5 questions about the environmental impact of crypto-mining

Originally published on Thomson Reuters Insights by Gina Jurva, with Joseph Raczynski.

Is the act of mining for cryptocurrency damaging to the environment? We asked our resident technologist to assess this emerging landscape

Two hot words in the corporate and financial worlds today seem to be cryptocurrencies and ESG (environmental, social, and corporate governance issues) — yet, are the two intertwined? More specifically, are cryptocurrencies environmentally friendly or are they a global threat to meeting climate targets as articulated at the recent United Nations Conference of the Parties (COP26)?

We spoke to Joseph Raczynski, Thomson Reuters’ resident Technologist & Futurist and early adopter of cryptocurrency, about crypto-mining, the cost to the environment, and its sustainability going forward.

Thomson Reuters Institute: In its most basic terms, what is crypto-mining?

Joseph Raczynski: The traditional act of mining cryptocurrency is driven by heavy computer processing power as processors race to solve a mathematical problem first, so that the sole winner can add a grouping of transactions to the blockchain. For example, a transaction could be one person sending another person money via Bitcoin.

Computer processing power — which you can tangibly feel as your machine gets warm — means the processor is working very hard to do something. The act of mining financially rewards the first computer, or grouping of pooled computers, that solve the mathematical puzzle with that cryptocurrency’s native token. In the Bitcoin example, more than 100,000 nodes (computer groupings) all over the world are competing to win the race, and if they do, they earn 6.25 Bitcoin (valued today around $237,500) for the ability to add the grouping of transactions to the next block on the chain. This happens roughly every 10 minutes.

Joseph Raczynski of Thomson Reuters

Baked into the code is a reduction of the reward over time, and there is a fixed supply of Bitcoin that will ever exist, so the mining becomes likely more difficult over time depending on how many computers are competing at any given moment. This process is called proof of work and is heavily energy intensive; while another form of mining consensus is proof of stake and is far more efficient.

Thomson Reuters Institute: How much does cryptocurrency cost the environment?

Joseph Raczynski: This is a very nuanced and politically divisive topic. Having been in this space since 2011, I can see both sides of the debate, and I believe I can distill its reality. Proof of work is natively inefficient, as it uses lots of electricity to solve that mathematical problem to win the reward. On its face value, this is not environmentally sound.

However, crypto-miners intrinsic interest lies in being as electrically efficient as possible because energy consumption is their principal expense after the hardware investment of fast computers and processors, which are also called mining rigs. Miners seek out the cheapest places in the world to plug their rigs into the electrical grid. They pursue renewables — solar, wind, and hydro power — and have used the blow-off captured from natural gas, which would have been lost or burned as waste.

Although the quest for clean energy is increasingly being sought, not all crypto-miners are doing this. There is little question that proof of work is a cost for the environment, but it is not as catastrophic as some suggest. An intangible effect, of course, is aligning that energy consumption and environmental impact with the benefit that cryptocurrency has created via a vast new industry. The technology has created an internet of value that we will all leverage, so there is a cost benefit that is being struck as well.

Thomson Reuters Institute: Could the impact of crypto-miners be reduced in some way?

Joseph Raczynski: Another fascinating argument about the environmental impact is that crypto-miners are essentially the new intermediary. Be it banking, legal, insurance, supply chain, or most other transactional businesses, each of these enterprises could be replaced with a blockchain. As a result, all of the physical and environmental impacts of those institutions could be negated with a move to blockchain. Think of the electricity used to build and run office buildings, the workers who travel, gas and oil used, materials needed, and all other combinations of energy and environmental impact that any such institution has on the environment — that would be reduced with the underlining technology that would serve its purpose. Ultimately, proof of stake solves this environmental issue, but proof of work is something that will persist, in a decreasing form.

Thomson Reuters Institute: One cryptocurrency, Ethereum, said it wants to reduce its energy use almost 100% this year through transitioning to a proof of stake process. How can cryptocurrencies use proof of stake to be more sustainable?

Joseph Raczynski: There is great news afoot that pretty much solves the electricity issue, and in turn, the environmental problem. The primary blockchains, Ethereum, Solana, Avalanche, Cosmos, along with many others and which are the future of the industry, rely on proof of stake, which itself relies on a different mechanism to confirm and add transactions to the digital ledger. There are many flavors of proof of stake, but if someone wishes to participate as a crypto-miner in this instance, they are not using processing power to win a mathematical race. Instead, each person puts up money, or a stake, to participate. These users are hoping to earn anywhere from 7% to 1,000% on the money that they stake, by locking it into a smart contract that reinforces the resiliency of the network. The incentive is that the more money that people stake, the greater the network effect and security.

