Three Essays on Bitcoin, Energy, and Digital Asset Public Policy

by Gabriel M. Royal

B.S. in U.S. History & American Politics, May 2012, United States Military Academy
M.P.A. in Public Administration, May 2022, The George Washington University

A Dissertation submitted to

The Faculty of
The Columbian College of Arts and Sciences
of The George Washington University
in partial fulfillment of the requirements
for the Doctor of Philosophy

May 21, 2023

Dissertation directed by

Joseph Cordes
Professor of Economics, Public Policy and Public Administration
The Columbian College of Arts and Sciences of The George Washington University

certifies that Gabriel Michael Royal has passed the Final Examination for the degree of

Doctor of Philosophy as of March 31, 2023. This is the final and approved form of the

dissertation.

Three Essays on Bitcoin, Energy, and Digital Asset Public Policy

Gabriel M. Royal

Dissertation Research Committee:

Joseph Cordes, Professor of Economics, Public Policy and Public Administration,

and International Affairs, Dissertation Director

Lang (Kate) Yang, Assistant Professor of Public Policy and Public

Administration, Committee Member

Peter Linquiti, Associate Professor of Environmental Resource Policy, Committee

Member

ii
 Abstract of Dissertation

Three Essays on Bitcoin, Energy, and Digital Asset Public Policy

The environmental impact of cryptocurrencies which rely on energy intensive,

“proof of work” (PoW) cryptographic processes is a chief concern for policymakers

considering digital asset public policy legislation and regulations. As other

cryptocurrencies tout greater efficiency and drastically lower energy expenditures,

Bitcoin still dominates the cryptocurrency space by tenure and market cap, despite its

continued reliance on PoW protocols. Where most academic work focuses on Bitcoin’s

propensity for electricity consumption, these essays examine the Bitcoin network’s

relationship with nation-state public policy. The first essay explores the governance

structure of decentralized autonomous organizations (DAOs) like Bitcoin. It grounds an

understanding of DAO governance in a multidisciplinary review of network theory and

highlights the relevant policy implications therein. The second essay examines how the

Bitcoin network responded to an adverse public policy intervention – China’s

cryptocurrency mining ban. Finally, the third essay assesses whether the economic

incentive structure built into the Bitcoin protocol can align with environmental and

energy public policy goals through an empirical analysis of mining data centers in Texas.

iii
 Table of Contents

Abstract of Dissertation………………………………………………………….……...ii

Table of Contents……………………………………………………………….……….iv

List of Figures…………………………………………………………………….....……v

List of Tables……………………………………………………………………………vii

Glossary of Terms……………………………………………………………………...viii

Dissertation Series Introduction…………………………………..……………………….1

“No Trusted Third Party”: Governance in Decentralized Autonomous Organizations….10

China’s Crypto Ban: How Decentralized Networks React to Policy Interventions……..67

Evaluating Proof-of-Work Mining as a Tool in the Energy Transition………………...127

Bibliography…..……………………………….……………………………………….196

Appendix A: Bitcoin Mining Economics and Demand Response Profitability……......227

Appendix B: : Essay 3 LMP Data Detailed Results, Tables and Figures …………..….232

iv
 List of Figures

Figure 1.1 Communications Network Typology………………………………………..22

Figure 1.2 Network Typology and DAO Tradeoffs……………………………………..25

Figure 1.3 Academic and Technological Inspirations for Bitcoin………………………55

Figure 1.4 Bitcoin Addresses by Balance………………………………………...……..60

Figure 1.5 Bitcoin Transactions per Second………………………………………….....60

Figure 1.6 Bitcoin Hashrate…………………………………………………………......61

Figure 1.7 Bitcoin Median Tx Size vs. Tx Fees………………………………………...63

Figure 2.1 Share of Bitcoin Network Hashrate by Country…………………………..…83

Figure 2.2 Seasonal Impact on Bitcoin Hashrate by Chinese Province…………………83

Figure 2.3 Bitcoin Network Hashrate Around the Ban………………………………….92

Figure 2.4 Ex-ante Country Share of Network Hashrate………………………………..96

Figure 2.5 Ex-ante Absolute Levels of Country Network Hashrate…………………….96

Figure 2.6 Intervention Country Share of Network Hashrate…………………………...97

Figure 2.7 Intervention Absolute Levels of Country Network Hashrate………………..97

Figure 2.8 Ex-post Country Share of Network Hashrate………………………………..98

Figure 2.9 Ex-post Absolute Levels of Network Hashrate……………………………...98

Figure 2.10 Percentage of Blocks Won Daily by Major Mining Pools………………..100

Figure 2.11 2021 Bitcoin Bull Run, China Ban, and 2022 Market Price Crash……….104

Figure 2.12 Average Daily Bitcoin Transactions per Second………………………….107

Figure 2.13 Daily Average Time Between Bitcoin Blocks……………………………111

Figure 2.14 Reachable Nodes………………………………………………………….113

Figure 2.15 Bitcoin Nodes by Country…………..…………………………………….113

v
Figure 3.1 Notional Example of Curtailment………………………………………….133

Figure 3.2 Distance Between West Texas VRE Hubs and Metro Areas………………134

Figure 3.3 Wind and Solar Plants in Texas……………………………………….........134

Figure 3.4 The “Duck Curve”: CAISO’s Net Load for Jan. 11, Years 2012-2020……139

Figure 3.5 Hourly Wholesale Energy Price Frequency in West Texas in 2021……….167

Figure 3.6 ERCOT Load Zones………………………………………………………..171

Figure 3.7 Example of Select Data Centers with Energy Mix Concentric Rings……...172

Figure 3.8 ERCOT Average LMP and Natural Gas Price Over Time…………………176

Figures 3.9-3.12 Average Settlement Point Prices by Load Zone, 2019-2022………...177

Figure 3.13 Average LMPs During High Demand Hours May-August ’22………...…180

Figure 3.14 Fort Stockton Electricity Use vs. LZ West Energy Prices………………..183

Figure 3.15 Fort Stockton Electricity Use vs. System Wide Demand…………………184

Figure 3.16 CLR Response to Underfrequency Event…………………………………185

vi
 List of Tables

Table 1.1 Bitcoin and Ethereum Network Participant Types…………………………...28

Table 1.2 Economic Network Theory and DAO Concepts…………………..…………35

Table 2.1 Measures of Bitcoin Network Security, Health and Distribution…………….88

Table 2.2 Statistical Analyses of Network Hashrate……………………………………93

Table 2.3 China and Total Network Hashrate Around the Ban…………………………94

Table 2.4 Paired two-sample t-test: Non Top-4 Mining Pool Hashrate……………….101

Table 2.5 Statistical Analyses of Market Price………………………………………...105

Table 2.6 Statistical Analyses of Transactions per Second……………………………107

Table 2.7 Bitcoin Mining Difficulty Adjustments Around Intervention Period……….110

Table 2.8 Statistical Analyses of Block Time………………………………………….111

Table 2.9 Summary of Bitcoin Network Metric Changes Around the Ban……………115

Table 3.1 Estimates of Yearly Electricity Consumption of Bitcoin Over Time…….…147

Table 3.2 Estimates of Yearly GHG Emissions of the Bitcoin Network………………150

Table 3.3 Bitcoin Mines in Texas……………………………………………………...168

Table 3.4 Power Plants in Texas……………………………………………………….171

Table 3.5 Power Plants Near Bitcoin Mining Facilities by Energy Technology ……...173

Table 3.6 Power Capacity Near Bitcoin Mining Facilities by Energy Technology...…173

Table 3.7 Frequency of ERCOT Negative LMPs in 2021……………………………..174

Table 3.8 ERCOT Average Locational Marginal Prices……………………………….176

Table 3.9 Statistical Comparison of LMPs: High Demand Summer…………………...180

vii
 Glossary of Terms

Blockchain: a digital database containing information (such as records of financial

transactions) that can be simultaneously used and shared within a large decentralized,

publicly accessible network. Or, the technology used to create such a database (Merriam

Webster 2011).

Central bank digital currency (CBDC): two kinds of existing central bank money are

cash and reserves held by eligible financial institutions. CBDC is “a generic term for a

third version of currency that could use an electronic record or digital token to represent

the digital form of a nation's currency. CBDC is issued and managed directly by the

central bank” (Board of Governors of the Federal Reserve 2021)

Cryptocurrency (crypto): “a digital or virtual currency that is secured by

cryptography… many cryptocurrencies are decentralized networks based on blockchain

technology – a distributed ledger enforced by a disparate network of computers”

(Frankenfield 2021)

Decentralized autonomous organizations (DAOs): any organization governed by

consensus rules embedded into code; controlled by non-hierarchical membership and no

central management (author)

Decentralized Finance (DeFi): “[any] effort to replicate functions of our traditional

finance systems through the use of blockchain-based smart contracts that are composable,

interoperable, and open source” (U.S. Securities and Exchange Commission 2021).

Distributed Ledger Technology: the protocols and supporting infrastructure that allow

computers in different locations to propose and validate transactions and update records

in a synchronised way across a network (Bank of International Settlements 2017).

viii
Network Hashrate (TH/s): the amount of computing power across the network

dedicated to mining and the processing of transactions. Hashrate is effectively a measure

of the amount of “guesses” being generated to solve a block.

Stablecoins: a cryptocurrency or digital asset tied to the value of a fiat currency. For

example, Tether (UST) works and transacts on a blockchain and 1 UST equals/is

exchangeable for $1 USD (author)

Smart contracts: computer code that automatically executes all or parts of an agreement

and is stored on a blockchain-based platform. Can either be the sole manifestation of the

agreement between the parties or might complement a traditional text-based contract and

execute certain provisions, such as transferring funds from Party A to Party B.

Commonly used and replicated on a blockchain, thereby benefitting from the security,

permanence and immutability that a blockchain offers (Levi et al. 2018, Harvard Law).

ix
 Dissertation Series Introduction and a Brief Primer on Bitcoin

This energy is productive of wealth and is imperishable… [it] is the security upon which I
believe we can base the currency for Muscle Shoals… Under the energy currency system,
the standard would be a certain amount of energy for one hour that would be equal to $1.
- Henry Ford, 1921 (New York Tribune 1921)
In December 1921, Henry Ford toured a nitrate plant in Muscle Shoals, Alabama

with Thomas Edison and offered to pay $5 million for a 100-year lease of the plant,

existing dam, and land around Muscle Shoals. He vowed to complete a massive new

dam, creating thousands of jobs and building a ‘75-mile city’ out of a sparsely populated

bunch of farm towns (McClung 1922). But he did not stop there. His vision for Muscle

Shoals was a city where currency was based on energy, not gold. Ford believed “the

cause of all wars is gold” (New York Tribune 1921) and fixing money’s dependence on

gold would end horrific bloody conflicts like The Great War which had ended just three

years prior. Muscle Shoals would serve as a shining example of what a new national

monetary policy backed by imperishable natural resources might look like.1

Austrian economist Friedrich Hayek argued governments were obstacles to the

development of “good money” and “all we can do is by some, sly roundabout way

introduce something they can’t stop” (Hayek 1984). It is unclear whether Satoshi

Nakamoto was familiar with Ford’s idea for an energy-based currency system or sought a

solution to Hayek’s problem when they developed Bitcoin in 2008.2 But they created an

1
Rather than borrowing the estimated $30 million required to complete the dam, Ford suggested the United
States Treasury pay for the dam by issuing the $30 million in currency backed by the eventual dam’s
productive capacity. Ford’s dream was not realized, facing too much political opposition to pass in the
Senate (Kazek 2013).
2
Satoshi Nakamoto is the pseudonym under which the author(s) wrote “A Peer-to-Peer Electronic Cash
System,” better known as the Bitcoin white paper in 2008. To this day, Nakamoto’s gender and whether
Nakamoto is/was one person or many remains a mystery. I refer to Nakamoto as “they/them” for the

1
energy-based currency designed to disintermediate third parties and remove the need for

government involvement in the exchange of value, nonetheless. Bitcoin uses a

decentralized consensus mechanism called “proof-of-work” where those who facilitate

transactions (i.e., miners) must prove to the network that they have expended

computational effort to solve an encryption.3 Miners receive rewards for solving these

algorithms and adding valid blocks of transaction data to the blockchain – a distributed

ledger (i.e., publicly available historical record) accounting for all past transactions.

Other members of the network can verify the validity of publicly broadcast transactions

and choose to reject any attempt to add an invalid block to the chain. The longest chain

serves as the majority decision of network, so bad actors risk expending computational

power for no reward (Nakamoto 2008).4

The more computational power dedicated to solving these algorithms, the greater

a miner’s chance of winning a block reward becomes.5 This makes cheap electricity

critical to mining economics.6 As Edison was touring Muscle Shoals, his protégé Samuel

Insull was pioneering widespread grid electrification and time of use rates; two novel

ideas which now enable low-cost Bitcoin mining in the United States (Insull 1910).

According to the Cambridge Center for Alternative Finance (CCAF), Bitcoin consumed

about 100 Terawatt Hours (TWh) in 2021, exceeding the consumption of several small

purposes of this dissertation. Hayek is not mentioned in Nakamoto’s writings, but they displayed some
understanding of Austrian economics in an online discussion forum post in 2010 (Champagne 2014).
3
For a more comprehensive review of proof-of-work, other consensus mechanisms, blockchain
functionality/design choices, and cryptography, see Wang et al. 2019.
4
Dwork and Naor (1992) effectively introduce proof-of-work cryptography as a technique to combat junk
mail. Haber and Stornetta (1991) invented blockchain as an idea for “How to Time-Stamp a Digital
Document.” Nakamoto largely combined the novel ideas of others with the invention of Bitcoin (See
Figure 1.3).
5
Miners typically organize into pools. Pools then win blocks and distribute rewards evenly according to
how much mining power individual miners contributed. See section 2.2.3.
6
An overview of Bitcoin mining economics is included in Appendix A.

2
countries and accounting for about 0.55% of global electricity production (CCAF 2022;

Carter 2021). From a normative standpoint, whether this is good use of energy is a matter

of perspective and opinion. For some, the existing financial system works well. The idea

of expending massive amounts of energy to create and/or transfer value is wasteful, at

best. At worst, it exacerbates the many threats climate change poses to the long-term

viability of human civilization on earth. For others, Bitcoin represents the manifestation

of the sovereign individual’s fundamental right to hold and transfer value in a

permissionless system with zero counterparty risk or third-party verification. Expending

energy is a small price to pay to support a revolutionary monetary policy which

transcends borders and is completely uninfluenced by the preferences of nation-state

governments.

This dissertation is a series of three essays wherein normative questions about the

societal usefulness of cryptocurrencies are set aside in pursuit of an objective framing of

their implications for public policy. Bitcoin introduces a new hybrid governance structure

of decentralized human and digitally automated control, now called the decentralized

autonomous organization (DAO). The first essay defines and grounds an understanding

of this new governance structure in network theory principles from computer science,

economics, and public administration. More importantly, it highlights how DAO

governance presents new challenges for policymakers.

Essay 1 shows how DAOs are designed to avoid institutional involvement or

disruption in their processes while essay 2 evaluates how successful they can be in doing

so. The second essay considers a practical example of the relationship between DAOs

and nation-state policy. For years, most of the computing power supporting the Bitcoin

3
network was based in China until it explicitly banned cryptocurrency mining in June

2021. China’s ban and a great deal of publicly available data about the Bitcoin network

provide an opportunity to study how DAOs respond to adverse policy interventions. This

essay is largely an examination of DAO adaptability and contains lessons learned for

policymakers weighing various digital asset public policy prescriptions in the United

States.

Conversely, essay 3 focuses on a more accommodative approach to

cryptocurrency mining regulation and considers where the economic incentive structure

in “proof of work” (PoW) mining clashes or aligns with energy and environmental public

policy goals in the United States. Miner migration from China contributed to the influx of

new Bitcoin mining capacity in crypto-friendly Texas. A critical literature review of

studies related to Bitcoin, energy infrastructure, and the environment shows the need for

more rigorous, empirical work on the state of Bitcoin mining to inform good policy.

Essay 3 describes the relationship between Bitcoin mining and Texas’ power grid using

data from the Electric Reliability Council of Texas (ERCOT) and the Energy Information

Administration (EIA).

The essays in this dissertation each make various contributions to the different

subfields of public policy. The first essay focuses on theoretical frameworks for

understanding the relationship between nation-states – created and led by humans – and

decentralized autonomous organizations (DAOs) created by humans but operating

according to smart contracts embedded in code. It identifies network governance theories

in the social sciences as a useful starting point, but also shows where new theoretical

work is needed to apply to DAOs like Bitcoin. Miners are the primary stakeholders in the

4
second and third essays, providing a look at the human aspect of the Bitcoin network and

how antagonistic or friendly state policy approaches affect their decision making.

Incorporating environmental and energy concerns into the third essay includes all of

humanity as stakeholders in the question of what to do about digital asset public policy. It

also applies the interdisciplinary lens described in the first essay in the evaluation of an

innovative energy policy approach in Texas. The methodology builds on other works in

energy economics but is novel in its empirical evaluation of the impacts of flexible loads

on electrical grids in deregulated markets.

A New Kind of Money: The DAO Application to Cryptocurrency

The Byzantine General’s Problem is a game theory allegory in which hypothetical

military leaders besieging an enemy city from different locations must figure out how to

communicate with one another by messenger to coordinate a plan of attack with traitors

in their midst. To solve the problem, these leaders need an algorithm which guarantees all

loyal generals will adopt the same, “good” plan. This allegory serves as an analogy for

fault redundancy in computer systems and several researchers have proposed proofs and

algorithms to solve it for decades (Lamport et al. 1982). It is also critical to understanding

why cryptocurrencies were developed and how they work.

Designing consensus algorithms with Byzantine fault tolerance has been a goal in

computer science for decades because of hacking attempts by bad actors and software

errors which commonly occur in digital information systems (Castro and Liskov 1999).

Blockchain technology could be used and applied on a permissioned system without

5
decentralization and still provide a myriad of economic benefits (Casey et al. 2018).7 A

desire for more participatory, network-based forms of governance has existed in America

since the early 1900s, and technology has helped flatten organizational structures and

streamline the exchanges of information and value. But DAOs represent a fundamental

shift – an attempt to build systems requiring no trusted third party or centralized authority

for a wide variety of applications beyond computer security, including economics.

At best, cryptocurrency is an active referendum on existing methods of value

transfer. At worst, it is an indictment of legacy financial systems. Policymakers would do

well to understand why people choose to opt-in to alternative forms of doing finance –

particularly when the reasons speak to a lack of trust in institutions. Essay 1 describes

Bitcoin through the lens of these DAO governance insights to discuss public policy

implications in a practical way. But a brief discussion of the history of money and digital

currency helps illuminate why Nakamoto felt Bitcoin was needed in the first place and

how they used network theory to make it work.

It is commonly accepted that money should serve three functions (St Louis Fed):

1. Store of value: our money should hold value over time.

2. Unit of account: Money should provide us with a reliable way of assessing and

comparing the values of various goods and services.

3. Medium of exchange: We should be able to use money in lieu of simply trading goods

and services and know that it will be widely accepted.

The Federal Reserve mentions six characteristics of money: durability, portability,

divisibility, uniformity, limited in supply, and acceptability. Technological advances have

7
Stablecoins and central bank digital currencies use blockchain technology to tie digital money to the value
fiat currency to capitalize on some of these benefits like cross-border payments and final settlement
efficiency.

6
allowed for evolutions in money as we strive to develop currencies which fulfill these

three functions and possess these characteristics. As the world gets “flatter” (in terms of

trade, travel, globalization etc.), the need for money which can travel quickly across

borders securely increases.

