do) argue that such a standard ensures economic stability, as gold retains a stable value to the currency — therefore governments would not be able to raise their debts without first obtaining more gold.
Through this lens, the gold standard is thus a tool to legally curb government spending — and the money supply into society;
governments would not be able to ‘print more money’ in order to ‘finance new debt’.
And let’s be honest — they have a point here! The US debt problem is getting larger by the day — at the end of 2020, the US government debt held by the public was more than 21 trillion dollars. This is more than the entire GDP, and much more than what the country owns in gold (about 11 trillion).
But there are also compelling reasons to not have a gold standard. No one is denying that the US government’s fiscal situation is challenging, but having the dollar tied to gold would change the most basic fundamentals of the current monetary policy — and if government’s had not had the tools to react intelligently — crises like the 2008 & COVID in 2020 could have been much, much worse.
Despite gold being relatively “hard” as a currency, the speed at which gold can be mined also introduces a lot of randomness to monetary policy. Central banks would not be able to target inflation as they do today. With a gold standard, a central bank’s primary focus would be to keep their gold reserves intact; this would be contrary to having a focal point of providing ideal economic/business conditions, fighting unemployment, raising productivity, and controlling inflation.
Another negative aspect of the gold standard, which is not often discussed, would be environmental damage due to the fact that gold is a scarce mineral, and an increased demand for the metal would mean mining efforts to get it would also increase — with these efforts having negative implications for the environment.
The Pivotal Bretton Woods Conference
The global order established in 1944 at the Bretton Woods conference set the stage for the global world we have today — it was at this conference that both the IMF & the World Bank were established.
In the words of Geopolitical strategist Peter Zeihan;
“The core of Bretton Woods was the US would fund and protect the new global system in exchange for security primacy.”
Essentially, the Americans would — using their powerful navy — keep the seas safe for the movement of goods and people; and so the US navy spread across the world to enforce order as necessary, and this immediately changed the way countries could interact with each other — fundamentally changing the mechanics of the global market, predominantly because many countries didn’t have to focus on keeping themselves safe — they could focus on becoming rich instead (looking at you, China).
Now — post-Bretton Woods, the US still had a gold standard — Bretton Woods in fact established the system by which a fixed currency exchange rate could be created on the back of gold, but the toughest dude on the playground still got his way — as this could only be done through the dollar, all other countries were to keep their currencies fixed, but adjustable to the dollar (which was pegged to gold, at 35 dollars to 1 ounce).
Fast forward to 1971 and president Nixon abandoned the gold standard, due to a number of reasons — the US would no longer buy gold in order to maintain this fixed ratio of dollars to gold. Two years later and the gold standard was abandoned completely, and it was at this point that the European community tied their currencies together, jointly floating them against the US dollar — this could be seen as the end of the Bretton Woods financial system — and the introduction of the infamous fiat currency & floating exchange rates.
Hello, Fiat Currency
The value of the fiat currencies we have today is solely down to the fact that people are ‘forced by governments’ to use it as a medium of exchange, and so (begrudgingly?) agree on it’s value, which is set by governments.
Fiat money does not have intrinsic value, and cannot be used for anything besides exchange — it is not backed by anything, merely peoples’ trust in the government & the stability thereof.
China first used fiat money back in 1000AD, but it only really took off in the modern world upon Nixon’s abandonment of the gold standard in 1973.
There are many who would insist on the benefits to having fiat currencies; the most important one being that, through it, governments can protect their countries’ economies from the inevitable ‘booms and busts’ of the business cycle.
Fiat money has thus generally been viewed as a more stable currency, relative to commodity based money such as currency backed by gold, as it can cushion against recessions.
The global financial crisis of 2008 however, seemed to prove otherwise — and we also have yet to experience the true aftermath of COVID-19 pandemic. Though central banks were able to soften the blows, they were still unable to stop these crises from happening — critics of fiat money would argue that the limited supply of gold makes it a more stable currency than fiat money (for which supply is unlimited).
The Incredible Invention of Digital Scarcity
The Byzantine General’s Problem is a problem in game theory describing the difficulty that decentralized systems have in agreeing on a single truth.
The problem outlines a situation in which, in order to avoid catastrophic failure of the system, the system’s actors must agree on a concerted strategy —with the problem being that some of these actors are unreliable.