Currently, the potential of these high interest rates at are driving tens of billions of dollars into staking. Of those participating, the code dictates who actually gets to save the latest batches of transactions to the blockchain. There is a disincentive if you are a bad actor and try to upend or alter a block, by saving information to the ledger, for example. If you attempt to disrupt the network, you get slashed which means your stake could be confiscated. Proof of stake is expected to reduce the electrical consumption of crypto-mining by well over 99%. Ethereum should be upgraded to this version in 2022, and that alone will reduce the environmental impact.

Thomson Reuters Institute: Does mining and transacting with cryptocurrencies actually contribute to climate change?

Joseph Raczynski: If proof of work continued with Ethereum, which is the most-utilized blockchain in the world, then yes, crypto-mining could have had a negative impact on climate change over time. However, the upgrade to Ethereum 2.0 (ETH2), on a proof of stake model will dramatically change this.

DAO (Decentralized Autonomous Organizations) and Regulation

Originally published on Cryptos on the Rise.

A DAO (Decentralized Autonomous Organization) is a revolutionary change in the manner that people and businesses can organize.  Leveraging blockchain technology, it is a decentralized model of control and governance.  The essence of a DAO is transparency, clarity of rule, and process driven decisions – primarily utilizing smart contracts on distributed ledgers.  Once a DAO has been established, via a blockchain, participants take ownership of its token, which allow them to participate in the system.  Token holders can propose changes, and can vote on those changes, with the subsequent actions being taken, “leaderlessly”.  There are no CEOs, CFOs, CTOs, only code and community.

Close to 5,000 DAOs have been formed to date, expecting to grow exponentially.  Many involve pooling digital money together to purchase assets, both physical and digital.  ConstitutionDAO was established seven days prior to the auctioning of one of the eleven remaining copies of the US Constitution. The intent, to purchase and house it at a protected public location.  Participants in the DAO contributed money in ETH (Ethereum token) to the cause, raising $45 million.  Separately, the AssangeDAO raise $53 million for the criminal defense of Julian Assange.  These are quick and powerful ways form decentralized autonomous organizations.

Central to a DAO is transparency.  Anyone can see which individual (wallet address) owns tokens.  Tokens allow for people to vote on proposals.  Anyone can create a proposal.  Simply stated, and in an ideal setting, it is egalitarian.  Challenges to the model are its extremely democratic nature, i.e. voting on everything.  As a result, it can be overly deliberate and result in a slower process compared to a more centralized formed organization like a corporation.

With this nascent, but extremely powerful organizational structure, the regulatory landscape at the state level is nearly non-existent.  Wyoming, which has led the US on regulation for blockchain and cryptocurrency, recently codified rules for DAOs residing in the state. Therefore, a DAO could be created under the laws of the State of Wyoming. No other state enables this yet.  Further, there is a movement afoot for corporations in the cryptocurrency space to dissolve and become DAOs.  With potentially hawkish regulation on the horizon for cryptocurrency, DAOs, by their very nature, are code based, self-running, leaderless entities running via a decentralized network, which permits actions based on how users interact under brassbound, predefined rules. Theoretically, under the current regulatory landscape there is nothing the law can do about such an entity. The converted corporation to a DAO would no longer be in control of the platform, which reverts to a completely new decentralized model, unlike anything regulated currently.

According to the SEC guidance issued in 2017, they determined that “The DAO”, an entity raising money in an ICO, Initial Coin Offering, that it was indeed a security.  The difference here is that many of the DAOs created now are under the auspices of “investment clubs” or are simply voting mechanisms, whereby the SEC generally does not regulate, unless met by the “Securities Act of 1933” regulating the offer and sale of those membership interests, or under the Investment Company Act of 1940 (1940 Act), or if a person who is paid for providing advice regarding the investments of the club or its members may be an investment adviser under the Investment Advisers Act of 1940 (Advisers Act) or state law. (SEC, https://www.sec.gov/reportspubs/investor-publications/investorpubsinvclubhtm.html)

The SEC is reportedly looking into true DAOs like Uniswap in the decentralized finance (DeFi) space, as a decentralized exchange (DEX), which is a code-based organization that matches buyers and sellers of cryptocurrency.  One area of focus is lending pools, where users will provide their assets for other users to trade, which provide healthy yields, just as banks provide interest on your assets.  This may fall into the Howey Test investment contract realm. 

DAOs are in their embryonic stage with legislatures and regulators.  There is little question that this space if bursting with potential and therefore creating a framework with regulation is certainly on the horizon. 

Lawyers and the Metaverse

Interview from Asian Legal Business published April 2022

How did you discover your passion for all things innovation and technology related?

When I was a young boy, I watched a movie that transformed my life then and by happenstance altered my path forward.  War Games, starring Matthew Broderick was about an inquisitive kid who unintentionally almost started World War 3 by hacking into a U.S. Government mainframe computer.  Broderick’s approach to solving problems was mind altering for me at the time.  More than anything that movie taught me the power of creativity in thinking and designing processes to accomplish tasks in a novel way leveraging technology, sometimes with computer code, sometimes by tying disparate technologies together.  Since that day I have been immersed in technology, starting with the beginning of the Internet via BBS (Bulletin Boards), setting up networks, peer-to-peer file sharing, designing websites World Wide Web, testing of mining cryptocurrency, creating my own tokens, white hat hacking, and then tinkering with electronics of all sizes.  Eventually, I added the professional layers from an undergraduate degrees of economics and sociology and a Masters in Business Administration and eCommerce, combined with my own interests in geopolitical trends, finance, and the legal implications of it all.  All of this really excites me to no end!