Even in subsistence economies, evidence suggests people engaged in considerable

trade using some form of money going back centuries. Records show commodities priced

in salt bars in 19th century Northern Ethiopia and the practice of using salt bars as money

in the region may go as far back as before the common era. Salt bars held some form of

intrinsic value in and of themselves – almost everyone had some use for salt – but they

failed as a stable store of value since something as common as the rainy season could

effectively flood the money supply (Pankhurst 1964). Cowrie shells have little practical

value beyond the aesthetic and were used as money in Africa as a medium of exchange

between the 14th and 19th centuries (Gregory 1996). Cowrie shells were durable, portable

and functioned as a remarkably simple unit of account. But their supply was not fixed

within West Africa. Once European companies understood cowrie shells could purchase

slaves, they flooded West Africa with tens of thousands of tons of shells over a short

period of time, crippling their value and effectively ruining a key function of commerce

in the region (Ofonagoro 1979; Gregory 1996).

Gold has a few practical applications and derives some intrinsic value from its

aesthetic appeal. Its supply is not fixed, but it is very difficult to extract more. Gold

served as a reliable unit of account and medium exchange across borders for centuries.

But it is heavy, hard to transport in large quantities, and not easily divisible. Fiat currency

– particularly in digital form – suffers from less portability and divisibility challenges

7
relative to gold. But fiat currencies are effectively unlimited in supply which can factor

into inflation.8

Most of our money is deposited and digitized by commercial banks.9 But private

forms of e-money bear a striking resemblance to state bank notes in the United States

(Weber 2015). Until 1863, individual states issued their own notes and passed their own

laws governing the supervision and regulation of their state bank operations. This caused

several issues: acceptability and counterfeiting chief among them. Though Weber (2015)

notes transactions were often more efficient in this system and over issuance was rarely

an issue. M-Pesa is an early e-money success story. In Africa, mobile phone users

exchanged airtime minutes as a proxy for money – effectively conducting secure,

borderless exchanges of value with final settlement within seconds (Economist 2013).

But most forays into non-state digital cash failed due to reliance on central authorities,

slow adoption, and the inability to solve the “double-spend” problem (Gensler 2018).

Nakamoto invented neither digital cash nor blockchain (see Figure 1.3). The

novelty of Bitcoin lies in combining the two to solve for “the double-spend problem

using a peer-to-peer network” (Nakamoto 2008, 1). When defining e-money (i.e.,

electronic coins, tokens) by a series of digital signatures between previous transactors,

ledger entry numbers effectively become the money itself. The double-spend problem

arises when payees cannot verify if their transaction involves a coin that was already

spent. Typically, this sort of digital money problem is solved by a central authority.

8
On August 15th, 1971, changing international dynamics, growing deficits and a need for inflationary US
monetary policies finally pressured Richard Nixon into suspending gold convertibility, ending the Bretton
Woods system (Bordo 2019). Bretton Woods indirectly placed major restrictions on federal government
spending. Without it, the federal government no longer had to uphold promises to convert dollars into gold
from the nation’s reserves. This effectively “untied” the U.S. dollar from something of tangible value,
established the dollar as a pure fiat currency, and allowed for potentially unlimited supply.
9
97% of money in circulation is digitized by a bank (Mookerjee 2021).

8
Instead, Nakamoto proposed a network solution with absolute transparency to avoid

financial censorship and “the arbitrary inflation risk of centrally managed currencies”

(Nakamoto 2010).10 By broadcasting all transactions publicly, building each new

transaction off the previous one, and distributing the historical ledger, nodes can verify

transactions do not include double-spent coins (Nakamoto 2008). The aforementioned

energy expenditure required for miners to add blocks to the chain and Bitcoin’s block

reward provide the game theoretical incentive structure for rational network participants

to behave honestly. Lastly, Bitcoin’s inflation rate is controlled by the block reward

embedded in the Bitcoin Core software and consensus rules.11 Essay 2 explores Bitcoin’s

history as a store of value and a medium of exchange. Bitcoin is far from being used

anywhere as a unit of account.12 Still, Bitcoin’s rise in market value and user base (Figure

1.4), the creation of thousands of other cryptocurrencies, and the development of

derivative products speak to a broader, growing interest in Nakamoto’s pursuit of

alternative finance.

10
When announcing version 0.3 of Bitcoin, Nakamoto said, “Escape the arbitrary inflation risk of centrally
managed currencies! Bitcoin’s total circulation is limited to 21 million coins.”
11
Nearly every four years, block rewards are cut in half until a total of 21 million Bitcoin are in circulation.
At this point, miner rewards are limited to the fees associated with processing transactions. This should
occur around the year 2140 (Khalif 2022).
12
I have found no examples of goods and/or services priced in some static amount of Bitcoin as opposed to
a dynamic BTC/USD or some other fiat-based exchange rate.

9
 Essay 1

“No Trusted Third Party”: Governance in Decentralized Autonomous Organizations

Abstract:

Blockchain applications for simple record keeping or ensuring the integrity of

information are not particularly controversial, but the utility and broad applicability of

blockchain-based decentralized autonomous organizations (DAOs) in financial systems is

hotly debated. This paper grounds an understanding of DAO governance in a

multidisciplinary literature review of network theory. I find trust (or the lack thereof)

plays a critical role in DAO network design choices (1.3), blockchain economics (1.4),

and the push away from more centralized forms of governance (1.5). Bitcoin’s inception

illustrates the role trust plays in DAO decision-making (1.7). Public policy prescriptions

for regulating or influencing DAO behavior must account for “hybrid governance,”

distinguishing between the human and digital elements of their networks. More broadly,

this research speaks to changing perceptions of legitimacy in public administration and

the role of government in the digital age.

10
1.1 Introduction

The Byzantine General’s Problem is a game theory allegory in which hypothetical

military leaders besieging an enemy city from different locations must figure out how to

communicate with one another by messenger to coordinate a plan of attack with traitors

in their midst. To solve the problem, these leaders need an algorithm which guarantees all

loyal generals will adopt the same, “good” plan. This allegory serves as an analogy for

fault redundancy in computer systems and several researchers have proposed proofs and

algorithms to solve it for decades (Lamport et al. 1982). It is also critical to understanding

why cryptocurrencies were developed and how they work.

Satoshi Nakamoto’s stated intention with the invention of Bitcoin was the secure

transfer of value between two parties without the need for a trusted third-party

(Nakamoto 2008).13 They sought to solve the Byzantine General’s Problem and apply

that solution to value exchanges in the digital world rather than the exchange of

information in the physical world. To do so, they incorporated knowledge of academic

theories from a wide range of disciplines including economics, game theory mathematics,

cryptography, computer science, and electrical engineering. In a sense, the novelty of

Nakamoto’s invention is the unification and application of the novel ideas of others (see

Figure 1.3).

Any rush to answer public policy questions about what to do with cryptocurrency

without considering what ethos lies at the core of these new efforts to decentralize

finance is a missed opportunity to learn more about why people choose to opt-in to such

13
Satoshi Nakamoto is the pseudonym for the creator (or creators) of Bitcoin. Their true name and identity
is still the subject of much speculation. Hal Finney, an early pioneer of Bitcoin who corresponded with
Nakamoto frequently before Finney’s death, suspected Nakamoto was a “young man of Japanese ancestry”
(Finney 2013).

11
systems in the first place. As an asset, Bitcoin is a cryptocurrency, but its underlying

network functions as a decentralized autonomous organization (DAO). DAOs represent a

new method of organizing and operating the exchange of information and/or value within

a network where smart contracts and code eliminate the need for trust in third parties. The

goal is to replace hierarchical organization or chain of command with a robust, “flat”

network whose operations are executed according to embedded code.

This essay begins with a brief review of DAO origins and early definitions/views

of DAOs from various research perspectives (1.2). I contend that DAOs are best viewed

as networks with a new hybrid form of governance. The bulk of this paper grounds an

understanding of DAO governance in a multidisciplinary literature review of network

theory. Specifically, it distinguishes where DAO governance overlaps with – or is

distinctly different from – network governance in computer science, economics, and

public administration literature. Early computer science network theory (1960s) centered

on how to communicate in the presence of faults and offers a useful framework for

understanding how DAOs utilize network distribution and automated processes for

security (1.3). Communications networks become the subject of a new subfield of

economic research on network effects in the 1980s, and I consider how various network

effect mechanisms work within DAOs (1.4). Public administration scholars begin to give

serious consideration to governance by network outside the context of the firm during the

1990s as part of a broader exploration of decentralizing the provision of public goods

(1.5). Finally, I outline these DAO-specific network theory insights as they relate to

public policy (1.6) and show them at work in the Bitcoin network (1.7).

12
1.2 Origins and Early Research on Decentralized Autonomous Organizations

Five years after first offering his own formal definition for the term, Chohan

(2022) laments that DAOs still suffer from “definitional ambiguity” as the social sciences

struggle to define the “new socio-technological arrangement” (1) of organizations using

technological innovations to encode social structures. This section attempts to alleviate

this definitional ambiguity by reviewing the conceptual origins of the DAO (1.2.1) and

focusing on the role smart contracts play as a mechanism of governance (1.2.2). Finally,

gaps in the existing research on DAOs demonstrate the need for a unifying,

multidisciplinary framework for understanding how public policy relates to this novel

form of governance (1.2.3).

1.2.1 DAO Origins in Bitcoin

Nakamoto’s release of the Bitcoin white paper in 2008 triggered several online

discussion forum posts and e-mails between cryptography enthusiasts and Bitcoin’s core

software developers.14 In 2013, one such enthusiast named Daniel Larimer began using

the phrase ‘decentralized autonomous corporation’ (DAC) in blogposts to describe a new

form of “incorruptible” corporate governance in which bylaws were encoded in “open

source software distributed across the computers of their stakeholders” (Larimer 2013;

Hassan and DeFillipi 2021). Larimer and others effectively sought to generalize and

apply the governance structure at work in Bitcoin, namely blockchain and an open,

distributed network of users, to other organizations (Hsieh et al. 2018). They envisioned

DACs as corporations where shareholders own, run, and revenue share according to

published rules without hierarchical control or figureheads. Larimer (2013) saw

14
These crypto enthusiasts are colloquially referred to as “cypherpunks” and they communicated with
Nakamoto on bitcointalk.org until Nakamoto’s last known communication on the forum in December 2010
(Champagne 2014).

13
applications to banking, electronic courier, venture capital, and escrow services. Vitalik

Buterin, the eventual inventor of the Ethereum network, expanded on the DAC concept in

a 2013 article in Bitcoin Magazine15 and proposes the phrase ‘decentralized autonomous

organization’ a year later as a more general and inclusive term for the use of autonomous

code to decentralize organizational governance (Buterin 2013; 2014).16

Early libertarian-minded crypto enthusiasts saw Bitcoin as the original, “model”

DAO (Larimer 2013; Buterin 2014; Hsieh et al. 2018). They envisioned DAOs with

virtually zero human control, immune to government regulation. In describing the “future

of DACs,” Larimer (2013) said “Like Bitcoin, DACs armed with a set of inviolable core

laws are far safer to deal with than corruptible human organizations… DACs don’t need

regulation, you don’t want to regulate them, and happily you can’t.”17 But DAOs are

coded and designed by humans. Human decision-making plays a role in choosing to join

or leave a DAO, and – even in Bitcoin – mechanisms exist for humans to modify core

software and change consensus rules.18 While governments may not be able to change

on-chain protocol and automated operations directly, they have several tools at their

disposal to exert pressure on human participation in DAOs.19 Governments are clearly

interested in regulating DAOs (OSTP 2022) and much of the nascent DAO-related

15
Buterin is also the co-founder of Bitcoin Magazine
16
Werner Dilger, a German computer science professor, appears to be the first to use the phrase
‘decentralized autonomous organization’ in any formal or academic context. Dilger used it to describe a
theoretical system for a self-sustaining, ‘intelligent home’ of the future for a common family (Dilger 1998).
Dilger makes no mention or allusion to anything resembling blockchain technology or how we envision
DAOs today.
17
From a Larimer blogpost in 2013 on LetsTalkBitcoin.com about ‘distributed autonomous corporations’
(another early colloquial DAO variant).
18
At the time of writing, Bitcoin Core is on version 24.0.
19
The second essay in this dissertation series is about the effects of government interventions on DAOs –
specifically, the impact of the China cryptocurrency ban on the Bitcoin network.

14
literature explores this DAO-government relationship. But a consensus definition for

what constitutes a DAO is needed to clarify the policy concerns at hand.

1.2.2 DAO Definitions

Bitcoin undoubtedly provided “a glimpse into the future of new organizational

forms,” (Lakhani 2018, 10) but academics and outside observers have struggled to pin

down what DAO governance means and often disagree on the limits of its applicability.

Hassan and DeFillipi (2021) define a DAO as “a blockchain-based system that enables

people to coordinate and govern themselves mediated by a set of self-executing rules

deployed on a public blockchain, and whose governance is decentralized” (2). Most

formal definitions for DAOs mention the use of smart contracts to assign roles and

responsibilities, allocate decision-making power and resources, or assign other

operational functions to user-members of the organization (Chohan 2022; Singh and Kim

2019; DeFilippi and Hassan 2018). Smart contracts are transaction protocol embedded in

code (Wright 2021) and changing this code requires some form of consensus among

users according to the consensus rules (Dwivedi et al. 2021).

Unlike corporations, DAOs like Bitcoin lack formal leadership and are not

registered to operate under any specific jurisdictional authority. A true DAO should have

a decentralized governance structure and run autonomously – owned and operated by no

one person or small group of persons – but the level of autonomy and decentralization

may vary (DeFillipi and Wright 2018). The use of smart contracts in organizational

processes does not necessarily constitute DAO governance. Smart contracts can simply

program functions to run when triggered by certain events or when certain conditions are

met. Krishnan (2020) described a potential use case where a user could make a payment

15
which triggers a software command to unlock a rental car’s doors. Here the use of a smart

contract does not mean we should consider the rental car company a DAO. Organizations

can use smart contracts to automate certain processes but maintain human, hierarchical

control of broader decision-making and operations.

However, smart contracts can also govern the allocation of resources and control.

This application is core to DAO governance. One of the most common use cases for

smart contracts in DAOs is for tokens which are transferable and tradeable (Krishnan

2020). Users can gain decision-making power or a share of ownership in the DAO by

exchanging capital or as a reward for work invested in achieving some organizational

goal.20 In DAOs, control of such smart contracts is not owned by any one or small group

of persons but by the members of the organization. Defillipi and Wright (2018) describe a

ride-sharing use case where a DAO could replace a company like Uber. Artificial

intelligence could aid in matching drivers to users, smart contracts would handle

automatic payments from customers to drivers for services rendered, and even collect

administrative fees required to keep the DAO online. While this is entirely automated,

code could also allow for a negotiation between the driver and customer, adding an

element of human control. Furthermore, the DAO could tokenize ownership in the

organization by awarding tokens to drivers per service or in exchange for capital. Here

smart contracts effectively govern both equity within the organization and the doing of

certain organizational processes without human assistance.

20
Of course, this kind of structure can allow for concentration of power, so DAOs try to ensure
decentralization in various forms. Some of these approaches are discussed in detail later in this essay.

16
1.2.3 Existing Research on DAOs and Government

DAOs lack solid definition and treatment from a legal standpoint besides SEC

warnings that they can be used to offer unregistered securities illegally (Tse 2020;

Pranata and Tehrani 2022). Some DAO governance studies highlight the practical issues

associated with this legal ambiguity (Rodrigues 2018; Werbach 2018). DeFillipi and

Wright (2018) introduce the concept of lex cryptographia, or the idea that the only law

organizations like DAOs truly follow is that which is embedded in code. Combined with

a decentralized node structure spanning across geographic borders, DAOs effectively

lack a specific jurisdiction and any “personhood” status to grant legal rights to or hold

accountable (Bayern 2014).

Economists’ attitudes towards the potential of DAO governance in economics

range tremendously. Techno-optimists argue blockchains will usher in a “revolutionary

new institutional technology of governance” (Davidson et al. 2016, 2) and discuss the

possibility of an apolitical crypto-economy which rivals capitalism and becomes its own

formal academic discipline (Babitt and Dietz 2014; Pilkington 2015). Others see DAO

governance as best suited for smaller scale use cases like a new form of corporate

governance (Sims 2019; Kaal 2020). But skeptics see DAO governance as a solution in

search of a problem to solve, where security risks outweigh any benefits that the

democratization of finance might bring. TheDAO21 was one of the first decentralized

autonomous organizations founded in 2016 and ended in disaster (DuPont 2017;

Morrison et al. 2020; DeFillipi and Wright 2018). The idea was for TheDAO to use smart

contracts to govern decisions ranging from “distribution and management of its $150

21
TheDAO was the name of a single decentralized autonomous organization when the concept was still
relatively new. It is italicized for emphasis so as to not confused the singular TheDAO organization with
DAOs more broadly.

17
million dollar fund, risk, residual claims, voting rights, and voting itself… achieved

through the consensus of the investing community” (Morrison et al. 2020, 1). But when

users and hackers found vulnerabilities in TheDAO code, nearly $50 million was

siphoned away from the organization (Price 2016).

Some early qualitative research explores how DAOs might change various nation-

state security dynamics. Leaderless or decentralized organizations have long been topics

of interest for those studying social resistance, civil disobedience, and terrorism

(Beckstrom and Brafman 2006; Sageman 2008; Michael 2012; McFate 2018). But

Krishnan (2020) argues that adding blockchain, digital autonomy (smart contracts), and

anonymity elements seen in DAOs add a new level of evasiveness for governments

contending with social resistance and/or terrorism. The internet provided the platform for

a new kind of illicit black market called “Silk Road,” but it also enabled the FBI’s

cybercrime team to track its users and servers to usher in its eventual downfall (Kushner

2014). Krishnan (2020) outlines how a Silk Road running on DAO governance would

make it harder to shut down. Conversely, it could provide citizens with workarounds to

censorship and suppression of civil rights in totalitarian states. In three case studies in

Africa,22 Gladstein (2021) finds Bitcoin’s DAO structure helps individuals protect their

identities in anonymous exchanges of value with nothing more than a phone and internet

data. He argues this enables families living under centralized governments which brutally

punish their citizens for owning precious metals or foreign currencies the opportunity to

shield themselves from rampant inflation.

Most public-oriented research on DAOs focuses on blockchain applications in

government or the delivery of public goods. In a systematic literature review of

22
Nigeria, Sudan, and Ethiopia

18
blockchain governance in the public sector, Tan et al. (2022) find that leveraging

blockchain technology in public administration requires careful consideration of system

design characteristics based on contextual factors. At the micro level, governance

decisions seem highly technical (e.g., blockchain architecture, specific smart contracts)

but implementation at the macro level involves normative and subjective concerns (e.g.,

accountability, control of governance). This limits the DAO public sector use case.

Distributed ledger technology and blockchain was designed to increase trust, legitimacy,

and transparency between transactions within a system, but whether “the transaction rules

are fairly established” in the first place is “beyond the technical scope of blockchains”

(2). While citizens may feel blockchain-based government processes are more

decentralized and transparent, questions about who designs or changes the system create

a “governance paradox” where blockchain loses its value as the central party ends up in a

position of authority regardless (Werbach 2018). If public blockchains are designed to

mitigate concerns when trust is low (Meijer and Ubacht 2018), highly automated (non-

human controlled) DAOs only risk exacerbating that lack of trust by obscuring the notion

of accountability further (Tan et al. 2022). Removing the human aspect of governance in

favor of over-automation risks missing out on the “embedded public values in public

sector organizations” (8) in the pursuit of transparency and efficiency. Public blockchains

may execute primary rules and functions well but lack secondary rules which capture the

nuance of informal social dynamics and the flexibility required in delivering most

social/public goods (Hart 1961; Simpson 2014; Yeung and Galindo 2019).23

23
Hart (1961) argues every legal system needs secondary “rules of change” which govern how primary
rules change, flex, and adapt to the needs of the governed. Simpson (2017) and Yeung and Galindo (2019)
applied this idea to blockchain based systems in the public sector.

