China’s State Council committed to cracking down on cryptocurrency trading and mining this May in an attempt to combat the financial risk that comes with speculative trading.
In 2020, cryptocurrency mining firms based in China mined around two-thirds of the total Bitcoin minted that year, with two of these firms providing around 50% of the total global “hash rate” energy used to mint Bitcoin, which has been a topic of concern due to reports that Bitcoin could contribute to global warming.
In a July article written for Fortune magazine, journalist Sophie Mellor wrote that if China were to eliminate cryptocurrency mining, it would eliminate half of the total energy dedicated to mining cryptocurrency.
But of course, it’s not that simple. These miners won’t just disappear after a ban. Following the Chinese crypto mining ban, we saw a spread of China’s mining power across the globe, from cold regions of Russia to areas like Texas, where U.S. oil and gas executives suggested that cryptocurrency miners could use surplus natural gas to generate electricity.
This exodus of the hash rate moving out of China could be good news for Bitcoin’s independence.
The two aforementioned firms that provided around 50% of the total global hash rate could have easily worked together — or have been forced to work together by the Chinese government — to perform a hostile takeover of the Bitcoin blockchain. Because these firms were forced to downsize and move their operations abroad, there is no longer a potential for government intervention in the blockchain.
However, we must also look at the ripple effect that China’s Great Leap Backwards may have. If other countries decide to prohibit cryptocurrency mining, we could see a massive decrease in the hash power available to all cryptocurrencies, including Bitcoin.
China’s ban on crypto mining exposes a fatal flaw in Bitcoin and other proof-of-work-based cryptocurrencies.
Proof-of-work is a method of verification for miners to assist in the minting of more cryptocurrency by providing computing power to the blockchain.
PoW blockchains, like Bitcoin’s, are not only potentially harmful to the environment, but it also, evidently, allows an entryway for governments to interfere with a supposedly “independent” form of value.
In the upcoming years, we are bound to see more countries ban cryptocurrency mining — India and Japan have already been debating these issues for months.
This is why proof-of-stake will be all the more important in a blockchain-based future. PoS is a method of “mining” that doesn’t require any mining at all, utilized by the likes of Ethereum. Mining power is distributed randomly to holders or pools of holders of Ethereum with more than 32 ETH — the denomination for the Ethereum blockchain’s Ethereum cryptocurrency — creating both a more democratic process and eliminating the need for large amounts of electricity.
Not only do PoS blockchains like Ethereum remove the danger of consuming too much energy — or any significant amount of energy at all — to be superior to the existing banking system, which uses 238.92 terawatt-hours or double that of Bitcoin in 2021, but it removes the danger of a re-introduction of a central authority in a system designed to be for the people, powered by the people.
Governments intrinsically cannot and should not support cryptocurrencies, as cryptocurrencies are designed to counteract the oppressive and sometimes even undemocratic behavior of central authorities like the Federal Reserve. Therefore, governments will naturally do what they can to halt the rise of cryptocurrency in our daily lives, including prohibiting the mining of cryptocurrencies.
Bitcoin will be target No. 1, and an easy target at that, in its current form as a proof-of-work chain that requires mining.
Only the future can tell whether Bitcoin will be the MySpace of crypto or be able to evolve to survive. For now, though, I encourage you to read up on Ethereum and other proof-of-stake projects.
If Bitcoin’s hash power providers cannot collaborate to shift the blockchain to a proof-of-stake system, Bitcoin’s days are numbered.