You’ve written about the Metaverse and the preparedness of lawyers, how widespread do you think use of this will be in the near future, and how can lawyers make sure they are sufficiently prepared? 

If by the near future we are saying 3-5 years, I would say 100% that the Metaverse will be used in various forms by the majority of the population in the industrialized world.  It has already started.  There are two forces at play which are enabling the Metaverse; one, blockchain, which is a unique way to store information in a provable, unalterable way.  Secondly, the coming hardware is key.  Likely to hit the mainstream when Apple releases their Virtual Reality or Mixed Reality headset in the coming year or so, this will force all of us to head into the Metaverse.  Just for perspective, VR is fully immersive, while MR allows you to see the physical world and places digital imagery on top of that.   

I have likely spoken to thousands of lawyers over the last several years.  Extraordinarily bright to a one that I have interacted with, the one limiting factor in this sense, is their dedication to their own craft.  Meaning, most often and understandably, they do not have the time to pick up their heads and see what is coming.  All of these emerging technologies will impact their practice in some way, as well as the business of law.  At a minimum, lawyers need the opportunity to focus on the big four: AI, Blockchain, Workflow, and the grab bag of General Emerging Technology.  There are a multitude of places to learn about these things, including at Joetechnologist.com but I would include some of the classics with Google alerts, Twitter threads on these topics and magazines like Wired, which should be a staple for everyone.

What kind of opportunities could the Metaverse give lawyers?

Imagine a world, much like what we have now, but only digital.  It is nearly as immersive and interactive, and then extrapolate out all the problems, issues, benefits, and challenges we have currently in real life, and think about where lawyers play a role.  It will be similar.  In the beginning much of legal’s play will be on IP issues and copyright.  Soon thereafter, insurance and contractual disagreements will ensue, but these contract issues could be interesting because of the nature of the platform a metaverse will be built upon.  Since it should rely on blockchain and smart contracts, these disputes could likely be easier to solve at the lower tier, leaving lawyers to resolve more complex issues.  

We’ve heard that tech adoption rapidly increased during the pandemic — what are some of the significant ways this has changed the way lawyers work, or indeed the legal profession?

The adoption of technology has been fascinating to watch across the legal landscape over the last two years.  My favorite part was how lawyers who were technologically phobic were gently pushed into the space and most thrived.  Bigger picture, the acceptance and now reliance on the Cloud has been massive.  Once upon a time, most law firms would have shuttered at the thought of its use.  Now Cloud has become nearly ubiquitous.  With that adoption has come greater use of workflow tools around document automation processing transactional documents much faster and more reliably for clients.  I have also seen greater openness to this idea of a Legal Platform, meaning an ecosystem like a portal which is first secure, yet open to applications, that can be used in a “containerized” fashion.  What that means are apps that are interoperable and secure, resulting in greater efficiency and productivity.  The last area of growth was around law firms open to APIs, or data feeds which allows them to bring in information, comingle it with their own, create new workflows, and leverage out of the box analytics tools to garner greater insights into both the business and the practice of law.

What can lawyers do to ensure they access all opportunities offered by the variety of tech innovations?

I firmly believe lawyers need to dedicated time, almost every day, be it 30 minutes, to read up on current awareness in technology.  Some days they will find a topic they could spend a week on, but they should try to unpack that in time, to better position themselves for the future of the industry, and more tangibly, in the short term to help their clients.

How does our engagement with digital worlds/environments shape the way we work and the kind of work we carry out?

If we presume we are moving increasingly into a digital world, then every nuance surrounding that space will become increasingly important.  Start with AI.  Algorithms will increasingly be able to make decisions for us.  Yes, this includes much of the lawyerly work out there.  These algos start of simply, but will become far more complex, freeing us from some decisions or work.  Stack on top of that blockchain, which is a trustless (trusted) database, meaning both AI and blockchain can work in tandem to begin doing some pretty impressive workflows that are automated.  When we move into the Metaverse for both fun and business, everything can be quantified, e.g. the house, shoes, art, tickets to a concert, via an NFT (Non-Fungible Token) which uses a blockchain.  Processes will increasingly be leveraging data and AI to make decisions which will rely less on human intervention.  I know this can sound frightening, and it could be, which is why as this progresses, we need the best legal minds to understand the implications, yet keep a progressive mindset to guide the path forward.  We do not merely wish to replicate everything we have in the real world, but try to evolve it to the best we humanly can, until AI takes over, kidding, not kidding.