19
1.3 DAOs: Hybrid Governance with Multidisciplinary Roots

DAOs possess both human and technical (i.e., coded, automated) elements –

policies aimed at thwarting, supporting, or regulating a DAO must consider both. Hsieh

et al. (2018) describe machine consensus as the process of enforcing smart contracts

along the blockchain through code. But “humans must first decide what protocol to run

before the machines can enforce it,” (Lopp 2016) requiring a social consensus among

DAO stakeholders. Janssen et al. (2020) suggest academia is replete with research

focusing on the technical aspects of blockchain but lacks insights concerning the

“complex socio-technical infrastructures… like culture, laws and regulations, contracts

which guide and coordinate the behavior of actors and the technology” (16) within these

new organizations. Pedagogically, DAOs lie at the nexus of computer science and several

social sciences. But scholars tend to study and define DAOs only within the context of

their respective academic disciplines.24

Just as DAOs rely on hybrid governance (i.e., a mix of human and automated

control), a great deal of cross-disciplinary literature focuses on the formal and informal

forces at work in networks. ‘Network governance’ emerges as a new subfield for public

academic inquiry in the late 1990s, but pluricentric conceptualizations of public and/or

private governance have multidisciplinary roots throughout the mid-20th century

(Kersbergen and Waarden 2004). Early communications systems modeling provided a

foundation for algorithmic-based security measures in computer science and contributed

network typology definitions still used to describe organizational structures (1.3.1).

Studies of the underlying mechanisms powering network effects help explain DAO value

24
However, Reijers et al. (2021) is an excellent example of the multidisciplinary approach to understanding
on-chain governance, legal philosophy, and economist interests colliding with the advent of blockchain
governance.

20
proposition in terms of the ‘cost of trust’ (1.4). Finally, network theories in public

administration illustrate the role trust plays in decentralized authority, shedding light on

the motivations behind the creation of Bitcoin and early DAO development (1.5).

1.3.1 Communications Network Theory: Centralization Typology and Automated

Security

Writing during the height of the Cold War, Paul Baran’s (1964) “Typology of

Networks” endures as a seminal work of network theory with interdisciplinary

applicability. While Baran focused primarily on communications network survivability,

the terminology for network typology he offered is still commonly used today. With the

backdrop of a potential looming nuclear threat, Baran felt the existing communications

apparatus in the United States was highly vulnerable to single points of failure and attack

(Yoo 2019; Hafner and Lyon 1996). Through his work at the RAND Corporation, he

proposed a new communications system based on a distributed configuration which

utilized redundancy to maximize survivability against attacks to the network.

Baran made two early contributions along the path to DAO governance: 1) a

useful typology for classifying network decentralization (Figure 1.1); and 2) combining

distributed network structure with digitally automated processes (i.e., algorithms) as a

security measure. Baran described communications networks as the combination of

nodes, stations and links (Baran 1964, 1). A purely centralized network has a singular

node with a link to each station. Destruction of the central node effectively kills the

network by severing all links to communications stations. A decentralized network has

many nodes each with links to stations they own and links to other nodes. Reliance on a

single link/node is not required, but attacks on single links/nodes can offline several

21
stations. The distributed network has many nodes which double as stations with links to

other nodes with double as stations. The destruction of one link may have no effect on the

overall strength of the network beyond severing one of several links between station-

nodes. The destruction of one station-node has no effect on the remaining station-nodes.

Baran said, “We will soon be living in an era in which we cannot guarantee survivability

of any single point. However, we can still design systems in which system destruction

requires the enemy to pay the price of destroying n of n stations” (16).

Figure 1.1 Communications Network Typology From Baran (1964, 2)

Trust is the driving motivator in network security research. The presence of bad

actors in a communications network is inevitable – this is the Byzantine General’s

“problem.” Baran’s paper was intended as an appeal to revamp defense communications

systems based on this distributed network model, posing centralization as the key

network vulnerability. But his novel contention that distributed system operation must be

necessarily digital proves remarkably prescient for modern network security research

(Baran 1964, 17). Redundancy only succeeds in making networks more resilient if nodes

are “able to make independent routing decisions and reroute traffic autonomously in the

22
face of partial network failure” (Yoo 2019, 166). Today’s basic personal computing

firewalls rely on automatic algorithms and distributed network setups for digital security

(Alfaro et al. 2006), but this was a revolutionary idea in 1964 – and incredibly difficult to

pull off. In fact, Baran’s idea was never adopted by the Air Force because the Defense

Communications Agency had so little experience in implementing digital technology in

communications systems and the proposal was ultimately scrapped (Abbate 1999, 21).25

It is striking to see the parallels between Baran’s work, the democratization or

“flattening” of the internet (Abbate 1999; Yoo 2019), decentralized finance,

cryptocurrency, and DAOs. Bitcoin was designed to operate much like Baran’s

distributed network. In Bitcoin’s founding document, Satoshi Nakamoto (2008) outlines

how Bitcoin works and echoed both key features of Baran’s proposal: a distributed

network model and digital operation of the system embedded in code. Nakamoto

envisioned an immutable monetary policy encoded in consensus protocol and (perhaps

unwittingly) used several principles of Baran’s network typology to operate it and used

many of the same terms to describe its operation. On the very first page, Nakamoto

mentioned Bitcoin’s “distributed timestamp server” and “nodes [which] collectively

control more CPU power than any cooperating group of attacker nodes” (Nakamoto

2008, 1). While transactions are processed on a blockchain, its network is effectively

secured by independent operators who choose to run the code necessary to validate those

transactions. Note that these independent validators of Bitcoin’s network are commonly

referred to as “nodes,” (3) just as Baran described the operators of his communications

network.

25
Though it should be noted that frequency-hopping technology used in military radio communications
today is based on Baran’s idea for a distributed network over which transmissions can “hop” between
frequency bands several times per second according to some encoded pattern to avoid intercept.

23
1.3.2 Network Typology and Automated Security in DAO Governance Framework

We can use Baran’s (1964) typology as a sliding scale of decentralization for

various aspects of DAO governance. The words ‘decentralized’ and ‘distributed’ are

often used interchangeably, but Baran’s distinctions help clarify and distinguish key

differences between the two. The question determining the network’s classification is:

what happens when a node or station is compromised? Different aspects of a DAO’s

network need not share the same typology.26 Wang et al. (2019) argue an ideal DAO is

organizationally distributed but power is decentralized as opposed to traditional

pyramidal organizations with centralized power.

Network security (i.e., resistance to network attack) increases with its level of

decentralization, but decentralization alone cannot ensure network security without sound

cryptography and invulnerable code. Smart contract robustness must increase as DAO

network distribution increases as well. Hackers took advantage of flaws in the TheDAO’s

smart contract governance (Reijers et al. 2021). This is primarily an issue for the digital

element of DAO governance, but vulnerabilities within TheDAO’s voting protocols

helped enable the hack (Mark et al. 2016). TheDAO’s downfall had as much to do with

failing to account for bad faith actors within the network as flawed transaction

verification methodology did. Furthermore, its smart contracts lacked rules/methods for

dealing with such an instance (DuPont 2017). Core developers had no way of returning

26
In Bitcoin, mining pools possess disproportionate power and the costs of becoming a miner are
somewhat high, while the power of each node validating transactions is equal and the cost to run a node is
relatively low. Thus, nodes are distributed but the mining aspect more closely resembles a decentralized
network.

24
funds or rectifying the situation immediately – proposed changes required approval by

token-holder vote.27

Figure 1.2 Network Typology and DAO Tradeoffs (author)

Fully centralized systems suffer from a single point of failure at the point of

central authority (Figure 1.2). In perfectly distributed systems, each member shares equal

authority. Partially decentralized systems may have members with varying degrees of

authority or particularly high barriers to entry for prospective new members.28 Truly

decentralized systems may have actors with more power than others, but still benefit from

less exposure to the possibility that 51% of the network could fall under the control of a

bad actor (or actors) to carry out invalid transactions or act against the best interests of

27
Even in the face of obvious fraud, several discussants on TheDAO discussion forums remained wary of
centralized control. Many likened the hard fork solution core developers proposed (and which was
eventually adopted) to bank bailouts seen in the wake of the Great Recession (DuPont 2017).
28
There are a myriad of possibilities depending on DAO design but imagine if squares in Figure 1.2
represent core software developers with the sole ability to alter code and triangles own a disproportionate
amount of tokens which represent their equity in voting decisions. Additionally, the difficulty of adding a
new “dot” to the network can factor into decentralization.

25
the network.29 This affords them significant security advantages over more centralized

networks. Aside from decentralization, there are few security techniques to provide

protection against 51% attacks because of how consensus protocols are designed to work

in DAO governance (Sayeed and Gisbert 2019).

The question determining the network’s adaptability is: what happens when a

change needs to be made? More centralized authority in the hands of fewer members of a

DAO allows them to adapt quickly to flaws in the core protocol (i.e., hacks, faults etc.).

More decentralized networks requiring democratic consensus mechanisms (e.g., voting)

to alter code are capable of instituting changes but are less agile in doing so.30 For this

reason, cryptographic processes and smart contract logic must be sound to protect the

integrity and security of their network since there are no elite players like a CEO to make

quick, unilateral decisions in the face of adversity. In open networks, the burden of

responsibility to evaluate the soundness of core software security protocols falls to the

user. Information asymmetries can arise when the threshold for truly understanding

coding language is too high for the average network participant.31

From a public policy perspective, network typology speaks to how, where and to

what extent a DAO can be influenced. The digital element of a DAO network is governed

entirely by the smart contracts within the core software. Assuming no glaring security

vulnerabilities, effecting changes to digitally automated operations depends on the

29
A “51% attack” is different than what happened with TheDAO collapse, but they have occurred before on
several cryptocurrency blockchains. Though notably, Bitcoin has never suffered a 51% attack (Sayeed and
Gisbert 2019).
30
This refers to a network’s ability to quickly make changes to core protocol, but it is worth nothing that
adaptability can be built into core protocol. The difficulty of mining a Bitcoin adjusts over time depending
on the amount of computing power dedicated to mining across the network. This is known as a “difficulty
adjustment,” and the core software is designed to change the difficulty commensurate with a target of 10
minutes to mine each block along the chain.
31
The next section of this paper expounds upon the issue of information asymmetries in DAOs

26
consensus rules of the organization.32 Unless governments can gain enough control of

membership within the organization (e.g., acquiring voting rights), exerting pressure on

existing members may be the only way to modify core software. For example,

environmental concerns about energy use and the carbon footprint of cryptocurrencies

provide the public policy rationale for switching from proof-of-work (PoW) to a less

energy-intensive consensus mechanism known as proof-of-stake (PoS). But since these

consensus mechanisms are embedded in core software, programmers must develop new

software and network participants effectively “vote” by choosing to adopt it or not.

The divergent paths of Bitcoin and Ethereum’s consensus mechanism illustrate

this point. Though Ethereum recently switched from a PoW to PoS consensus

mechanism, Bitcoin remains on its original PoW system. Understanding where a network

is truly decentralized and automated helps delineate where the digital, hard to change

aspects of DAOs end and where human control, power, and influence begins. DAOs may

be non-hierarchical but many are not entirely leaderless. For example, the Ethereum

community recognizes seven kinds of stakeholders with varying roles and responsibilities

in the governance process (Ethereum 2022).33 The barriers of entry for each kind of

stakeholder vary drastically, as does the influence they hold over the network. Since

inception, Ethereum has had a clear set of “primary core developers” followed by

“primary non-development members” (Buterin 2014) who played a critical role in two

32
In the event of fraudulent or criminal activity, government enforcement agencies often take advantage of
both an in-depth knowledge of how DAOs work and sloppiness on the part of those who try to use them
nefariously. After the Colonial Pipeline Co. paid hackers in Bitcoin in May of 2021, the FBI was able to
use Bitcoin’s public ledger to track the subsequent transactions from the hacker’s public address. The FBI
did not elaborate on how it eventually seized funds (Uberti 2021), but it is nearly impossible to crack the
“elliptic curve digital signature algorithm” cryptography protecting Bitcoin private keys. Experts suspect
“bad IT hygiene” on the part of the hackers (i.e., improperly storing private keys, transparent IP address
details etc.) (Sigalos 2021) rather than security vulnerabilities in Bitcoin’s blockchain.
33
For example, the cost of being a “node operator” is significantly lower than being a “miner/validator.”

27
hard forks of the Ethereum blockchain34 and serve as the final authority on proposed

changes to the Ethereum protocol.35 “Protocol Developers have no way to force people to

adopt network upgrades” (Ethereum 2022) but those who do not upgrade risk being left

behind.

Table 1.1 Bitcoin and Ethereum Network Participant Types

Level of Individual
DAO Network Network Participant Type
Influence
Miners & *Mining Pool
Low & *Medium
Leadership
Users (wallet address holders) Very Low
Bitcoin
Developers Medium
Node Operators (can also be
Low
users)
Ether Holders Low
Application Users Low
Application/Tooling
Medium
Developers
Ethereum Node Operators Low-Medium
EIP Authors Medium
Miners/Validators Medium
Protocol Developers ("Core
High
Developers")

Furthermore, Vitalik Buterin’s power and influence as the highly visible leader-

creator of Ethereum cannot be understated. He made both Time magazine’s “most

influential people” list and Forbes magazine’s “30 under 30” list. He spearheaded the

launch of, and all major subsequent changes to the Ethereum network since 2015 and

wrote a book promoting the merits of PoS-based blockchains (Buterin 2022). Bitcoin has

fewer individually influential network participants and no such recognizable human

34
One during the aftermath of TheDAO hack, the other to move Ethereum from a proof-of-work (PoW) to
proof-of-stake (PoS) validation system
35
These changes are known as Ethereum Improvement Proposals (EIPs). The process to get an EIP from
proposal to approval is outlined on the Ethereum website.

28
leadership (Table 1.1). Bitcoin’s creator(s) released its white paper under a pseudonym,

worked to modify it for a few years, and then disappeared into obscurity (Champagne

2014). This makes it comparatively difficult to garner enough support to execute protocol

switches in Bitcoin. Environmental campaigns have struggled to convince Bitcoin

network participants they should adopt a less energy-intensive consensus mechanism like

PoS (Gkritsi 2022).

1.4.1 From Communications Research to Network Effects

In the early 1980s, economists began studying communications systems as

markets with demand externalities where “benefit to a subscriber depends upon how

many of his communication partners also subscribe” (Oren and Smith 1981, 467). With a

focus on practical use cases for networks in national defense, Baran (1964) saw each

additional node in a communications system as increased security. Economists saw a

“network effect” at work where each additional subscriber-user added to the value of the

network.36 Before reaching an equilibrium or “critical mass subscription level” (Oren and

Smith 1981, 484), each additional subscriber receives more benefits than the last. Due to

advances in microelectronics and reduced costs of manufacturing, telephones provided

the greatest example of such a product at the time (Coase 1987): if 100 people own

telephones, the value of owning their respective telephones increases when the 101st

telephone is purchased and added to the network. Critical mass points are a function of

various subscriber cost/pricing mechanisms (e.g., flat rate subscription or volume-based

charges) and whether the system suffers from the negative externalities of congestion at

some point (Katz and Shapiro 1985; Liebowitz and Margolis 1994).

36
Marris (1964), Artle and Averous (1973), Rohlfs (1974) also offered up models and theories of
interdependent demand for communications-type services which factored into the economics-centric
network research of the 1980s.

29
 Katz and Shapiro (1985) expanded this analysis beyond monopolistic

communications networks. Much like Oren and Smith (1981) they defined positive

consumption externalities as “products for which the utility that a user derives from

consumption of the good increases with the number of other agents consuming the good”

(Katz and Shapiro 1985, 424) and use telephone networks as the primary example. But

telephones were a bit too simplistic to capture all the dynamics at play. They felt that

network externalities could be found in other markets as technology advanced (e.g.,

machinery). For example, positive consumption externalities for computers go beyond

the benefit of simply adding another hardware computer to a network. Incentives lead to

the creation of new programs and software to run on computers and increase their

functionality further.

Economists dubbed this the “hardware-software paradigm” (Church and Gandal

1992). But unlike the monopolistic view of the telephone, firms compete in these other

markets, and Katz and Shapiro developed a model to capture the dynamics of competition

in markets with positive consumption externalities. They conclude public policy would

have to consider both protecting firms’ technological innovations while ensuring healthy

competition between firms. Societal pareto optimality must take both static efficiency

(improving existing products) and dynamic efficiency (developing new products) under

consideration (Ghemawat and Costa 1993). Similarly, policymakers needed to consider

“costs of compatibility” (439) and adaptability to protect the firm’s intellectual property

without stifling the benefits of positive network externalities for consumers.37

37
Perhaps an overly simplistic example of this can be seen with the popularity of Apple’s iPhone. They are
allowed to change the kind of charger used in newer models of their phones, despite some cost of
compatibility/adaptability to the consumer. However, Apple’s entitlement to ownership of several design

30
 Their work in this field expanded well beyond their initial model. Katz and

Shapiro led a symposium for studies of network effects, or the broader economics

surrounding systems where component parts are complementary and boost value when

combined. Scholars of network effects found market competition between such systems

was different than with individual products in three important ways (Katz and Shapiro

1994). First, expectations really matter; and studying expectations in the context of

network effects opens new opportunities to examine the consumer’s ability to make

rational decisions in the face of inadequate or asymmetric information. Consumers’

willingness to pay for a network effect product is not just based on its immediate utility,

but an expectation of what might develop around it (i.e., the hardware-software

paradigm) and who else may buy it in the future. Similarly, coordination matters. If the

internet is the software which makes the hardware of a computer more valuable, much of

that potential value is tied to expectations that others will collaborate, share ideas, and

boost collective human capital. Finally, compatibility is an issue where many scholars

expanded upon Katz and Shapiro’s (1985) earlier work summarized above. How do

consumers evaluate the cost of technology adoption, or choose between two rival

incompatible systems (Katz and Shapiro 1994)? They found that imperfect competition,

inadequate/asymmetric information, and issues with compatibility/coordination result in

some market inefficiencies where “it is theoretically possible for government intervention

to improve market performance” (112) as not all network effects are necessarily positive

network externalities.38 Incumbent firms benefit from network effects, naturally seek to

elements of smartphones has been contested in court for decades and several antitrust suits continue for the
country’s largest corporation.
38
Katz and Shapiro ultimately admitted they were far away “from having a general theory of when
government intervention is preferable to the unregulated market outcome” (113).

31
box out potential rivals and also possess certain rights in protecting their intellectual

property.

1.4.2 Network Governance Roots in Economics

As the analysis of network effects expanded beyond communications systems,

economists considered the roles social dynamics play in firms. Though commonly

associated with public management today, ‘network governance’ originated as the study

of “network forms of organization” (Powell 1990, 295) among business economics

scholars in the 1990s. They sought to distinguish behavior within and between firms

(Ring and de Ven 1992; Larson 1992; Kreiner and Schultz 1993; Jones et al. 1997) from

a dichotomous view of ‘market’ and ‘hierarchical’ modes of organization which

previously dominated the field of economics (Richardson 1972). Coase (1937) and Simon

(1962; 1985) provided early inspiration for economists to consider firms separate from

their component parts. Firms form to limit transaction costs independent persons would

face in the absence of cooperation (Coase 1937) and maximize different individual

competencies (Simon 1962). But Simon (1985) implored the field to expand studies of

economic cooperation by considering a “view of the nature of the human beings whose

behavior we are studying” as “fundamental in setting… and informing our research” (77).

