The Blog

Node Ahead 36: Bitcoin incentivizes clean energy and Ethereum undergoes its Shanghai Update

By Brett Munster, Director of Research at Onramp

Welcome back to The Node Ahead, a cryptocurrency and digital asset resource for financial advisors. Every other week, we discuss the latest crypto news and the potential impacts it may have on you and your clients.

In this edition, we’ll cover:

  • Bitcoin trading at a 60% premium in Nigeria
  • How bitcoin is saving endangered mountain gorillas
  • Deep dive into Ethereum’s upcoming upgrade

BTC demand spikes in Africa

In our 2023 trends to watch issue, we highlighted that regions with strict capital controls were likely to see an increase in bitcoin adoption. If it pleases the court, I would like to submit the following piece of evidence: Nigeria.

In an attempt to push the country towards a “cashless” economy, the Nigerian government recently began imposing a limit on bank and ATM withdrawals. Individuals and businesses in Nigeria are now limited to withdrawing $45 per day and $225 per week from ATMs. As a result of these imposed capital controls, the demand for bitcoin has skyrocketed in the country over the past month. In fact, demand has spiked so much that on January 30th, the price of bitcoin was trading more than 60% higher in Nigeria than in the US. Nigeria has also become the leading country for bitcoin web searches, according to Google Trends.

And individuals aren’t the only ones adopting bitcoin in Africa. Retail giant Pick n Pay announced that it will now accept bitcoin as payment in every one of its 1,628 stores across South Africa. As part of its nationwide rollout, store customers will be able to pay for items using bitcoin via smartphone apps or by scanning a QR code and accepting the South African rand’s conversion rate at the time of payment.

It turns out that most people don’t like it when a government tries to tell them what they can and can’t do with their money. Rather than just go along with the restrictions, the people of Nigeria are turning to an open, permissionless, and fully transparent monetary system. I’m going to go out on a limb and say Nigeria won’t be the last country we see this happen to.

Numerous ways bitcoin mining is accelerating the adoption of clean energy

In previous issues, we argued that bitcoin mining is the single greatest tool we have to incentivize the adoption of clean and renewable energy. We showed that more than half of the bitcoin network is already powered by clean energy sources and why it’s possible that in the next decade or so, the bitcoin network might become carbon-negative, reducing the number of global carbon emissions. We’ve highlighted examples of how bitcoin mining is being used to capture methane rather than flaring it at oil drilling sites or letting it seep into the air from landfills. However, there are plenty of other real-world examples of bitcoin mining incentivizing the development and use of clean energy sources in a practical way you might not be aware of.

In 2021, the Environmental Defense Fund released a map of 81,000 abandoned oil and gas wells that are leaking methane into the atmosphere. Methane is far worse for the environment than carbon dioxide (CO2). In fact, The EPA found that methane from these abandoned oil and gas wells accounts for the equivalent of 60 million metric tons of CO2 in the atmosphere combined, the fifth largest source after landfills and manure management. With insufficient federal funding to address the issue, bitcoin mining is likely the best solution. Bitcoin mining advocate group, the Satoshi Action Fund, is pushing a policy that would allow bitcoin miners to take responsibility for these abandoned wells, capture the remaining gas to power bitcoin mining operations, and then seal the well once it runs out. According to Dennis Porter, founder of the advocacy group, “It is a win-win-win for everybody. It’s an inarguable win for the environment. It’s an inarguable win for the economy. And it’s an inarguable win for those states that don’t have to spend taxpayer dollars to plug these abandoned oil and gas wells.”

In Sub-Saharan Africa, bitcoin mining is being used as a business model to bring electricity to the region. Roughly half of the population doesn’t have access to electricity even though there are plenty of river, solar, wind, and geothermal sources of energy that can be used to generate clean electricity for local communities. The problem has always been these communities tend to be very poor, and the fear of an unstable customer base and inability to recoup investment has prevented infrastructure development. Enter bitcoin mining. Bitcoin miners are essentially helping bootstrap local energy production by being the initial, guaranteed, and persistent buyers of locally produced clean energy. This lowers the barrier for capital investment into projects such as dams or small hydroelectric plants because investors know they have a buyer of last resort even if the local community is unable or unwilling to purchase the electricity. A company called Gridless is doing exactly this in several locations throughout Africa. In addition to the needed infrastructure, the bitcoin mine brings economic empowerment and job opportunities to these communities.