The Byzantine General’s Problem plagued money for millennia — but it was solved with Bitcoin by Satoshi Nakamoto, the mysterious & pseudonymous inventor of the cryptocurrency & of the blockchain, described in this paper in 2008. Bitcoin can be seen as the hardest currency to have existed thus far because it’s supply is predetermined by the blockchain code on which it runs.
The blockchain, for the first time ever, allowed for the concept of true digital scarcity — and the General’s problem is solved through the consensus mechanism by which Bitcoin operates — known as Proof-of-Work.
Proof-of-Work
Proof-of-Work (PoW) is what secures the Bitcoin blockchain, it does this by enforcing that a certain amount of energy is expended for doing some task (computing hashes, in Bitcoin’s case) in an easily verifiable way.
PoW is a form of cryptographic proof in which one party proves to others that a certain amount of computational effort has been expended.
Could the work be ‘more’ useful?
In their paper, ‘Proofs of Useful Work’, researchers highlight how Proof of Work consensus can be applied to a wide-array of computational problems — and also any problem that can be reduced to them (Ball et al., 2021).
Applying this concept to a currency such as Bitcoin, could result in a (crypto)currency that utilizes a consensus whose completion does not waste energy* but instead is useful for the solution of computational problems of a practical interest.
Recently, Flux, a decentralized computational network similar to Ethereum, announced that they would be pioneering the first ‘Proof of Useful Work’ blockchain.
*Bitcoin enthusiasts and others may argue that the work done is not ‘wasting energy’ but rather ‘securing the blockchain’ — which is, of course, of vital importance. I get the point, but if it is possible to do work that may be considered ‘more useful’ instead, whilst still securing the chain — is that not better? Why not?
Could the ‘Useful Work’ be Carbon Sequestration?
A really interesting property of money such as the US dollar, and any other widely used currency— is that it is pretty much the only thing for which demand will always move to outweigh supply. We can never have enough money, can we?
What if we were to tie this intrinsic property to consensual agreed, global societal problems— like Climate Change? Could we have a ‘Proof of Carbon Sequestration’?
This way the ‘mining’ of the asset that which backs the currency — could actually consist of pulling Carbon out of the atmosphere. Though this would not eliminate the hidden Carbon subsidy described above, it would certainly serve to offset ongoing emissions— which are certainly not slowing as fast as we would like.
Not only this — but the sequestered carbon could be used in a variety of ways, from creating Graphene used for screens, to synthesizing diamonds.
Could this be on a blockchain? Would it be so bad if it wasn’t?
The net result of this would be an economic forcing function to reduce Carbon in the Earth’s atmosphere — but the currency would retain many of the benefits provided by the Gold Standard, as well as some of those allegedly provided by fiat currencies.
I am not well-versed enough in the mechanics of blockchain technology, cryptography, and proof of work algorithms to understand whether this would in fact be possible or not.
From what I have read, the problem here is largely a technical one, which is why I wished to publish this post — we as a species are good at solving technical problems, so I’d better ask the internet.
It seems that the problem is a measurement one; how do we actually tie physical processes, such as Carbon Sequestration, to a consensus algorithm without fundamentally reducing the level of trust that blockchain networks provide — because sensors can be ‘gamed’ in a way that traditional PoW cannot be.
And if it cannot be on a blockchain, would it be so bad if it weren’t? I do not know the answer to these questions, but I do find the concept interesting.
Maybe we do need a ‘new Bretton Woods’
Back in October 2020, Kristalina Georgiev, current Managing Director of the IMF, called for a ‘new Bretton Woods moment’ in the face of the COVID-19 pandemic, echoing similar sentiments from economist Judy Shelton (known for her advocacy for a return to the gold standard).
Perhaps now — in the aftermath of COVID-19, when institutions are slightly more comfortable with cryptocurrencies, and in the midst of COP26 — perhaps this is where we are beginning to ‘ready-up’ for this moment?
Notable Mentions
Ricky Klopper
Special thanks to Ricky for helping me with this article, and providing many of the sources.
Greenchain Engineering
Back in 2016, myself and my partner Styger Kruger started an engineering firm named ‘Greenchain Engineering’, the name Greenchain came from our initial desire to create a blockchain that was somehow linked to green solutions, we began with water but we ended up having different visions of where we wanted to take the company went our separate ways, the company is still going though, now they are focusing more on water filtration.
Moss
Moss is a company that believes that the main solution for climate change is to develop the carbon credit market. The company is currently focused on simplifying and making it easy for clients to buy carbon credits from Amazon projects — because they consider that, out of all carbon credit projects, Amazon forestry is the most needed.
References
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