Such studies in the 1980s and 90s were dubbed the interdisciplinary field of “new

institutional economics” (NIE) (Williamson 1979; 1998).39

NIE birthed two concepts critical to understanding why firms work as a method of

organization: transaction cost economics (TCE) and embeddedness. Interfirm trust

dynamics play a role in each. The study of transaction costs was not new to the field, but

39
In an essay on transaction cost economics, Williamson (1979) first mentioned “new institutional
economics” in 1979, but expounded on the origins and development of NIE as a wide movement in
economics in 1998 (Williamson 1998).

32
Oliver Williamson was the first to define (1979) and advocate for TCE as a method of

studying organizations with transaction costs as the basic unit of analysis (Williamson

1981; 1986). His theory expanded upon the Coase Theorem (1937) in suggesting that

firms possess advantages over markets in “harmonizing bilateral exchange” (Williamson

1981, 559) and the optimal organizational form should seek to minimize transaction

costs.40 By joining individuals together in pursuit of a common goal, firms may reduce

incentives for opportunism (Provan and Gassenheimer 1994) and try to replace it with

interfirm trust instead (Noteboom 1996). Williamson (1998, 2000) distinguishes between

kinds of transactions requiring different forms of governance in TCE literature. Basic

governance structures suffice for “ideal” transactions in law and economics (Williamson

1998). Ideal transactions utilize general purpose technologies and require no safeguards

between parties whose identities are irrelevant (Macneil 1978). As transactions utilizing

special purpose technology increase in their complexity, more safeguards are required.

Contractual safeguards leverage penalties built into contract language to deter contractual

breaches. Williamson refers to this as a “hybrid” form of organization. Other transactions

are so complex they require organization “under unified ownership within hierarchy,”

(Williamson 1998, 38) better known as firm organization.

TCE was widely considered the branch of NIE concerned with firm governance

and predictive behavior (Williamson 1998), but Jones et al. (1997) were among the first

to incorporate both TCE and social network theory into a framework for identifying when

and how network governance works (913). TCE logic informs when network governance

may emerge: when problems are complex, requiring adaptation, coordination, and

safeguarding exchanges more efficiently; and when other modes of organizing (market

40
TCE is critical to understanding the economic benefits of vertical integration (Levy 1985).

33
and hierarchical) are at a competitive disadvantage (917). A network governance

structure can reduce the cost of trust in transactions by bringing transactions within the

firm. Entire industries revolve around profiting off a lack of trust between parties (e.g.,

contract law) and reducing the cost of trust is a key component of TCE literature

(Williamson 1975; Chiles and McMackin 1996; McMackin et al. 2021).

Still, trust issues exist within firms as well (Mellinger 1956). Participative

management styles and democratic organizations were found to increase trust among firm

operatives in non-managerial positions (Savery 1982) and embeddedness emerged in the

1990s as the social mechanism by which intrafirm trust could be built. Embeddedness

stems from the idea that transactions have a human, relational component (Granovetter

1985) and that repeated positive exchanges generate trust (Buskens 1998). Jones et al.

(1997) saw embeddedness as the connective tissue between social network theory and

network governance. Unlike in one-on-one relationships, structural embeddedness is

defined by how many mutual contracts (“third” parties) are linked indirectly. The level of

structural embeddedness is a “function of how many participants interact with one

another, how likely future interactions are among participants, and how likely

participants are to talk about these interactions” (924). This incentivizes the diffusion of

information (potentially eliminating information asymmetries), enhances coordination

and safeguards exchanges within the network. Even something like “negative gossip” can

serve as an accountability check between members of a network. Embeddedness studies

considered interfirm patterns of social behavior and the economic outcomes that result

(Granovetter 1985; Williamson 1994).

34
Table 1.2. Economic Network Theory and DAO Concepts
Foundations Economic Concept DAO Concept Public Policy Implications
Network Effects: Competition concerns; encourage positive
Demand Externality (Positive) externalities vs. discourage natural monopolistic
Communications Network
(Oren and Smith 1981) Value co-creation (Yang 2021) tendency
Theory:
Capacity Limits/congestion (Negative) Digital platform governance tradeoffs
Typology (Baran 1964)
(Katz and Shapiro 1985; Liebowitz and (McIntyre 2017; Chen and Patel 2021) intergenerational rivalry, compatibility (Katz
Externalities and Pricing (Squire
Margolis 1994) Blockchain Trilemma and Shapiro 1992; Farrell and Saloner 1986)
1973; Littlechild 1975)
Positive Consumption Externalities (Buterin 2017; Abadi and Brunnermeier
Value increase with new subscribers
(Katz and Shapiro 1985) 2018) users value shared responsibility and
(Artle and Averous 1975)
hardware-software paradgm (Church and ownership in decentralized ecosystems (Yang
Gandal 1992) 2021); public admin. implications
transaction transparency; public blockchain
Distributed Ledger Technology transaction broadcasting
(Swanson 2014; Davidson et al. 2019; Sims
Transaction Cost Economics 2019) semantically-defined contract advantage;
Theory/Nature of the Firm
(Williamson 1975; 1981; 1998) Transparency; Information Diffusion smart contract inflexibility may induce transaction
(Coase 1937)
Embeddedness (Nakamoto 2008) costs; DAO use case limitations
Complex hierarchical systems (Simon
(Granovetter 1985; 1992; Williamson 1994) Blockchain (Sklaroff 2017; Meunier and Zhao 2019; Murray
1962)
Embeddedness in Network Effects (Haber and Stornetta 1991) et al. 2021)
Human psychology in economics
(Uzzi 1996; 1997; Dnyawali and Madhavan DAC/DAO "bootstrapping"
(Simon 1985)
2001; Simsek et al. 2003) (Larimer 2013; Buterin 2013; 2014) minimize cost of trust in traditional finance
"cost of networking" (Catalini and Gans (Chiles and Macklin 1996; Casey et al. 2018)
2016)
information asymmetries for DAO participants
smart contracts (Chohan 2017; 2022;
Network Governance (Jones et al. 1997) Singh and Kim 2019; DeFillipi and Hassan
semantic gaps (Wang et al. 2019)
Macroculture (Camerer & Verpsalainen 2018; Wright 2021)
New Institutional Economics
1988)
(NIE): TCE, Embeddedness practical governance issues; lack of flexibility in
opportunism (Provan and Gassenheimer consensus rules (Dwivedi et al. 2021)
DAO gov. (Dupont 2017)
1994; Noteboom 1996)
open source software collaboration

1.4.3 TCE, Structural Embeddedness and Network Effects in the DAO Framework

The previous section of this paper poses trust as a main factor in DAO network

design – increasing network decentralization/distribution decreases vulnerability to a

compromised central authority. In economics, the idea that individuals might seek their

own self-interest while obfuscating the truth is the assumption of opportunism

(Williamson 1993). The psychology of trust for economic agents (Ho 2021) and

determining the transaction costs of mitigating trust-related concerns (Pratten 1997) is

essential to economics. Public blockchain-based DAOs seek to mitigate this cost of trust

by relying on a new kind of transparent, distributed ledger to verify ownership and past

transactions without the need for the type of centralized authority which makes

communications networks vulnerable. This demonstrates a novel shift in the concept of

how ledgers have worked historically (Davidson et al. 2016).

35
 In an op-ed on distributed ledgers and blockchain technology, a group of

prominent regulators and digital currency educators including Gary Gensler, Chair of the

Securities and Exchange Commission, said “We believe this technology could reduce the

ingrained ‘cost of trust’ that currently adds friction to commerce and enriches trust-

intermediating gatekeepers across the economy” (Narula et al. 2018). But they questioned

the long-term fate and value proposition of decentralized systems. Catalini and Gans

(2016) contend the true economic innovation in blockchain technology, DAOs, and

cryptocurrency lies in the shift away from centralization. They showed how several

general-purpose technologies have enabled a consistent reduction in the “cost of

verification,” as embedding incentives and governance rules into protocol reduce the

“cost of networking,” or the launching, operating, and scaling an economic network

(Catalini and Gans 2016). Still, the field lacks empirical studies comparing the

transaction and administrative costs of DAOs to that of hierarchical organizations

performing the same functions. Permissionless networks without centralized control and

self-contained incentive systems do not operate without costs and fees. There is

tremendous value to be gained from exploring where human action and centralization

outperforms hard-wired autonomy in decentralized systems.

The substitution of code for the human element of organizational power and

process is the central difference between DAOs and firms relying on network

governance. In offering “A General Theory of Network Governance,” Jones et al. (1997)

discussed “coordination characterized by informal social systems rather than by

bureaucratic structures within firms and formal contractual relationships between them”

(911). Relationships are often informal and “based on implicit and open-ended contracts”

36
(914) and eventually lead to a “macroculture" of shared values and knowledge

(Abrahamson & Fombrun 1992). This macroculture “enhances coordination among

autonomous parties” (Jones et al. 1997, 930) who tacitly understand the unwritten rules

which benefit the organization (Camerer & Vepsalainen 1988; Williamson 1991).

Notably, in their definition of network governance, Jones et al. (1997) described

firms as “autonomous” and adaptable, just as DAOs strive to be. But the major difference

between DAO and network governance lies in that DAOs effectively try to formally

embed what is informal in network governance using smart contracts. When “code is

law” (lex cryptographia) and the code is vulnerable, DAO members protected by

anonymity and unmotivated by organizational goals take advantage with no social

repercussions, as seen in failure of TheDAO. In network governance, macroculture allows

members of a firm to respond with “appropriate actions under unspecified contingencies”

(Camerer & Verpsalainen 1988), but when “code is law,” the potential exists for

“semantic gaps” (Wang et al. 2019, 876) between the code written in smart contracts and

intended organizational rules. Here, DAO governance suffers from a lack of flexibility

(Wang et al. 2019) or “practical governance” (DuPont 2017) relative to network

governance.

This lack of flexibility plays into the transaction cost economics of DAOs. Recall

that TCE works along a continuum of contractual complexity (Williamson 1998). DAOs

smart contracts can govern both simple transactions (e.g., “A” send value to “B”) and

complex ones (e.g., ownership rights) using special purpose technology (e.g., blockchain,

distributed ledgers, cryptography). DAOs also utilize various incentive structures to deter

bad actors from violating consensus rules rather than relying on unified ownership. For

37
example, Bitcoin miners who attempt to add an invalid block to the chain risk receiving

no block reward for the work (energy) expended. Thus, the TCE at work in DAO

governance look like Williamson’s description of hybrid modes of organizing

transactions – distinct from market and firm modes of organization.

Just as economists contend firms can reduce opportunism through embeddedness,

DAOs attempt to do the same through the public transparency and cryptographic

enforcement of their distributed ledgers (Swanson 2015; Davidson et al. 2019; Sims

2019). In fact, Catalini and Gans (2016) claim DAOs provide lower authentication costs

and reduce opportunism relative to traditional conceptions of the firm (Williamson

1981).41 But others argue that smart contract inflexibility creates transaction costs relative

to traditional, semantically-defined contracts (Sklaroff 2017; Murray et al. 2021). For this

reason, Meunier and Zhao-Meunier (2019) specify simple, natively digital transactions as

the best use case for DAOs seeking to avoid the need for a trusted third party in the

process.

Collaboration plays a role in strengthening DAO networks but is fundamentally

different than the embeddedness at work in traditional conceptions of the firm. Most

DAO transactions occur anonymously, so incorporating embeddedness into the TCE

framework (Jones et al. 1997) does not apply in the context of a DAO. Granovetter

(1992) referred to both relational and structural embeddedness. Relational embeddedness

is “the degree to which exchange parties consider one another’s needs and goals” (Jones

et al. 1997, 922) and the behaviors they exhibit as a result (e.g., information sharing)

(Uzzi 1996). Blockchain and distributed ledger technologies are based on information

41
Again, empirical studies comparing the transaction and administrative costs of DAOs and firms are
needed to substantiate these claims.

38
diffusion through transaction transparency, but the impacts of what limited social

interactions occur between DAO participants is unknown. DAO message boards and

instant messaging social platforms (e.g., Discord, Reddit) certainly provide platforms for

the sharing of ideas and open-source software.42 However, consensus rules written into

core software (e.g., proof-of-work, proof-of-stake) are what tie DAO network

stakeholders together by disincentivizing any attempt to add invalid transactions to the

blockchain. Whether relational embeddedness intrinsically motivates participants to

promote DAO goals requires further examination.

Recall that structural embeddedness is the extent to which two parties have

mutual contacts – and share information about those mutual contacts. Structural

embeddedness can be difficult to operationalize and measure empirically in network

governance (Moody and White 2003), but information diffusion and transparency are

core to the blockchain and distributed ledger aspects of any DAO (Nakamoto 2008;

Swanson 2014; Pilkington 2015; Davidson et al. 2019).43 In this sense, the digital aspect

of DAO governance is quite literally structurally embedded into its code while the human

aspect is more akin to whatever relational embeddedness results from discourse between

network participants.

DAOs benefit from the same demand externalities seen in communications

networks (Oren and Smith 1981). Whether designed to exchange value (e.g.,

cryptocurrency), pool capital (e.g., The LAO) or support online gaming (e.g.,

42
Returning to an earlier example, Ethereum encourages R&D discussions, publishing research and even
runs a “Core Developer Apprenticeship Program”
43
Distributed ledger technology (DLT) refers to the system by which information and/or transactions are
recorded across geographic space simultaneously. Public blockchains use DLTs and make all information
contained them within publicly available – serving as a sort of consensus historical record.

39
GameDAO),44 DAOs get better as more users are added to the network until reaching

some theoretical critical mass. In a study of technology adoption where network

externalities are present, Katz and Shapiro (1992) raised the potential for issues of

intergenerational rivalry when “an older technology with an installed base competes

against a newer technology lacking such a base” (57). Policies involving licensing

contracts and intellectual property are designed to promote intergenerational

compatibility, so the market is not biased for or against certain products and technologies

(Farrell and Saloner 1986). Models exist for determining whether existing incentives “to

adopt a new technology are socially excessive or insufficient” (Katz and Shapiro 1992,

56) (Farrell and Saloner 1986), but no such models and studies exist specific to DAO

technology or cryptocurrencies. The highly technical nature of DAO digital governance

may result in significantly different rates of financial technological adoption across age

groups due to digital proficiency gaps.

Existing research touts the advantages decentralized governance enjoys over more

centralized platforms thanks to network effects. Chen et al. (2021) find sharing

responsibilities, rights and control with participants causes them to act in the interests of

the overall network and attracts more participants. Yang (2021) adopts a view of DAOs

as decentralized ecosystems with different layers and subsystems. Motivations for

participation in different layers or subsystems of the network may vary, but they each

engage in “value co-creation activities [which] generate network effects” (55)

nonetheless. Cryptocurrency miners, investors, and users, have different motivations

(short-term, long-term profits, and value exchange respectively) but each new miner,

44
The LAO is a venture capital DAO designed to be compliant with U.S. law (similar to crowdfunding).
GameDAO provides a platform for users to play in games designed by others or design their own.

40
investor, and user added serves to push the network towards the benefits of further

distribution.

Concerns about consumer expectations and information asymmetries (Katz and

Shapiro 1994) in DAOs abound. The degree to which regulators should try to protect

consumers from themselves – particularly when DAOs involve the exchange of fiat

currency for tokens – is up for debate. But what is clear is that few people possess the

requisite knowledge to read code and comprehend the smart contracts running these

organizations. Competition presents another public policy dilemma. Since further

decentralization/distribution benefits network security, new additions boost DAO value

proposition. Policymakers must decide whether to encourage positive externalities or

discourage the natural monopolistic position of the network. Lack of recognized legal

status and DAO ownership play a confounding role amidst antitrust concerns (DeFillippi

and Wright 2018). Developers create inherently open-source software in the public

domain – unlike in other markets, there is nothing proprietary about DAO code.

Conversely, this also allows for anyone to create competing DAOs at any time.

However, network effects have natural negative externalities which may mediate

such policy concerns as well. Capacity limits may result in crowding and congestion

within the network as additional participants are added (Katz and Shapiro 1985;

Liebowitz and Margolis 1994). There is considerable debate as to whether blockchain-

based systems must also reach a saturation point where additional user-members reduce

their value proposition.

41
 The advent of blockchain-based systems leads to theoretical debates about a

“Blockchain Trilemma.”45 Buterin (2017) claims blockchains can possess only two of

three properties: decentralization, scalability, and security. Critics of cryptocurrencies

point to their scalability problem (Croman et al. 2016). Because cryptocurrencies operate

on decentralized networks and exchanges of value require high security, their efficiency

in transaction processing pales in comparison to more traditional digital payment

methods (i.e., credit cards).46 Assuming the trilemma holds, any secure DAO must also

be limited in scalability. Thus, DAOs processing high amounts of data should reach some

capacity where they suffer the same negative externalities (i.e., congestion) as seen in

other networks (Katz and Shapiro 1985; Liebowitz and Margolis 1994) unless they

centralize or make some security concessions.

1.5 The Push For Decentralized Governance in Public Administration

Since the Minnowbrook Conference in 1968, the field of public administration

has been engaged in a near-constant state of critical self-examination. One topic of debate

is whether practitioners and scholars of public administration are too far removed from

those whom government is meant to serve. So far, this paper has explored network

theories and their derivatives to describe how, why, and when DAOs work and the

resulting public policy implications therein. This section explores why people find

decentralized systems attractive in the context of evolving perceptions of trust and

legitimacy in public administration. I find motivations to opt-in to DAO participation

45
Brewer’s (2000) “CAP” theorem stated that shared data systems could only possess two of three
properties simultaneously: consistency, availability, and tolerance to network partitions. 45 Distributed
databases would tradeoff between consistency and network partitions while forfeiting availability (Brewer
2000).45
46
Several studies explore how to solve scalability issues (Kim et al. 2018; Zhou et al. 2020) and even
suggest the Blockchain Trilemma is already obsolete due to new innovations in blockchain technology. I
discuss one such innovation later in the discussion about Bitcoin.

42
resemble desires for more participatory, representative, and decentralized provisions of

public services.

1.5.1 Polycentricity

With the help of Charles Tiebout, Vincent and Elinor Ostrom developed and

popularized the concept of polycentric governance in political economics from the 1960s

through the early 2000s. As economists developed theories of TCE, network effects, and

structural embeddedness from the perspective of firms competing in markets, early

political economy scholars developed governance theories through the lens of public

finance. Economists considered the merits of socialism (Mises 1922; Lange 1938) in the

wake of stark class divisions, economic depression, and a World War. Polanyi (1951)

first used the term ‘polycentricity’ to describe a system in which individuals possess

some autonomy in decision-making within a larger rules-based order, and their decisions

impact or “adjust” the decision-making calculus of other individuals (Carlisle and Gruby

2019).47 For Polanyi, socialists erred in thinking central planning could reach Pareto

efficiency in polycentric systems (Aligica and Tarko 2011).

The Ostroms theoretical development of polycentricity began with the

observation that metropolitan governments benefit from multiple independent (and often

uncoordinated) decision-making centers providing various goods and services (Ostrom et

al. 1961). Since metropolitan areas are home to a variety of stakeholders with different

needs, public goods are more efficiently produced and distributed “at different levels of

special aggregation” (Stephan et al. 2019, 21). These political units often compete with

one another and “enter into various contractual and cooperative undertakings or have

47
Polanyi saw analyzing polycentric tasks and problems economically in the aggregate as useful but using
aggregate economic ‘science’ to understand the decision-making causes and/or motivation behind
individual actions was presumptuous and ultimately dangerous to human liberty.