Believe it or not, bitcoin mining is helping to save Congo’s most famous national park and the endangered mountain gorillas that live there. The Virunga National Park, Africa’s oldest protected park and a place famous for endangered mountain gorillas was financially devastated due to a lack of tourism caused by COVID. Facing the threat of shutting down, the park turned to bitcoin mining. The proceeds from the world’s first known Bitcoin mine operated by a national park, one that runs on 100% clean hydroelectric energy, are helping pay for park salaries, infrastructure projects like roads and water pumping stations, and protecting the endangered gorillas.

In El Salvador, geothermal energy generated by numerous volcanoes in the country is being used to produce 100% clean energy for local communities. However, these power plants produce more sustainable energy than they can consume. Bitcoin mining is being used to absorb the excess energy, which lowers costs, balances the electrical grid, and produces an extra source of revenue.

Bitcoin mining is being explored to help unlock clean, continuous, and year-round baseload power for one billion people by harnessing the thermal energy of the oceans.

Bitcoin mining is being used to clean up millions of tons of leftover coal waste in Pennsylvania that pollutes groundwater and releases ash toxins into the air. And, in addition to the positive environmental impact bitcoin mining is having, it is also saving local taxpayers more than $5 billion to clean up all the state’s abandoned mines.

Bitcoin mining not only saved the oldest hydroelectric energy facility in the US, but the renewable energy facility is also now more profitable than ever. In Costa Rica, a hydroelectric plant that had shut down for nine months because it was lagging in profits is now back to producing clean energy thanks to incorporating bitcoin mining into its operations. And in Norway, a bitcoin miner running on 100% hydroelectric and wind power uses the heat generated from the machines to dry out wood for local businesses as a free service.

Every year there are millions of used and discarded tires that can’t be buried because they can contaminate the soil, nor should they be burned because the tires release a whole bunch of air contaminants. Instead, North Carolina-based PRTI created a process to convert these tires into clean energy and uses that energy to power bitcoin mining rigs.

Japan’s largest power company TEPCO now uses its surplus renewable energy to mine bitcoin and help lower energy costs for consumers, increase profits, and decarbonize the energy grid. ConocoPhillips is selling extra gas to bitcoin miners so that it can both monetize excess energy as well as reduce carbon emissions. Exxon Mobil is reportedly expanding its bitcoin mining pilot program to four countries in order to further reduce the volume of natural gas it routinely burns off or flares into the atmosphere.

Lastly, as Texas has proven over the last two years, the effect of bitcoin mining on electrical grid demand response has been a runaway success. As a persistent buyer of electricity, bitcoin mining stabilizes the electrical grid by absorbing excess energy created and then turning off when demand peaks. This is especially true for intermittent energy sources such as wind and solar. For example, wind farms in Texas are using bitcoin mining to absorb excess energy from the wind farm and prevent the need for curtailment when the wind is at full tilt. This improves the stability of the energy generation and economics of the farm.

What all of this means is that bitcoin is rapidly increasing the innovation and adoption of renewable energy and reducing our dependence on carbon-based methods.

Ethereum’s Shanghai Update

Last September, Ethereum successfully changed the network’s process of validating transactions from proof of work to proof of stake. We covered why the Merge was so important in previous editions as well as highlighted the impacts from the Merge as one of our top trends to watch in 2023. Now the first upgrade to the Ethereum network since its transition to proof of stake is scheduled in a little over a month. So, we figured it is as good a time as any to explain what in the world the Shanghai Hard Fork is, what EIPs are, and what it all means for Ethereum.

Let’s start with the name. A “Hard Fork” is simply a change to the rules by which the blockchain operates. Because all blockchains run on some sort of consensus mechanism (in this case, proof of stake), the validators on the Ethereum network have to agree to the changes. Thus, when rule changes and technical upgrades are introduced, developers create a temporary split in the network (in other words, a “fork”). At first, there will be one chain running the old system and one chain running the system with the new improvements. Whichever block gets majority consensus from the validators becomes the block of record. The term “hard” means the new fork is not backward compatible, which forces validators to choose one or the other. Hence, forks are usually agreed upon ahead of time so that validators adopt the changes in unison, and the fork with the upgrades becomes the new chain of record. As for why they called this particular upgrade “Shanghai,” honestly, I have no idea, but let’s go with it.