43
recourse to central mechanisms to resolve conflicts” (Ostrom et al. 1961, 831) that make

their patterns and behavior quite predictable. This theoretical work is supported by

empirical findings which show advantages of polycentric and self-governance systems in

metropolitan areas over more centralized local governments (Ishak 1972; Ostrom et al.

1973; Ostrom et al. 1973; Rogers and Lipsey 1974; Ostrom and Whitaker 1974; Ostrom

1976). Notably, in studies of police departments across 80 metropolitan areas, “large

centralized departments [never] outperformed smaller departments serving similar

neighborhoods” (Ostrom 2010, 644) and no evidence was found to support widely held

claims that polycentric policing approaches are less efficient.

In the Ostrom view, trust plays “the central role in coping with” and “overcoming

social dilemmas” (Ostrom 2010, 662) when perfectly rational individuals should expect

others to be self-interested (Rothstein 2005). Private citizens need not be trapped by

selfishness which precludes them from any ability to solve problems collectively without

a government presiding over the administration of maximum social welfare (Loomes and

Sugden 1986). Citing the failures of several highly centralized governments in preserving

common resources (e.g., climate, oceans), Dietz et al. (2003) touted the benefits of

“institutional variety,” (1910) or a mix of hierarchical, market, and community self-

governance approaches to avoid environmental degradation. Decentralizing control in

common-pool resource environments allows individuals to develop norms to specific

various ‘microsituational’ contexts (Crawford and Ostrom 2005). Boundedly rational

participants in these microsituations build trust that others will reciprocate and cooperate,

resulting in net benefits for all despite incomplete information regarding future events

(Poteete et al. 2010). Decentralized governance is complex, but not necessarily chaotic

44
(Andersson and Ostrom 2008) in the delivery of public goods and services. It serves as a

remedy for the otherwise helplessly trapped individual in the rational model (Ostrom

2010).

Technological changes and contemporary urban organization challenged

definitions and conceptions of polycentricity. The democratization of information and

ubiquity of internet access transformed communication, space, and time so that cities

with once easily defined borders now looked like functional metropolitan regions

(Castells 1996). As a result, urban-geographic polycentricity research in the 2000s

focused on the flow of people and information between centers rather than municipal

government or the physical structures of where people reside (Parr 2005; 2007; Hall and

Pain 2006; Hall 2009). Scholars questioned whether urban government was too narrow a

lens through which to view a phenomenon which could refer to any multimodal human

activity (Kloosterman and Musterd 2001). Others questioned the mechanisms by which

polycentricity worked, emphasizing the need for firm definitions for the functional

linkages between nodes and sub-centers (Green 2007; Vasansen 2012). For this subset of

researchers, trust is rarely mentioned as a mechanism for polycentric success. Like the

mechanisms at work in transaction cost minimization, increased connectivity and robust

transport infrastructure serve as remedies for the problems of geographic space and

incomplete information (Agarwal et al. 2012; Vasansen 2012).

1.5.2 Network Governance in Public Administration

Network governance studies captured the attention of a wide range of scholars

from various academic disciplines, particularly during the 1990s. Jones et al. (1997)

synthesized TCE and social networking theories (e.g., embeddedness) into an economic-

45
specific framework for network governance as sociologists declared the rise of a new

network society (Castells 1996; van Dijk 1999). Social networks used micro-electronics

to process information within the network, giving people access to a diverse set of

individualized networks (Wellman 2001) which would transform the diffusion of

information. O’Toole (1997) recognized the network concept taking hold in business,

nonprofit, and some governmental sectors and implored public administration to pursue

research focused on networks. He argued public administration needs to be a part of the

world it seeks to operate in and points out mismatches between the administrator and

networked world (e.g., conceptions of authority, outgroup influence, coordination

opportunities) (O’Toole 1997).

Provan and Milward (1995) were among the first to offer a theory of network

effectiveness in their comparative study of four community mental health delivery

systems. One primary finding is that “predominantly centralized” (25) networks

performed better than those which relied on stronger integration of decentralized

networks. However, in Provan’s most recent work on the topic of network stability, his

conclusions were modified slightly. Provan and Lemaire (2012) stated the limited

research conducted on network stability points to a “stability-flexibility” paradox where

“networks need to be relatively stable at their core, while maintaining flexibility,

especially at the periphery” (645).

Provan and Milward (2001) still viewed principal-agent theory as a useful lens

through which to examine network effectiveness. Whether someone is a principal, agent,

or client, the effectiveness of the network depends entirely upon the “level” of network

analysis (community, network, or organization/participant). Agranoff and McGuire

46
(2001) review relevant research about the intersection of network theory and the public

sector primarily conducted throughout the 1990s in pursuit of a better-defined subfield of

public network management and come to a different conclusion. The concept of network

management relies on trust between participants in achieving network success through

social capital (O’Toole 1995; Fountain 1998) and conceptions of accountability are often

ambiguous (O’Toole 1997). For Agranoff and McGuire, this diminishes the applicability

of principal-agent theory in network management:

… because in networks there is no obvious principal or agent, and no exigent

authority to steer the activities of the network in harmony with elected officials, the issue
of accountability is miscast. With no single authority, everyone is somewhat in charge,
thus everyone is somewhat responsible; all network participants appear to be
accountable, but none is absolutely accountable. (Agranoff and McGuire 2001, 310)

Similar to economic studies of network governance, Agranoff and McGuire

(2001) find social capital, shared learning, and negotiation are the ingredients which

made up the concept of groupware: the synergistic effects associated with group tasks

(Agranoff and McGuire 2001). Public administration scholars differ on the role trust

plays in building social capital and the power it holds in network governance. Clegg and

Hardy (1996) referred to a “façade of trust,” (679) where “power over” remains just as

powerful in policy networks as “power to.” Others argued trust is required in any public

network – even centralized ones – due to the nature and fundamental importance of the

problems public networks try to solve (Moynihan 2009). Provan and Kenis (2007)

framed trust in a more nuanced light with their discussion of ‘trust density,’ contrasting

dyadic trust with the kind of “dense web of trust-based ties” (238) which enables shared

governance within networks. They argued network governance can still be effective in

47
the presence of low-density trust provided participants believe collaboration to be

beneficial.

1.5.3 DAOs and Public Administration Network Theory

DAOs use polycentric systems to govern the distribution of community-pool

resources (Howell et al. 2019; Tan et al. 2022). Well-designed DAOs take the

motivations, roles, and responsibilities of various network actors and stakeholders into

account in their digital governance structure (Stephan et al. 2019). Hierarchical

governments appear less suited to solve the increasingly complex problems of a diverse

polity (Sorensen 2002; Goldsmith and Eggers 2004; Eggers and O’Leary 2009; Sorensen

and Torfing 2015). Just as technological advances changed how people and information

move across geographic space and created new functional metropolitan sub-regions

(Castells 1996), it now enables the borderless and permissionless transfer of information

and/or value in DAOs. Still, DAOs suffer constant failures in the trial and error of this

new form of organization just as Sorensen and Torfing (2015) saw “inherent risks and

frequent failures of public innovation projects” (146).

While decentralizing the provision of public goods may have benefits, public

administration literature is replete with cautions about removing government from

governance. Fung and Wright (2003) warned explicitly against radical “demands for

autonomous decentralization” (21) where simply empowering citizens to participate in

their government might alleviate the tensions between the governed and their

government. Sorensen and Torfing (2005) found network self-governance fails without

some form of regulating ‘meta-governance,’ but the push for inclusion in democratic

processes is natural and healthy. Like Crawford and Ostrom (2005), Sorensen and

48
Torfing (2005) posed meta-governance as setting the conditions (i.e., incentives, identity

development, shared values) for trust building and reinforcing norms. Pure self-regulating

governance networks like DAOs could “lead to the atomization and fragmentation of

societal governance” (224) but promoting meta-governance principles could provide

institutional structure for incorporating the best parts of network governance into a new

kind of democratic network governance.

For public administration scholars, the push for decentralized self-governance is

an indication of “a gradual problematization of the traditional focus on the sovereign

political institutions that allegedly govern society top-down” (Sorensen and Torfing

2005, 200). But decentralizing government is radically different than replacing its

functions entirely with automation. Early DAO enthusiasts sought to eliminate the need

for government and highly institutionalized organizations in the delivery of various

services (Larimer 2013). DAOs attempt to engrain all governance functions into a

technical system of peer-to-peer accountability. Meijer and Ubacht (2018) argue

blockchain technology “enables the technological institutionalization of values in

environments that are highly dependent on these values” (3). In the disintermediation of

trust, blockchain technology lowers the level of control any single actor or institution has

over a DAO’s processes. Trust lies in the fidelity of the transaction rather than in third

parties or other network participants (Meijer and Ubacht 2018).

Therefore, trust plays an important role in DAO formation, but in a radically

different sense than the way it is described in building social capital in network

governance (O’Toole 1995; Agranoff and McGuire 2001) or conceptions of meta-

governance (Sorensen and Torfing 2005). The aim of DAO governance is to use

49
technology to develop systems in which participants can be indifferent to intra-network

trust. “The DAO represents a new species of governance characterized by the alienation

of trust from the ownership and control of the organization” (Morrison et al. 2020, 12).

Where citizens crave top-down accountability from leadership in network governance

(Tummers and Knies, 2016), DAOs turn the democratic concept of ownership and

accountability on its head. DAO membership may constitute some level of equity in the

organization, but conceptions of accountability and ownership are nebulous by design.

DAOs, network governance, and the push for government decentralization share a

similar propensity for challenging traditional conceptions of trust and sovereignty in

public administration. Rhodes (1997) saw the rise of “self-organizing,” “autonomous”

networks as “a challenge to governability” with “important implications… for democratic

accountability” (667). Sorensen (2002) felt network governance presented specific

challenges to liberal democracy. She argued decentralizing political and administrative

authority away from the state towards local or self-governance could delegitimize the

internal sovereignty of the state. Network governance brings “a multi-layered system of

shared sovereignty” (696) and “highlights deficiencies in traditional theories of

democracy” (696). New questions emerge about the decision-making competence of “the

people” and how the sovereign citizen might engage in decision-making processes.

Sorensen’s questions about where sovereignty lies relative to “the people” echoes

a trend seen across public management and public administration scholarship at the turn

of the 21st century. Denhardt and Denhardt (2000) famously asked, “In our rush to steer,

are we forgetting who owns the boat?” (549) in reference to the analogy of how to best

row and steer government with a renewed focus on a more involved democratic polity.

50
McSwite (1997) re-examined the historical discourse around the Anti-Federalist spirit

and recasts the American origin story as one where colonists wanted a personal, heuristic

discourse about a government in which they were actively involved. Anti-Federalists

were fundamentally distrustful of centralized governance and opposed the creation of a

central bank. Bitcoin was born out of the Great Recession and a desire for a peer-to-peer

payment system without the need of third-party verification by a financial institution

(Nakamoto 2008).48 More faith is placed in “the people” or the member-nodes ability to

understand and take ownership of their own governance and responsibilities. As open

networks, DAOs only further complicate these questions of ownership, individual

sovereignty, and the role of the state in regulating peer-to-peer transactions.

Blockchain, DAO governance, and cryptocurrencies may foster financial

inclusion (Vincent and Evans 2019), censorship resistance and increased privacy

(Catalini and Gans 2019). But technological utopianism in American society historically

lacks practical solutions to social problems (Segal 1985). Atzori (2015) argued DAOs can

enable the very fragmentation Sorensen and Torfing (2005) warned about. Rather than

promoting trust and norm-building between participants in microsituational contexts

(Crawford and Ostrom 2005) over-decentralizing governance now risks having the

opposite effect. Society risks the “regression of human communities into a pre-political

condition” (Atzori 2015, 25) not unlike “Hobbesian deregulated landscapes” (Marden

2003, 90) with no concern for the public good.

1.6 Central Insights

A multidisciplinary review of network theory yields several insights regarding

DAO governance:

48
Bitcoin’s founding is examined in detail in the next section

51
1) DAOs vary in design but possess both a human and digital element. Digital decision-

making is ruled by the base DAO core software. But this code is designed and often

changed by various human stakeholders. Understanding the hybrid nature of each DAO –

where digital control stops and human control and/or influence begins – is critical to

crafting effective policy. Unilateral policies mandating changes to core features of a well-

geographically distributed DAO are likely to have a limited effect, as opposed to

influencing network stakeholder attitudes/opinions.

2) Networks use decentralization and automation to boost security against untrustworthy

participants to avoid single points of failure. DAOs often consist of various kinds of

stakeholders with varying degrees of power and influence over the network. In this sense,

there are varying degrees of decentralization between and within DAOs. While increased

network distribution among those with decision-making power may provide better

defense against bad actors, it requires broader consensus in changing core software. As a

result, we can conclude highly distributed networks may suffer from a lack of

adaptability (absent any automated adaptability built into base code). Additionally, the

ability to read and understand code and smart contract logic presents information

asymmetry issues.

3) Because increased distribution adds an element of security, DAOs benefit from the

positive externalities of network effects as seen in purely digital communications

networks. At some saturation point, we can expect capacity limits and congestion to cap

DAO scalability.

4) DAOs try to formally embed informal social systems found in network governance

using smart contracts (the ‘embeddedness’ concept literally embedded into code).

52
Distributed ledgers and blockchain can reduce the cost of trust in TCE. But they may also

suffer from a lack of flexibility and are better suited for uncomplicated tasks and

processes.

5) Trust is a key concept in both DAO and network governance. Public administration

has been frustrated by the question of how to develop effective and inclusive forms of

governance for years to build trust with citizens. DAOs seek to form systems in which

trust is placed in some form of distributed network of validators – placing faith in

algorithms over bureaucratic structure, centralized authority and/or human leadership.

DAO design choices can largely be seen as trust tradeoffs between human influence

(adaptability)/digital control and scalability/decentralization/security.

1.7 Applying Network Insights to Bitcoin

These insights can help analysts and policymakers better understand how DAOs

work in relation to nation-state governments. In this section, I apply the lessons drawn

from this review of network theory to Bitcoin to distill broad conclusions about DAO

governance into specific policy applications for the world’s original DAO and most

popular cryptocurrency. Nakamoto invented neither digital cash nor blockchain. In fact,

Bitcoin’s novelty comes from combining and applying several academic concepts listed

in Figure 1.3 to the transfer of value. Social science theories on decentralization and

network organization guide the incentive structure built into Bitcoin to keep various

human network participants honest, while blockchain technology, advances in

cryptography, and past attempts at creating non-state-controlled forms of electronic

money informed the creation of the digitally automated portion of Bitcoin’s hybrid

governance (1.7.1). Baran’s network typology can be applied to classify different aspects

53
of the Bitcoin network (1.7.2). I then demonstrate how network effects (1.7.3),

embeddedness and TCE (1.7.4) are at work in the Bitcoin network.

1.7.1 Hybrid Governance in the Bitcoin Network

The digital-automated portion of Bitcoin’s governance uses proof-of-work (PoW)

cryptography along a blockchain to prevent bad actors from counterfeiting transactions.49

Nakamoto’s white paper (2008) references and applies Haber and Stornetta’s (1991;

1993; 1997) work on using linked digital timestamping for document certification to form

the basis for Bitcoin’s blockchain. The idea for requiring computer effort to validate

transactions came from Hashcash, an idea for combatting junk mail (Dwork and Naor

1993; Back 1997; 2002). A digital stamp in the header of an email requiring computing

time and effort to obtain prior to sending would signal that the sender was unlikely to be

a spammer. Bitcoin combines these two ideas so that transactions are recorded on

timestamped blocks and PoW is required to solve for a block’s nonce (an arbitrary

number used only once) and earn the block reward. Changing transactions within a block

would require attackers to commit more computer power to re-do the work, and each

block is deterministic from the last. This combination of ideas distinguished Bitcoin from

previous attempts at electronic money which failed to solve the double-spend problem

(Figure 1.3).

49
A full and in-depth explanation of PoW cryptography, SHA-256 hashing algorithms etc. is outside the
scope of this essay but is summarized rather succinctly in the Bitcoin white paper (Nakamoto 2008).

54
 Figure 1.3 Academic and Technological Inspirations for Bitcoin (author)

There are several stakeholders within the human element of Bitcoin’s governance

(Table 1.1). Some individuals simply choose to hold Bitcoin as an investor or transact in

it. Miners conduct the PoW algorithm hashing to compete for block rewards and process

transactions in the process. Other network participants run independent nodes capable of

broadcasting and confirming the validity of other transactions. Each node holds the

distributed ledger’s history of transactions. They help secure the network by adhering to

55
the consensus rules; validating and blocks and transactions within blocks. rejecting

invalid transactions. Programmers can code and propose changes to the Bitcoin Core

software. These core developers submit bitcoin improvement protocols (BIPs) and review

the proposals of others. Miners signal support for BIPs by adding a certain digit visible in

blocks along the chain. An even smaller group operating on the software repository are

known as ‘maintainers’ with authorization authority to merge new code with Bitcoin

Core. Nodes then choose whether to update to new software depending on if they agree

with changes in the code as the final check on the system.50

From a public policy perspective, Bitcoin’s popularity and the mining incentives

built into Bitcoin’s core protocol are lucrative enough to motivate thousands of miners to

expend massive amounts of energy to mint new coins. Approximately 105 TWh of

electricity was expended to mine Bitcoin in 2021 (CBECI 2022), equal to roughly 2.6%

of total electricity consumption in the United States for the year (EIA 2022). This energy

consumption is a top concern for the environmentally conscious. But the PoW aspect of

Bitcoin’s governance is embedded into the digital-automated element of the network. It

cannot be changed without consensus from various network stakeholders as illustrated

above.

Furthermore, history tells us it is unlikely to change anytime soon. Ethereum, the

second largest cryptocurrency by market cap, recently switched from PoW to a less

energy-intensive consensus mechanism known as proof-of-stake (i.e., the “Ethereum

merge”), but we should not expect a similar push in the Bitcoin network. In 2017,

concerns about Bitcoin’s scalability and processing speed caused some to call for an

50
If nodes opt not to upgrade, the blockchain effectively splits into two systems operating in parallel. This
is called a “fork” and is covered in some limited detail with the discussion of Bitcoin Cash.

56
increase in block size (Bier 2021). On one side of the debate, originalists felt Bitcoin

should emphasize a high degree of security with low barriers to entry for miners and node

operators to serve as the best store of value. On the other, supporters of what would

become “Bitcoin Cash” felt larger block sizes posed negligible risks to network security

compared to the benefits of boosting its practicality as a medium of exchange. After no

agreement could be reached, dissenters “hard forked” the blockchain into Bitcoin Cash

(Bier 2021).

Bitcoin Cash is still active today, though the original Bitcoin is far more relevant

in terms of active users and market cap. Originalists won the “block wars” – a clear

triumph for those who valued maximum competition among miners and decentralized

governance over scalability. Bitcoiners have similar concerns about moving away from

PoW. Some argue Ethereum’s new proof-of-stake model centralizes power in the hands

of the largest miners (Koss 2022). LeClair and Rule (2022) take issue with reliance on

“social governance” to deter bad actors rather than the “economic incentives and real-

world physical constraints” found in PoW. While the Ethereum merge proves there is

some appetite in the cryptocurrency community for environmentally friendly changes to

consensus protocols, environmentalist groups have been unsuccessful thus far in gaining

similar traction in the Bitcoin network (Gkritsi 2022).

1.7.2 Bitcoin’s Network Typology: Decentralized or Distributed?

Miners organize into pools and are compensated based on how much

computational power they have contributed to trying to solve cryptographic problems

using a secure hash algorithm. For this reason, blocks are typically won by pools, not

individual miners. Additionally, the barrier to entry to mining is quite high. Mining is

57
expensive in terms of hardware and electricity costs. So, while individual miners may

resemble a distributed network, the advent of pools makes the overall mining network

look decentralized with certain stations possessing more power than others.51

Running a full node is relatively cheap and each node possesses equal power to

validate transactions.52 There are approximately 15,000 reachable nodes in the Bitcoin

network, with no more than 11% of nodes located in a single country (Bitnodes 2022).

Validating nodes mirror Baran’s (1964) depiction of a distributed network. While

programmers and core software maintainers represent are a much more centralized

network, the consensus required from a decentralized network of miners to signal support

for protocol changes followed by actual adoption of new protocol software by this highly

distributed network of nodes make effecting major changes to core code very difficult.

From an environmental perspective, a more fruitful policy approach might consider

discouraging certain mining practices and incentivizing others.

1.7.3 Bitcoin and Network Effects

1.7.3.1 Users

Historically, electronic money (e.g., e-cash, credit cards) product adoption

demonstrates positive demand externalities (i.e., network externalities) due to the utility

gains they enjoy from each user added to their networks (Van Hove 1999). The number

of Bitcoin users is hard to pin down since wallet addresses are anonymous and there is no

limit to how many addresses a single individual can have. But the number of wallet

51
Currently, no single mining pool controls more than 22% of total network hashrate. This is covered in
more detail in the second essay in this dissertation series. Because of fears of a 51% attack, historically
miners have left large mining pools as they approach 50% of Bitcoin mining power (Hajdarbegovic 2014).
52
Full node hardware costs between $300 and $400. It then consumes no more energy than a personal
computer would. Amazon’s AWS Marketplace estimates approximately $0.24/hour to run a Bitcoin full
node.

58
addresses and changes in the wealth distribution of the asset across those addresses can

give us an indication of whether the Bitcoin network is truly benefitting from demand

externalities (Figure 1.4). Over the last ten years, the number of overall active Bitcoin

addresses has steadily risen along with the proportion of low balance holders (<1.0 BTC).

Transactions between addresses indicate whether holders are using Bitcoin as a medium

of exchange. As of January 2023, the network processes roughly six times as many

Bitcoin transactions per second as it did in January 2013.

1.7.3.2 Lightning Network

The usage of Bitcoin as a payment system on the base layer is still a long way

away from all-time highs in December 2017 (Figure 1.5), but it may have something to

do with the advent of Bitcoin’s ‘layer 2’ protocol, better known as the ‘Lightning

Network.’ The Lightning Network was invented to solve Bitcoin’s scalability problem

and break the Blockchain Trilemma by establishing a series of peer-to-peer

micropayment channels between users to facilitate payments and unburden the main

blockchain (Poon and Dryja 2016).53 Because these transactions occur off-chain, reliable

data on exactly how many transactions occur is hard to approximate. One study estimates

over 120,000 payment channels opened between January 2018 and July 2019 (Lin et al.

2020), which would help explain the drop in visible, on-chain transactions since 2018.

53
A full explanation of the Lightning Network is outside the scope of this essay, but users effectively
transfer Bitcoin locked up on the base layer to Lightning wallets and conduct peer to peer transactions on
layer 2. They can close these two-way micropayment contracts and transfer their funds back to the base
layer whenever they choose. Since lightning network transactions occur between two known parties on
their own private channel, they are not broadcast to the entire network and settle nearly instantaneously
without the need for energy-intensive PoW protocol.

59
 Figure 1.4 Bitcoin Addresses by Balance (author)54

Figure 1.5 Bitcoin Transactions per Second (14-day moving average) (author)55

1.7.3.3 Miners

Bitcoin’s network hashrate, or the amount of computing power dedicated to

mining/securing the network, has steadily increased despite major downward asset price

movement in recent years (Figure 1.6). This signals some degree of bullishness among

miners even in the face of lower profits. High hashrate makes executing an attack on the

54
Data sourced from CoinMetrics
55
Data sourced from CoinMetrics

60
network very difficult and expensive to pull off, so additional mining power coming

online effectively adds network security and increases the asset’s fundamental value

proposition. Competition among miners drives innovation to develop the most efficient

hashing technology possible – a prime example of the “hardware-software paradigm”

(Church and Gandal 1992).

Figure 1.6 Bitcoin Hashrate (author)56

1.7.3.4 Adoption

Studies show such electronic money products can be slowed by a lack of

compatibility with vendors and widespread adoption by institutional players (Van Hove

1999). Just as in communications products, e-money can reach a critical mass where the

effects of positive network externalities plateau (Economides and Himmelberg 1995).

2021 was a significant year for institutional Bitcoin adoption. 14 publicly traded

companies ended the year with over 1000 BTC on their balance sheet (Radmilac 2022),

including Microstrategy and Tesla. Liberty Mutual Insurance (NYDIG 2021) and Fidelity

Investments (Tellez 2021) invested in Bitcoin mining and technology companies. Visa

56
Data sourced from CoinMetrics

61
rolled out several cryptocurrency-related products and reported $2.5 billion in payments

by customers with “crypto-linked cards” in the first quarter of 2022 (Holland 2022).

Still, there is a big difference between customers using such cards to pay U.S.

dollars for products at a vendor to get cash back in Bitcoin and paying the vendor in

Bitcoin. More research is needed to show how the rate of institutional adoption of

Bitcoin-related products compares to the adoption rate of similar technologies and

electronic money products. From the standpoint of individual users and miners, Bitcoin’s

adoption rate appears to be growing despite a massive drop in market price. Despite

several hard forks, competing cryptocurrencies, and some policies aimed at curtailing

Bitcoin mining and adoption (e.g., China’s cryptocurrency ban), Bitcoin appears to be

benefitting from the positive externalities of network effects in several ways. Among

U.S. adults, major discrepancies for cryptocurrency adoption exist across age and gender

(Faverio and Massarat 2022).57 Assuming adoption continues at the same pace, social

inefficiencies (i.e., the differences between marginal social and private costs and benefits)

are sure to arise with Bitcoin and any PoW-based cryptocurrency due to the negative

externalities associated with energy-intensive mining.

1.7.4 Embeddedness and TCE Within the Bitcoin Network

As with any DAO, the cost of trust between parties in a Bitcoin transaction is not

related to embeddedness in the traditional social network theory sense. Bitcoiners and

other crypto enthusiasts are a very active subculture on online forums and social media

platforms. Empirically based research examining who typically uses and/or supports

Bitcoin is lacking, but one study finds higher rates of Bitcoin use in nation-states with

57
Surprisingly, cryptocurrency adoption is rather consistent across income groups. Whites are less likely to
invest in trade, or use a cryptocurrency than Blacks, Hispanics, and Asians (Faverio and Massarat 2022).

62
high “country individualism” scores (Foley et al. 2021). Bitcoin is assumed to be a

libertarian idea, and Nakamoto (2008) said “It’s very attractive to the libertarian

viewpoint.” But in the United States, Bitcoin has broad support and opposition across the

political aisle.58 Critics lament a culture of “Bitcoin maximalism” among many online

supporters embracing “aggression, hostility and toxicity” (Dylan-Ennis 2022) which

stems from the aforementioned “block wars.” But data supporting a definitive Bitcoin

cultural significance or a prototypical “Bitcoiner” beyond anecdotal evidence (Yelowitz

and Wilson 2015) are scarce.

The transaction cost economics of Bitcoin are based on the use of distributed

ledger technology (DLT) and blockchain to eliminate the trusted intermediary and reduce

transaction settlement costs. Blockchain serves as “a commonly agreed record of truth to

multiple, mutually distrusting participants in an economic system” (Casey et al. 2018, 9).

As long as transaction fees to network participants stay low, blockchain-based DAOs like

Bitcoin simply use transparency and automated processes to honestly record and

complete transactions.

Figure 1.7 Bitcoin Median Tx Size vs. Tx Fees (14-day moving average) (author)59
58
For example, the most comprehensive piece of cryptocurrency-related legislation to date (S.4356) is co-
sponsored by Democrat Kirsten Gillibrand and Republican Cynthia Lummis.
59
Data sourced from CoinMetrics

63
 Bitcoin’s base layer is particularly appealing for settling very large transactions

and the legacy payment system needs a 21st century upgrade. Since the Federal Reserve

started using telegraph wires to transfer funds between banks, automated clearinghouse

(ACH) services developed in the 1980s are the most significant, broadly applied

technological innovation in e-payment infrastructure (Powell 2021).60 Bitcoin proponents

point out how relatively cheap it is to transfer large sums of money on its blockchain

protocol (Figure 1.7). One analyst conducted an on-chain settlement efficiency analysis

of the 7-day moving average of volume of Bitcoin transacted fees charged on the

protocol’s base layer and found that an average transaction value of $95,142 and a

median transaction value of $751 was transferred for every $1 of fees in November 2021

(LeClair 2021). Domestic wire transfer fees within the U.S. average roughly

$20/transaction and international fees range from $40 and $65/transaction.

Bitcoin was the first financial tool to leverage this technology, but DLT and

blockchain are by no means exclusive to Bitcoin now. Policymakers must consider ways

to reduce the cost of trust by simply leveraging this technology in other forms. For major

financial institutions and large corporations, cryptocurrencies and central bank digital

currencies (CBDCs) offer tremendous promise for eliminating market inefficiencies in

large transactions/transfers, specifically for cross-border payments. Cross-border

payments face high costs, low speed, limited access, and insufficient transparency (FSB

2021). A Republican working group for the House Financial Services Committee cited

“addressing inefficiencies in the U.S. payment system” specifically among cross-border

payments as its first principle for CBDC development in the United States (Financial

60
However, in 2019 the Federal Reserve announced the building of the FedNow service (in progress) to
enable instant payments between banks and customers 24/7 (Powell 2021).

64
Services Committee Republicans 2021). The private sector has a vested interest in

eliminating fees and slow speeds associated with large cross-border payments for

fiat/reserve currencies. In 2020, JP Morgan launched Onyx, “a blockchain network

enabling the exchange of value for various types of digital assets” (JP Morgan 2021) and

conducted a simulated experiment in June 2021, using a common multi-CBDC network

to facilitate cross-border payments between the Monetary Authority of Singapore

(denominated in Singapore Dollars CBDC) and Banque de France (denominated in Euro

CBDC). They found that completely different cloud infrastructures and systems could

become interoperable on the blockchain, increased visibility for both central banks could

be achieved, and “know your client” (KYC) burdens could be minimized (Onyx JP

Morgan 2021).

1.8 Conclusion: The Role of Trust in Bitcoin

With the creation of Bitcoin, Nakamoto combined principles of network theories

across several academic disciplines to create a new form of organizational governance

now known as the decentralized autonomous organization. DAOs use hybrid governance:

human stakeholders with various interests and motivations are bound together by smart

contracts written into core software governing several aspects of organizational control

and operation. These organizations are best viewed as a series of networks made up of

humans with varying levels of power and influence over changes to the digital

governance of the organization. Distribution of power and authority away from individual

human stakeholders in DAO networks is critical to their security but can cause a level of

organizational inflexibility which leads some researchers to advocate for a rather limited

DAO use case.

65
 Writing in the wake of the Great Recession, Nakamoto’s (2008) white paper

specifically cites frustrations with how “the entire money system depends” on a “trusted

central authority” (2). They included a note in the first block of Bitcoin’s chain:

“Chancellor on brink of second bailout for banks,” a London Times headline about the

state of centralized economic planning in the wake of the Great Recession, and uploaded

the first source code for Bitcoin six days later (Champagne 2014). Trust is not just

operative in distributed computer system security or transaction cost economics – it is a

central motivator behind the very invention of Bitcoin. After Enron and Bernie Madoff, a

generation learns that “honesty comes at a price,” just as “the need for trust and

middlemen allows behemoths such as Google, Facebook, and Amazon to turn economies

of scale and network effects into de facto monopolies” (Casey and Vigna 2018). There

are several public policy implications associated with this unique form of DAO

governance – especially when applied to storing and exchanging value in the form of

cryptocurrency. But the push to use systems which disintermediate governments and

institutions from the exchange of information and value raises questions about

legitimacy, individual sovereignty, and trust in public administration.

66
 Essay 2

China’s Crypto Ban: How Decentralized Networks React to Hostile Policy Interventions

Abstract:

Beginning in May 2021, the People’s Bank of China enacted a series of policies

rendering cryptocurrency transactions and mining illegal, citing their role in enabling

illicit finance and their impact on the environment (2.2). The ban was the largest

exogenous public policy shock to the Bitcoin network to date, setting up a natural

experiment (2.4). This essay examines the ban’s impact on the digital and human

elements of the Bitcoin network. It establishes several quantitative measures of

decentralized cryptocurrency network conditions and compares these metrics before and

after the intervention (2.5). It also considers the decision-making calculus of Bitcoin

miners displaced by the ban (2.6). I find little evidence of any long-term impacts to the

Bitcoin network after the ban (2.7). Additionally, much of the mining activity lost in

China relocated to Texas primarily because of the availability of cheap energy, but new

regulatory and policy considerations factored into miners’ decision-making processes as

well. Interestingly, new evidence suggests several miners are still operating in China

undetected. Bitcoin’s quick rebound calls into question the effectiveness of individual

nation-state bans on curbing cryptocurrency use and energy consumption. More broadly,

this case study demonstrates how well-designed decentralized autonomous organizations

adapt to hostile policy interventions.

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2.1 Introduction

Bitcoin began in 2008 as the curious experiment of “cypherpunks” who sought to

develop a natively digital system of value exchange without the need for a trusted third

party. It became the catalyst for the birth of a broader movement towards systems of

decentralized finance (DeFi). Less than 14 years after the invention of Bitcoin, the global

cryptocurrency market capitalization eclipsed $2 trillion, up from $600 billion the year

prior.61 Cryptocurrencies like Bitcoin were designed to run as decentralized autonomous

organizations (DAOs) without government involvement or permission. But this does not

make DAOs fundamentally immune to nation-state intervention. The field of public

policy lacks studies examining the impacts of exogenous policy shocks to organizations

and/or assets which run on decentralized network consensus mechanisms (e.g., DAOs,

public blockchain-based cryptocurrencies). These organizations attempt to replace the

hierarchical, centralized structure of traditional institutions with an open network; using

smart contracts embedded into code to govern the allocation of resources, assign roles

and responsibilities, and automate processes.62

This study asks, How did the Bitcoin network change after China’s

cryptocurrency mining ban? to fill that gap.63 After providing some background

information (2.2), this essay establishes, defines, and explains the significance of key

metrics of cryptocurrency asset viability (2.3). On-chain data from the Bitcoin

blockchain, cryptocurrency exchange pricing data, and IP address-based geolocational

61
According to Coinmarketcap.com
62
For a comprehensive definition and overview of DAO governance, see Essay 1 in this dissertation series.
63
In May 2021, the People’s Bank of China (PBOC) prohibited financial institutions from conducting
cryptocurrency transactions. The PBOC then banned the mining of cryptocurrency specifically in June.
Finally, all forms of cryptocurrency exchange were banned in September 2021 (PBOC 2021). This study
focuses on the cryptocurrency mining aspect of the ban, specifically.

68
data speak to network security and decentralization, perceptions of Bitcoin’s value as an

asset, and its utility as a medium of exchange (2.4). I then use statistical analyses to

compare those metrics before and after the policy intervention to describe the ex-ante and

ex-post states of the Bitcoin network and explore whether ex-post changes correlate with

the timing of China’s mining ban (2.5). The ban serves as an opportunity to see how the

digital-automated aspects of Bitcoin’s core software compensate and/or adapt to a sudden

loss of computational power. The actions of cryptocurrency miners displaced from China

provide insights into the decision-making calculus of the network’s human element

relative to host nation-state cryptocurrency policy disposition (2.6). Finally, I draw

lessons learned for other governments considering various policy approaches to

regulating cryptocurrency mining and use (2.7).

2.2 Background

The cryptocurrency-state relationship is a complex one. Many popular

cryptocurrencies use an energy-intensive process called ‘mining’ to process transactions

and mint new units of the cryptocurrency (i.e., tokens, coins) into circulation. Thus, a

very physical infrastructure of data centers and electricity generation underpins an

intangible, non-physical digital asset. The physical nature of these mining operations

yields environmental policy concerns about energy use and greenhouse gas emissions

(Benneton et al. 2021; Roeck and Drennen 2022). The digital assets themselves can help

facilitate illicit finance (Fletcher 2022) and present a host of questions about how they

should be treated (i.e., regulated) as financial instruments (Clayton 2017; Hacker and

Thomale 2018) when used legally. These policy implications led President Biden to call

for a review of digital assets among all federal agencies dealing in financial regulation to

69
develop a comprehensive, interagency approach to addressing DeFi (Exec. Order No.

14067, 2022). The order comes at a time when the United States is now the world leader

in energy-intensive Bitcoin mining by global share of network hashrate (CBECI 2022)

and several DeFi products and cryptocurrency exchanges are the subjects of government-

led litigation.64

Despite humble beginnings, several cryptocurrency proponents believe this new

technology can revolutionize financial transactions (Davidson et al. 2016) and create a

new form of apolitical international economics (Babitt and Dietz 2014; Zamfi 2015;

Pilkington 2016). The technological ideas and infrastructure they run on (e.g.,

blockchain) offer tremendous opportunities and use cases for traditional fiat currencies

like providing financial services to the unbanked (Schuetz and Venkatesh 2020) and

addressing inefficiencies in final settlement transfers and cross-border payments (Guo

and Liang 2016). Stablecoins, or “digital assets that are designed to maintain a stable

value relative to a national currency,” (President’s Working Group 2021, 1) use

cryptographic security to enable near-instantaneous transaction settlement across

international borders. The amount of US dollar (USD)-pegged stablecoins in circulation

increased over 500% from 2020 to 2021 (Liao and Carmichael 2022). But stablecoins

carry significant risks. One such risk is that stablecoin holdings are not FDIC-insured like

a bank account, nor are they subject to the kind of audits and stress tests eligible financial

institutions which hold digital USD reserves with the Federal Reserve are. There is

comparatively little transparency about how DeFi platforms are leveraged and how they

would meet a 1:1 exchange of stablecoins for USD in the event of a massive liquidity

64
The U.S. Securities and Exchange Commission (SEC) has announced litigation against Ripple Labs Inc.
(2020), Chicago Crypto Capital LLC (2022), the former CEO of FTX Trading Ltd., Samuel Bankman-
Fried (2022) to name just a few.

70
crisis. Since stablecoins are used to trade cryptocurrencies and several traders do so with

leverage, some feel the growing size of the stablecoin market poses some threats to

overall macroeconomic and market stability (President’s Working Group on Financial

Markets 2021).

Central bank digital currencies (CBDCs) may offer the chance to bring some of

the same functionality and advantages of stablecoins and cryptocurrencies under the

purview of a central bank. The two kinds of existing central bank money are cash and

reserves held by eligible financial institutions. CBDC is “a generic term for a third

version of currency that could use an electronic record or digital token to represent the

digital form of a nation's currency. CBDC is issued and managed directly by the central

bank” (Board of Governors of the Federal Reserve 2021). For major financial institutions

and large corporations, CBDCs offer tremendous promise for eliminating market

inefficiencies in large transactions/transfers, specifically for cross-border payments.65

Cross-border payments face high costs, low speed, limited access and insufficient

transparency (FSB 2021). A Republican working group for the House Financial Services

Committee cited “addressing inefficiencies in the U.S. payment system” specifically

among cross-border payments as its first principle for CBDC development (Financial

Services Committee Republicans 2021).