So, the Shanghai Hard Fork is simply the name of the upcoming upgrade to the existing Ethereum blockchain. Within Shanghai are a series of changes called “Ethereum Improvement Proposals,” otherwise known as EIPs. EIPs are a standardized format and process for making changes to the Ethereum network. Each proposed change, whether implemented or not, has a number associated with it and is well documented. For example, the Shanghai upgrade consists of EIP 3651, EIP 3855, EIP 3860, and EIP 6049, all of which are designed to lower gas fees (a kind of tax that users pay to transact on the Ethereum blockchain). In the past, when activity on-chain has risen, the gas fees have become extremely expensive. These changes should help reduce those costs in the future.

However, the most important change implemented with Shanghai is EIP 4895, which allows users to withdraw their staked ETH. As we have covered in the past, the merge to proof of stake converted the mechanism by which transactions are verified from miners contributing computing power to validators who deposit cryptoassets (otherwise known as “staking”). Validators have been staking ETH and accruing rewards since December 2020, when Ethereum released its “Beacon Chain,” which was the first step towards transitioning to proof of stake. However, users have only ever been able to deposit ETH into Ethereum’s staking mechanism. They have never been able to withdraw those assets. According to Glassnode data, about 16.6 million ETH are currently staked on Ethereum. As of writing this, that’s more than $27 billion of value stuck on the Ethereum blockchain.

With Shanghai, that finally changes. Now, validators will be able to withdraw all or portions of their stake, giving users much more control over their funds and rewards. Some analysts believe this ability to de-stake will result in significant sell pressure as users who have had their assets locked up for years now have the ability to cash out on the rewards they have earned over that time frame. However, the more likely scenario is that staking will increase on the Ethereum network, not decrease.

First of all, the more ETH you stake, the more likely you are to earn rewards. Hence there is an incentive for stakers to keep their rewards staked on Ethereum. Second, providing the ability to de-stake lowers the risk for investors to stake ETH in the first place. Up until recently, investors never knew when they would ultimately be allowed to withdraw their funds, so they were taking on a big illiquidity risk which likely prevented many investors from participating at all. With this barrier removed, staking on Ethereum has now become more attractive. In fact, we can see this in the numbers. As of writing this, the participation rate for Ethereum staking stands at approximately 13.7%, according to data from Glassnode. This is significantly lower compared to other proof of stake tokens such as Solana, Cardano, and Polkadot, where staking participation rates can range from 50% to 80%. As we mentioned in our 2023 trends to watch post, we expect to see Ethereum’s percentage of staked assets to rise significantly over time as a result of the Shanghai upgrade.

Shanghai, which is on track to launch by the end of March, addresses the most pressing need on Ethereum today, the ability to withdraw staked assets, but there are a number of other upgrades it doesn’t address. Developers decided to keep the scope of Shanghai relatively narrow, mainly so that staked ETH withdrawals would be released as soon as possible. In doing so, some other big changes to the Ethereum protocol were omitted from Shanghai and pushed back to later upgrades. The most notable of these include sharding (a method of making the blockchain more scalable by splitting up the network across several chains, or “shards”) and changes to improve the Ethereum Virtual Machine. But we will save the explanation of those updates for another time.

In Other News

Top Republican lawmaker explains how Congress is warming up to crypto.

Mastercard is issuing prepaid crypto cards in Brazil as regional crypto interest grows.

Federal prosecutors are accusing Sam Bankman-Fried of witness tampering. As a result, the Judge banned SBF from contacting FTX employees.

Clyde Vanel, a Democratic State Assemblymember in New York, introduced a bill that would allow state agencies to accept crypto as a form of payment for fines, civil penalties, taxes, and fees. 

Forbes article on how fintech and blockchain are disrupting financial institutions.

Former Morgan Stanley CEO holds bitcoin and crypto.

Proof of Reserves for policymakers.

FASB, which sets accounting standards for U.S. public and private companies, announced it would issue a proposal by late March that would require businesses to use fair-value accounting for bitcoin and other crypto assets.

The UK launched its central bank digital currency plan, nicknamed “Britcoin” in the media.

Dubai has become the latest jurisdiction to unveil a crypto regulatory rule book, including a four-stage licensing process for crypto asset firms.

The central bank quietly released new guidance Tuesday that makes it harder for banks to work with crypto firms. Nic Carter, Partner at Castle Island Ventures, compared the Fed’s action to the politically controversial Operation Choke Point, a past Justice Department initiative aimed at limiting bank exposure to payday lenders. 

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.