65
The private sector has a vested interest in eliminating fees and slow speeds associated with large cross-
border payments for fiat/reserve currencies. In 2020, JP Morgan launched Onyx, “a blockchain network
enabling the exchange of value for various types of digital assets” (JP Morgan 2021) and conducted a
simulated experiment in June 2021, using a common multi-CBDC network to facilitate cross-border
payments between the Monetary Authority of Singapore (denominated in Singapore Dollars CBDC) and
Banque de France (denominated in Euro CBDC). They found that completely different cloud
infrastructures and systems could become interoperable on the blockchain, increased visibility for both
central banks could be achieved, and “know your client” (KYC) burdens could be minimized (Onyx JP
Morgan 2021).

71
 Another potential advantage of CBDCs is in banking the unbanked. According to

the Federal Reserve, 6% of Americans are unbanked (no bank account) and 16% are

underbanked (may have a bank account but rely on alternative financial service

products). This is an equity issue, as there are serious consequences for being

underbanked and these individuals are more likely to be minorities, poor, and less

educated than the fully banked population (Federal Reserve 2020). The Financial Health

Network estimated that underbanked and unbanked Americans spent $189 billion in fees

and interest on financial products in 2018 (Financial Health Network 2019). A CBDC

would allow individuals to essentially establish an account through a digital wallet

directly with a central bank providing some financial services rather than through a

traditional bank account as an intermediary. But CBDCs present concerns about

individual privacy and autonomy since their programmability and central control affords

the government a high degree of surveillance. Depending on CBDC design choices,

CBDCs could infringe upon the very financial privacy rights popular cryptocurrencies

were designed to protect.66

The nation-state challenge with blockchain and cryptocurrency is to strike the

right balance between fostering financial innovation, securing financial system integrity,

and protecting the public from bad actors (Ducas and Wilner 2017). Likewise, energy and

environmental considerations are chief concerns among nations like the United States

seeking to slow the impacts of climate change (OSTP 2022). Blockchains are

fundamentally disintermediated, transnational, and resilient; they enable anonymous

exchanges of value and data transfer, and they lack specific legal and policy frameworks

66
Bitcoin was specifically designed with this in mind. Nakamoto (2008) sought a peer-to-peer electronic
cash transfer system without government approval/involvement. Bitcoin was designed to run on a trustless
and permissionless system with no counterparty risk or third-party verification.

72
for addressing them comprehensively (DeFilippi and Wright 2018). Prasad (2021; 2022)

echoes the concerns of many economists (Bohme et al. 2015) in imploring U.S.

policymakers to consider whether this combination of stablecoins, cryptocurrencies, and

CBDCs could threaten monetary sovereignty and existing national currencies. The

“future of finance” may be filled with promise, but it is also murky – especially in the

absence of official policy statements indicating how the world’s leading economy might

approach various aspects of DeFi.

The Biden administration appears poised to address this ambiguity. Notably,

President Biden’s order on digital assets directs the Federal Reserve and other

agencies/departments to explore the development and implications of a United States

CBDC. As for non-state cryptocurrencies on public blockchains (e.g., Bitcoin), the order

focuses on the energy, climate, and pollution impacts of cryptocurrency mining. The

subsequent White House Office of Science and Technology Policy (OSTP 2022) report

on ‘crypto-assets,’ climate, and energy proposes no specific policy prescriptions but

recommends Congress and the Biden administration “might consider legislation to limit

or eliminate the use of high energy intensity consensus mechanisms for crypto-asset

mining” (7) should other methods of regulation (e.g., establishing environmental

evidence and performance-based standards for mining) prove ineffective.

2.2.1 The Cryptocurrency-State Relationship

A country-wide ban on cryptocurrency is not unique to China, but it is still an

extreme approach to cryptocurrency policy relative to the rest of the world. According to

a Thomson Reuters study (2022), cryptocurrency use is highly restricted or completely

73
illegal in just thirteen countries.67 As more countries and territories establish laws,

regulations, and policies specific to cryptocurrency, subsequent studies might analyze the

relationship between regime type and cryptocurrency restrictions. So far, authoritarian

regimes are more likely to restrict cryptocurrency use and legality. Of the 13 countries

where cryptocurrency is illegal or heavily restricted by law, only one is considered “free”

(Thomson-Reuters 2022; Freedom House 2022).68

Despite similar environmental and regulatory concerns about cryptocurrency use,

the United States’ approach to cryptocurrency regulation stands in stark contrast to

China’s. As a starting point, the legal and regulatory frameworks and precedents

governing currency in the U.S. and China before the creation of cryptocurrency differ.

The U.S. Constitution and subsequent laws were designed to establish the government’s

sovereignty as the issuer of its own currency and have historically “been exclusively

applied to prosecute counterfeited dollar bills and coins” (Xie 2019, 467) and do not bar

the creation of virtual currencies. From there, the U.S. approach to regulation has

essentially been to apply existing frameworks to cryptocurrencies largely based on

whether virtual currencies and their derivatives meet the standard for treatment as a

commodity or a security (Henderson and Raskin 2019).69 People’s Bank of China

67
Private cryptocurrencies only, excludes CBDCs and state-sponsored digital assets. Turkey is the only
country to institute a cryptocurrency ban around the same time as China (Turkey’s ban was announced in
April 2021) (Thomson Reuters 2022). However, there is no evidence of a significant Bitcoin mining
presence in Turkey prior to the ban (CBECI 2022).
68
Russia, China, India, Iran, Mexico, Colombia, Bolivia, Bangladesh, Turkey, Egypt, Algeria, Morocco are
all considered “not free” or “partly free” according to Freedom House’s Freedom in the World weighted-
scale methodology. Ecuador is the only nation with a “free” designation and somewhat restrictive
cryptocurrency regulations according to the Reuters study.
69
The three-factor “Howey test” is used as the standard for what is classified as a security. Its derived from
the SEC v. W.J. Howey decision. Still, neither Congress nor the SEC nor any federal court has explicitly
ruled whether specific cryptocurrencies are commodities or securities, and the debate is still ongoing
(Henderson and Raskin 2019)

74
(PBOC) laws expressly forbid anyone outside the Chinese central bank from “printing or

issuing token tickets which could replace renminbi” (Xie 2019, 472).

China’s path to an all-out ban on cryptocurrency evolved over time. In 2013, the

PBOC declared Bitcoin was not a currency, but a “virtual asset or digital commodity”

(PBOC 2013) and barred “financial institutions and payment companies from engaging in

Bitcoin-related businesses” (Xie 2019, 474). However, the public was still allowed to

trade virtual assets and digital commodities like Bitcoin. In 2017, depreciation of the

renminbi (RMB) and large capital outflows led China’s State Administration of Foreign

Exchange (SAFE), to place a cap on the amount of foreign currency its citizens could

exchange, annually (PBOC 2017; Xie 2019).70 Due to SAFE’s limited ability to monitor

cryptocurrency transactions, the PBOC also expanded upon its 2013 announcement by

explicitly prohibiting financial institutions from acting as cryptocurrency exchanges

(PBOC 2017). The PBOC then launched investigations into large cryptocurrency trading

platforms and instituted a series of restrictions designed to keep exchanges from

converting RMB into cryptocurrency (Borri and Shakhnov 2019).71

In 2021, Bitcoin’s price and trading volume surged, prompting a joint statement

on May 18th from three Chinese financial regulatory bodies expanding and specifying

exactly what constituted “business related to virtual currency” which “financial

institutions, payment institutions, and other member units” (PBOC 2021) were

disallowed from participating in. Three days later, the Financial Stability and

Development Committee of the State Council convened a meeting and announced a

70
$50,000 USD worth of foreign currency per year, after which a permit from SAFE is required.
71
SAFE’s purview is limited to certain appointed banks, so they were “unlikely to have the supervisory
capacity to monitor crypto transactions that can take place without a Chinese bank account” (Xie 2019,
479).

75
forthcoming “crack down on Bitcoin mining and trading behavior” (China Government

Network 2021). News reports indicate several provinces where Bitcoin mining was

prevalent (Sichuan, Qinghai, Xinjiang, and Inner Mongolia) shut down miners in early

May before the PBOC formally instituted its country-wide ban on mining in June (Feng

et al. 2021; Zhang 2022).72 Finally, all forms of cryptocurrency exchange were formally

banned in September 2021 (PBOC 2021). Between May and July, over 60% of the total

amount of computing power dedicated to mining Bitcoin across the entire network,

known as network hashrate, came offline – the largest such drop since Bitcoin began.73

Literature on why nations like China and the U.S. might differ in their approach to

cryptocurrency regulation is scarce. Dion (2013) sees the U.S. following long-standing

precedent of recognizing other legal currencies or mediums of exchange. The dollar

remains as the country's legal tender, but the law does not require the exclusive use of

dollars in the exchange of goods and services. The Federal Reserve has regulations

designed to monitor and regulate banking and lending practices where the PBOC has a

wider scope for issuing laws and regulations designed to maintain tight control on

capital.74 Xie (2019) argues the Chinese approach is designed to “maintain existing

regulatory consistency and conserve institutional resources,” (491) and that the U.S. is

more comfortable with folding technological ambiguity into existing legal frameworks

wherever possible.

72
Local governments faced pressure to meet energy efficiency targets. Inner Mongolia began banning
cryptocurrency mining as early as March (Akhtar 2021). A series of deadly coal mining accidents led to the
Xinjiang government suspending all coal-based mining in April, pending an inspection and review of other
coal mines (Pan 2021). Coal was a significant energy source providing electricity to mining farms in the
area.
73
I elaborate on the ban’s effect on network hashrate in section 2.5.1. Data collected from Blockchain
Explorer.
74
In 2014, Federal Reserve Chairwoman Janet Yellen said, “The Federal Reserve simply does not have
authority to supervise or regulate Bitcoin in any way. This is a payment innovation that is taking place
entirely outside the banking industry” (Tracy 2014)

76
 Another possibility is that China views blockchain technology as an opportunity

to seize a geopolitical monetary advantage with their own CBDC and views other

cryptocurrencies as competitors. In 2020, the People’s Bank of China (PBOC) launched

its CBDC pilot program in Shenzhen. Commonly referred to as the eCNY or “digital

yuan,” China became the world’s first major power to launch a fully functioning CBDC

(Deutsche Bank 2021).75 In July, the PBOC released a white paper about eCNY research

and development. The purpose of the white paper was to outline the objectives of the

eCNY system and “to seek public comments, as well as to deepen communication with

all those concerned and join hands with them in building an open, inclusive, inter-

operable and innovative currency service system for the era of digital economy” (PBOC

2021, 1). The brief, 15-page document does not address issues faced during the pilot’s

rollout, says very little about CBDC programmability, and has scant details of how user

privacy might be protected under the eCNY system. But the document makes one thing

abundantly clear: China intends to expand eCNY use well beyond its pilot program and

will market its use to financial service companies, commercial banks, and corporations

outside its borders.

2.2.2 Explaining the Focus on Bitcoin

DAOs and digital assets are broadly defined terms encompassing a wide range of

network/organizational structures and financialization. The set of relevant public policy

concerns necessarily differs for each type of asset. Even a focus on cryptocurrencies

alone is too broad in scope for meaningful empirical or theoretical research. Several

75
The renminbi (RMB) is the official name of China’s currency, but its principal unit is the Chinese Yuan
(CNY). The “eCNY” or “digital yuan” are the colloquial terms for what the PBOC calls “the Digital
Currency Electronic Payment” (DC/EP), a CBDC issued directly by the Chinese central bank. Its value is
fixed to RMB valuation (Huld 2022).

77
estimates suggest roughly 20,000 different cryptocurrencies exist today (Kharpal 2022;

Jones 2022).76

This essay focuses on the impact of China’s cryptocurrency ban on Bitcoin

specifically for several reasons. First, it has the highest market capitalization of any

crypto-asset – over twice that of the next highest cryptocurrency by market cap,

Ethereum – and it has maintained this dominance since its inception for over a decade.77

This speaks to its current significance despite the emergence of other cryptocurrencies

and its sustained popularity over time. Second, launched in 2009, Bitcoin is the original

and longest-tenured cryptocurrency.78 Most importantly, from a research perspective it is

the easiest to study due to its data availability. Transactions, wallet addresses, block

timing, and other information are all fully transparent and available on the blockchain.

Accurate market pricing data have been available since its inception, as well.

Bitcoin is recognized and singled out as different than other cryptocurrencies by

several financial regulatory institutions in the United States. Gary Gensler, Chairperson

of the U.S. Securities and Exchange Commission, has stated on record several times that

he considers Bitcoin to be the only cryptocurrency which qualifies as a commodity rather

than as a security (Gensler 2018). Gensler argues that all other cryptocurrencies are at

least somewhat controlled by a centralized entity which stands to profit more than other

stakeholders in the network. Commodities are typically raw materials like gold and are

76
Because cryptocurrencies are relatively simple to create, require no official approval, and are not all
listed for trading on exchanges, it is impossible to know precisely how many different cryptocurrencies
exist.
77
Coinmarketcap.com
78
Ethereum launched in 2015. Vitalik Buterin, Ethereum’s lead designer and creator, was a Bitcoin
enthusiast who co-founded Bitcoin Magazine in 2011.

78
often regulated less stringently than securities and their derivatives. Similarly, the

Commodity Futures Trading Commission declared Bitcoin a commodity in 2015.79.

From a public policy perspective, Bitcoin has perhaps never been more salient as

a topic of study and debate due to recent changes to Ethereum. In September 2022,

Ethereum switched from a proof-of-work (PoW) to a proof-of-stake (PoS) protocol to

reduce its energy consumption and assuage concerns about its carbon footprint and

environmental impact. Bitcoin now stands alone as the only major cryptocurrency relying

on PoW, and in many ways Ethereum 2.0 serves as a referendum on the viability of PoW

as a consensus mechanism in an environmentally conscious world.80

2.2.3 A Brief Overview of Proof-of Work (PoW) Mining

The incentive structure built into Bitcoin mining is just one of several key aspects

of Bitcoin’s overall monetary design. A comprehensive explanation of Bitcoin’s full

monetary policy is outside the scope of this essay. But an abbreviated overview of

“proof-of-work” (PoW) mining is necessary to understand both how Bitcoin mining

works and why it is an energy intensive process.

For starters, we must return to the concept of lex cryptographia, or the processes

and operations of an organization occurring according to embedded code only. The rules

and smart contracts embedded within that code must prevent bad actors from taking

advantage of the system. Proof-of-work systems are designed to make it cost prohibitive

for bad actors to alter the blockchain or operate outside the consensus rules of the

protocol. For this reason, the Bitcoin core software is open-source code, all transactions

79
Past SEC chairs have argued that Ethereum has also reached a level of decentralization to be considered a
commodity. A bipartisan bill introduced to Congress also seeks to formally classify both Bitcoin and
Ethereum as commodities.
80
For a comprehensive review of the differences between proof-of-stake, proof-of-work, and other
blockchain consensus mechanisms, see Wang et al. (2019).

79
are broadcast transparently across the network, and the record of all historical

transactions on the blockchain are publicly available. Additionally, Bitcoin nodes capable

of verifying valid blocks and transactions serve as checks on the network by running the

Bitcoin core software. These nodes are relatively cheap to buy and are only as energy

intensive as an internet modem or wireless router.81

In PoW, miners dedicate computing power to a process called hashing, or solving

cryptographic puzzles in hopes of earning the reward (denominated in the

cryptocurrency) associated with adding a new block to the chain. There is only one

reward per block, paid entirely to the miner who discovers the solution first. The data

contained in each block serve as a record of transactions between different addresses.

Once a miner solves the puzzle and “wins” a block, it must broadcast the solution for

verification by other miners and nodes. Invalid data can be immediately detected and

ignored. If this occurs, not only do bad actors not receive the block reward, but they get

nothing in return for the computational power (energy) expended.82

For this reason, the more decentralized the network becomes (more honest nodes

and miners), the more secure it becomes. A group of miners would need to control more

than 50% of the hashrate to alter PoW blockhains with invalid data.83 Specifically,

Bitcoin is designed to adjust to the amount of hashing power dedicated to solving these

cryptographic puzzles and adding new blocks to the chain across the entire network.

81
The cost of the hardware and memory storage required to independently run a node is somewhere
between $250 and $400 depending on the manufacturer and various pricing options.
82
Only 21 million Bitcoin can ever come into existence (assuming core code does not change). New
Bitcoin are ‘created’ through the mining process. As time goes on, the block reward decreases, effectively
reducing the rate of inflation built into the monetary policy. Once all 21 million Bitcoin are mined, miners
will receive fees built into each transaction to incentivize miners to add transactions to blocks promptly. At
the current rate, the 21 million cap will not be reached until around 2140.
83
This is called a 51% attack. A great deal of game theory analysis has been done on this subject regarding
cryptocurrency security (Sayeed and Marco-Gisbert 2019).

80
These difficulty adjustments (how hard it is to solve the puzzle) occur automatically

every 2016 blocks based on how difficult it was to find the previous 2016 blocks.84

Individual miners organize mining pools for several reasons. As overall network

hashrate increases, the probability of a single miner winning a block reward decreases

and it becomes nearly impossible for an individual miner to win a block without pooling

their hash with others. At current levels of network hashrate, it is highly improbable for

even the most well-capitalized individual miners to win blocks without collaboration.85

Mining pools now win block rewards and split those rewards amongst the individual

miners in their pools according to how much hashrate they dedicated to solving that

block. Mining pools may also offer certain hosting, flexible payment, software, security,

and/or tax reporting services.

In the cost accounting analysis of a large-scale Bitcoin miner, energy is the most

significant variable/operating cost.86 Efficient mining requires application-specific

integrated circuits (ASICs); highly specialized machines designed specifically to solve

the Bitcoin hashing algorithm known as SHA-256. The Antminer S19 Pro is currently the

most profitable mining equipment available at an average cost of $3734 per ASIC

(Hashrate Index 2023), before power, cooling, and hosting costs. To remain competitive,

miners must generate enough revenue to cover the initial hardware costs of these ASICs,

any debt service associated with capital raises, their respective fixed costs (e.g., data

84
With the goal of adding a new block every 10 minutes, these difficulty adjustments occur approximately
once every two weeks.
85
Let’s assume a single miner has 1000 highly efficient application-specific integrated circuits (ASICs).
The Antminer S19 Pro has a maximum hashrate of 110 Th/sec at an average cost of $3734/miner (Hashrate
Index 2023), before power, cooling, and hosting costs. For that $3.74 million investment, 110,000 Th/sec
represents just .044% of an overall network hashrate of 250 million Th/sec.
86
Appendix A provides a more in-depth breakdown of the mathematical relationship between Bitcoin
price, network hashrate, and the cost of energy, which ultimately determines how profitable Bitcoin mining
can be.

81
center hosting), plus the cost of running the machines designed to solve the hashing

algorithm. Overall network hashrate, the price of Bitcoin, and the price of energy are the

primary determinants of Bitcoin mining profitability.87 Since individual miners have

virtually zero impact on network hashrate and the price of Bitcoin, finding areas with

cheap energy at scale is the critical determinant in mining profitability.

Cambridge University’s Bitcoin Electricity Consumption Index88 (CBECI), began

collecting regional data on Bitcoin mining in September 2019, over 75% of the network

hashrate came from mainland China (Figure 2.1). Xinjiang province is abundant in cheap

wind and solar power generation and Sichuan province was once abundant in seasonal

hydropower (Xu and Stanway 2022). During the peak of China’s rainy season in

September 2020, Sichaun province accounted for over 50% of hashrate in China (Figure

2.2). Furthermore, China is more willing than other nations to fill energy gaps with cheap

coal despite its propensity for pollution and higher greenhouse gas emissions (Standaert

2021). Additionally, China’s industrial-level electrical infrastructure was robust enough

to support large-scale mining operations.

87
Any large-scale miners using financing and capital raises to acquire ASICs and cover other costs must
also consider the interest rates and the cost of capital in their profitability analyses. These factors are less
significant for self-financed individual miners, but they must factor mining pool fees into their
considerations.
88
CBECI extrapolates from a sample of Bitcoin mining information (hashrate, location (based on IP
addresses), energy consumption, regional energy mix) shared by mining pools to provide estimates of
entire Bitcoin network’s overall energy use and associated GHG emissions by location over time. It is the
authoritative source used for most Bitcoin mining data analysis. Details on how their data is collected and
extrapolated, as well as the acknowledged limitations of their methodology can be found at on the CCAF
website.

82
 Figure 2.1 Share of Bitcoin Network Hashrate by Country (CBECI 2022)

Figure 2.2 Seasonal Impact on Bitcoin hashrate by Chinese province (CBECI 2022)

CBECI partners with mining pools to aggregate a representative sample of

geolocational data on mining facilities across the globe and then extrapolates this data to

generate an estimate of the geographic distribution of Bitcoin’s hashrate over time. This

data is based on the IP addresses of miners connected to mining pool servers. Though

83
widely considered as the best estimator of geographic hashrate distribution (Harper 2019;

Carter 2021; OSTP 2022), CBECI recognizes that the assumption of IP address accuracy

is a significant one. The use of virtual private networks (VPNs) to spoof IP addresses and

obfuscate locational data across the Bitcoin network can introduce noise in CBECI

estimates. CBECI has some limited ways to recognize when the impacts of VPNs are

“particularly visible” in mining pool reporting and takes steps to proportionally adjust

hashrate estimations. They also encourage transparency among participating miners;

mining pool identities are encrypted and pseudonymized between the pool and the

application programming interface (API) from which CBECI pulls its data (CBECI

2022).89 Ultimately, CBECI concludes the VPNs “only moderately impact the validity of

the overall analysis” (2022) because VPNs increase network latency, reducing miner

revenues in the process. This puts miners using VPNs at a competitive disadvantage

relative to those who do not use such proxy services.

2.3 Measuring Cryptocurrency Asset Viability

Describing potential impacts of the Chinese ban on Bitcoin requires objective

metrics of its utility and viability as a digital asset. This necessitates some examination of

both Bitcoin’s original, expressed purpose (i.e., what was Bitcoin meant to do?) and its

most popular use case currently (i.e., how do people view/utilize cryptocurrencies

today?). It is widely accepted that money serves three purposes: 1) a store of value; 2) a

medium of exchange; and 3) a unit of account. The Bitcoin white paper (Nakamoto 2008)

focuses overwhelmingly on the mechanics of functioning as a medium of exchange.

Nakamoto set out to establish “an electronic payment system based on cryptographic

89
The Cambridge Center for Alternative Finance (CCAF) which founded and runs CBECI stresses it “has
at no point access to the underlying IP addresses or any other sensitive pool data” (CCAF 2022).

84
proof instead of trust, allowing any two willing parties to transact directly with each other

without the need for a trusted third party” (1). The white paper briefly explains the intent

of having an eventual hard cap on the number of coins in circulation to be “completely

inflation free” but otherwise mentions value only in the context of transactions or as it

pertains to incentivizing good behavior.90

Nakamoto’s correspondence with cypherpunks via email and internet forums

lasted just two years after the release of the Bitcoin white paper (Champagne 2014).

During this time, most of their correspondence continued to center on how Bitcoin would

operate as an exchange of value. But some of this correspondence gives insight into what

they thought about Bitcoin’s potential as a store of value. First, Nakamoto felt Bitcoin’s

value derived from its immunity to government control and its decentralized network

structure.91 In releasing version 0.3 of Bitcoin’s core software, Nakamoto (2010)

describes Bitcoin as an escape from “the arbitrary inflation risk of centrally managed

currencies! Bitcoin’s total circulation is limited to 21 million coins.” They also explicitly

addressed concerns with Bitcoin’s propensity to consume energy. In a forum post, one

concerned observer argued that Bitcoin carried an unnecessary “thermodynamic burden”

and that mediums of exchange did not need to have value to be useful. But Nakamoto

(2008) believed mediums of exchange needed to have some value to work, and Bitcoin’s

value would be derived from its network of miners and honest validator nodes. They also

argued that Bitcoin and gold mining are similar in that the energy expended to mine gold

90
It does not mention unit of account, either. Most likely because any brand new, unadopted currency
would obviously not serve as anyone’s unit of account.
91
On the cryptography mailing list they were a part of, Nakamoto replied to “You will not find a solution
political problems in cryptography” with “Yes, but we can win a major battle in the arms race and gain a
new territory of freedom for several years. Governments are good at cutting off the heads of a centrally
controlled networks like Napster, but pure P2P networks… seem to be holding their own” (Nakamoto
2008).

85
“is a waste, but that waste is far less than the utility of having gold available as a medium

of exchange” (Nakamoto 2010). Lastly, Nakamoto clearly felt Bitcoin’s value would

benefit from network effects, explicitly stating they expected value per coin to increase

with the number of users, triggering “a positive feedback loop” (Nakamoto 2009)

rewarding early holders of Bitcoin in the process.

Today, Bitcoin is clearly used as both a medium of exchange and a long-term

store of value. In 2022, the Bitcoin network processed between 200,000 and 300,000

transactions/day for most of the year on its base layer (Coinmetrics 2023). However,

hundreds of thousands of small payments between vendors and customers transacting in

Bitcoin now take place on the Lightning Network – a ‘layer 2’ protocol designed to

facilitate micropayments and free up traffic on Bitcoin’s base layer blockchain.92 But the

majority of Bitcoin in circulation remains in the hands of long-term holders, defined as

users who have bought and held their Bitcoin for at least six months. Since 2019, on-

chain data shows 70% and 80% of all Bitcoin supply has been held by long-term holders

(Radmilac and Van Straten 2022). Despite several bear market periods in which the

market price of Bitcoin has dropped over 60% in a short period of time, long-term

holders rarely divest their Bitcoin holdings. Data shows the most committed holders

typically acquire more Bitcoin during periods of low prices (Radmilac and Van Straten

2022).

Table 2.1 is a summary of key metrics of Bitcoin’s viability as a financial

instrument: as a store of value and a medium of exchange. Blockchain-based

cryptocurrencies with DAO governance are different than other commodities in that their

92
One study estimated the Lightning Network processed over 800,000 transactions in February 2022
(Arcane 2022). See Essay 1 of this dissertation series for a more in-depth explanation of the Lightning
Network.

86
value is so closely tied to the health of the network which processes transactions and runs

core software.93 If gold mining and bullion exchanges ceased to exist, gold would retain

its intrinsic value and individuals could still find ways to trade it, if needed.

Cryptocurrency miners effectively execute all base layer transactions. Exchanges provide

an interface for users to trade fiat currency for cryptocurrency in a nominal sense, but

exchanges effectively issue users the right to withdraw crypto coins/tokens from the

exchange’s holdings on the blockchain.94 Users do not truly “own” their cryptocurrency

until they withdraw it from the exchange and manage their own private keys. Exchanges

do not play a role in processing on-chain transactions. Token transfer on the blockchain

occurs between private key holders with miners processing transactions. For this reason,

several metrics in Table 2.1 have to do with the distribution and security of different

aspects of the Bitcoin network.

93
Cryptocurrency ownership also differs from equities ownership. Equities or stocks serve as shares or
portions of a company. Bitcoin “possession” is nothing more than ownership of ledger entry numbers.
94
The collapse and bankruptcy of several prominent cryptocurrency exchanges in 2022 occurred because
exchanges did not own the reserves necessary to restore funds to exchange users. What they experienced is
very similar to a bank run. Several users thought they “owned” the cryptocurrencies held on these
exchanges. In reality, most exchanges had some reserves, but not nearly enough to survive when users
decided to sell and/or withdraw their tokens all at once.

87
Table 2.1. Measures of Bitcoin Network Security, Health, and Distribution
Metric Units Data Source Description
The amount of computing power
Total Network Hashrate TH/s Blockchain Explorer dedicated to mining across the
entire Bitcoin network
The amount of computing power
Country Share of Hashrate % per country/month CBECI
dedicated to mining by country
Mining Pool Hashrate Distribution % blocks/day blockchain.com % of blocks mined by each pool
daily closing price of 1 BTC
Market Price $USD Yahoo! Finance
denominated in USD
average number of Bitcoin
transactions/sec (7-day
Transactions per second Coin Metrics transactions processed per second
moving avg.)
per day
daily average of time between
Block Time minutes BitInfo Charts
blocks added to the blockchain
number of reachable nodes
Nodes Online* # nodes bitnodes.io
verifying transactions
Nodes by Country* % bitnodes.io % distribution of nodes by country

*raw numerical data unavailabe. Graphic depictions only available through bitnodes.io

2.4 Design of the Natural Experiment

The nature of the treatment in this natural experiment – the Chinese

cryptocurrency ban – is multifaceted and requires clarification regarding the kind of

knowledge that can be gleaned from pre/post statistical analyses. The first aspect of

China’s ban was announced on May 18, 2021, targeting financial institutions

participating in “business related to virtual currency” (PBOC 2021). Three days later, a

forthcoming ban on cryptocurrency mining was announced, but not formally instituted

across all of China until June. The final aspect of the ban barring any form of

cryptocurrency exchange took effect in September.

The timing of the three different aspects of the ban, and gaps between

announcements and formal implementation complicates claims of causality and the

identification of causal mechanisms therein. For example, the first aspect of the ban was

the third of three such crackdowns (2013, 2017, 2021) specific to financial institutions.

88
Following the 2013 and 2017 announcements, the price of Bitcoin dropped over 30%

within the next 10 days. Price action following the announcement of the forthcoming

mining ban was likely impacted by the financial institution aspect of the ban and a host of

other potential contributing factors which are difficult to control for. Bitcoin’s price

tumbled 13% from $56,700 to $49,100/BTC in one day after electric-vehicle maker Tesla

announced it would no longer accept Bitcoin as a form of payment on May 12th. When

the PBOC’s expanded ban on financial institutions was announced six days later, (PBOC

2021) the price of Bitcoin was already down almost 15% from the previous day, closing

at roughly $37,000/BTC. For some metrics (e.g., total network hashrate, country share of

network hashrate), drawing a causal relationship between the ban and changes to that

metric are clearer than others (e.g., market price), but most of the analysis in this study is

necessarily descriptive and correlational.

This study focuses on the mining aspect of the ban and relies on statistical

analyses of several Bitcoin metrics to paint a picture of the Bitcoin network before and

after miners in China were ordered to shut down their operations. The mining aspect of

the ban represents the greatest departure from previous Chinese policy positions. Mining

is also critical to Bitcoin’s use as a medium of exchange. The crackdown specific to

crypto-related financial services is not insignificant, but Bitcoin was designed to facilitate

value exchange without the involvement of third-party intermediaries (i.e., financial

services industry). Furthermore, the financial services ban did not constitute a stark

change in China’s cryptocurrency policy disposition. The third and final aspect of the ban

clearly states all “virtual currency-related activities are illegal financial activities” (PBOC

2021) which represents some departure from previous policies which allowed private

89
Chinese citizens to continue trading cryptocurrencies. But China had already prohibited

the exchange of fiat currency for cryptocurrency and barred Chinese financial services

industries from facilitating such cryptocurrency trading in China four years prior (PBOC

2017).95 The only new specified “virtual currency-related [activity]” in the order which

had not been barred prior to September 2021 was the “[exchange] of one virtual currency

for another” (PBOC 2021).96

The policy intervention is also designated as a period (May ’21 through June ’21)

rather than a single point in time. As previously mentioned, evidence suggests some

miners in certain provinces began shuttering operations as early as April 2021, but news

reports of the forthcoming ban broke in May before the formal ban was implemented in

June. Starting with the one-year period (May ’20 through April ’21) before PBOC’s

crypto ban allows us to build an ex-ante profile of the overall condition of the Bitcoin

network by each metric before the policy intervention. The period for ex-post analysis of

network conditions is designated as the one-year period (July ’21 through June ’22) when

dislocated miners found new hosting sites outside of China. Data for all metrics in Table

2.1 is available from May 2020 through June 2022 except for country share of hashrate

since CBECI locational mining data has only been published through January 2022.

The following sections analyze metric trends before and after the PBOC’s

cryptocurrency ban. Each section begins by offering a formal definition of each metric

followed by an explanation of each metric’s significance to Bitcoin as a digital asset

and/or the Bitcoin network. I then cover the data collection process and present a

95
In 2013, the PBOC specifically prohibited the use of Bitcoin as a payment instrument for goods and
services as well (Xie 2019; PBOC 2013).
96
In the “Notice on Further Preventing and Resolving the Risks of Virtual Currency Trading and
Speculation” (PBOC 2021), Section 1.2 lists illegal “virtual currency-related activities.” Nearly all the
listed activities were already prohibited between 2013-2017.

90
statistical analysis of the pre and post periods to discern whether there are observable

treatment effects. Finally, each section concludes with a discussion of potential

confounders and/or barriers to causal analysis, as well as any useful information which

can be gleaned from correlational relationships.

2.5.1 Network Hashrate

The total amount of computing power dedicated to mining Bitcoin across the entire

network. Critical to network security, asset store of value, and asset functionality as a

medium of exchange.

In proof-of-work (PoW) based systems, aggregate hashrate is a critical indicator

of the network’s security in defending against attacks. As hashrate increases, attacking

the network effectively becomes more expensive. If attackers control over 50% of

network hashrate in PoW-based systems, they can create a new blockchain with a new

transaction history and double-spend cryptocurrency. Nakamoto (2008) proposed a

timestamp server and distributed ledger technology to account for the double-spend

problem. The public and transparent nature of broadcast transactions and the blockchain

history provides all nodes awareness of a single historical record of transactions.

Hashrate is measured in hashes per second. Bitcoin uses SHA-256 cryptography –

a deterministic, one-way hashing function.97 Hashrate can be thought of the amount of

hashes mining equipment work through over time as they order transactions and compete

for block rewards. Basic home computing equipment is capable of thousands of hashes

per second, but mining equipment specifically designed to solve the SHA-256 hash

function are typically measured in terahashes (trillions of hashes per second).

97
This means hashes are determined from inputs only – it is virtually mathematically impossible to
determine inputs from outputs. This is critical to the blockchain’s immutability and transaction
irreversibility over time, as each blocks timestamp is built off the previous.

91
 Figure 2.3 Bitcoin Network Hashrate (million TH/s) Around the Ban (author)98

During the 12-month ex-ante period before China’s cryptocurrency ban, hashrate

generally increased by 154,000 TH/s per day.99 After approaching a new all-time high on

May 13th, 2021, China’s massive share of global hashrate (Figure 2.1) came offline in the

span of just two months. Network hashrate crashed from 186 million TH/s to just 58

million TH/s on June 27th (Figure 2.3).100 But Bitcoin’s mining difficulty – which adjusts

every 2016 blocks – dropped on July 3rd making it easier for miners based elsewhere.101

Older, less efficient mining equipment suddenly became profitable (Sigalos 2021). No

evidence exists that a serious 51% attack was attempted during the intervention period,

despite half the network hashrate coming offline. Hashrate recovered at a rate of 281,000

TH/s per day during the ex-post period, surpassing the previous all-time high by early

December 2021.

98
Data pulled from Blockchain Explorer.
99
Each Antminer S19 Pro miner has a maximum hashrate of 110 Th/s. So, this is roughly the equivalent of
adding 1400 new ASICs-worth of mining power across the network each day
100
Policy intervention period shaded yellow. The red dot marks the lowest point of Bitcoin’s network
hashrate on June 27, 2021.
101
2016 blocks is roughly every two weeks

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 Table 2.2a. Paired two-sample t-test: Total Network Hashrate
ex-ante ex-post
Mean 134.648 172.058
Variance 445.272 1621.460
Observations 365 365
Degrees of Freedom 364
T Statistic -24.6614
P(T<=t) two-tail 1.1815E-79
t Critical two-tail 1.9665
Table 2.2b. OLS Trend Statistics
ex-ante ex-post
Slope 0.1541 0.3473
Standard Error (slope) 0.0067 0.0083
R-squared 0.5936 0.8281
F-statistic 530.2785 1748.9064
Residual sum of squares 96215.3169 488764.4937
Regression sum of squares 65863.8047 101447.1165

Table 2.2 compares only the one-year ex-ante and ex-post periods using a paired

two-sample t-test of means and the ordinary least squares method of a linear best fit for

the data.102 The t-test yields a low p-value providing some support for claims that the

treatment effect had a significant impact on mean hashrate between the two periods. In

fact, mean hashrate increased during the year following the intervention period. Hashrate

increased at a faster rate after the ban, and OLS statistics indicate the regression model

provides a better explanation for the higher variance seen in the ex-post year than the year

prior.

Both CBECI data (Figure 2.1) and news reports indicate a disproportionately

large share of Bitcoin’s network hashrate was based in China prior to instituting a

complete ban on cryptocurrency mining.103 Quantitative evidence supports claims that the

mining ban played a significant role in the unprecedented drop in network hashrate

between May and July 2021 as China-based miners shutdown operations and began to

102
The two-month intervention period is excluded because it is likely to be driven by many idiosyncratic
factors that are of little interest to policymakers.
103
I expand on this in the next section regarding country share of network hashrate.

93
relocate. However, the drop in network hashrate cannot be entirely explained by the loss

of China-based hashrate. Monthly network hashrate grew in absolute terms through May

2021 while China’s absolute hashrate began its decline in March. Total network hashrate

dropped by 41.1 EH/sec from May to June, while China’s absolute hashrate decreased

only 29.9 EH/sec over the same period (Table 2.3).

Table 2.3. China and Total Network Hashrate Around the Policy Intervention
March April May June July
Total Network Hashrate (monthly avg., EH/sec) 159.6 157.2 161.2 120.1 100.4
Change from previous month (EH/sec) -2.4 4.0 -41.1 -19.7
% Change from previous month -1% 3% -26% -16%
China monthly absolute hashrate 78.3 72.4 71.0 41.1 0
Change from previous month (EH/sec) -5.9 -1.4 -29.9 -41.1
% Change from previous month -8% -2% -42% -100%

Bitcoin’s sudden decline in market value during this period (see section 2.3.4)

likely contributed to network hashrate losses. While hashrate does not typically correlate

with Bitcoin’s market price, studies suggest there may be some unidirectional causal

relationship from Bitcoin price to hashrate, just as oil and gas revenues/losses drive the

purchase/shut down of rigs (Fantazzini and Kolodin 2020; Rehman and Kang 2021).

Miner revenues are tied to Bitcoin’s market value, so miners with less efficient ASICs

can often afford to keep their machines on when the price of Bitcoin is high. These

miners will keep less efficient ASICs running so long as the price of energy is below the

breakeven price at which they know their machines will be profitable.104 All else equal,

more efficient mining machines effectively raise this breakeven price of energy. As

104
Returning to the discussion of mining economics, the decision for whether Bitcoin miners will turn their
machines on or off is mostly dependent on four things: the price of Bitcoin, the price of energy, the
efficiency/performance level of the mining equipment, and network hashrate. Though ASIC efficiency
erodes over time, their lifecycle is relatively predictable. Based on the known hashing efficiency of their
ASICs, miners can generate a profitability matrix based on the two more volatile variables in this equation,
bitcoin price and the overall hashrate of the network, to determine how much revenue they can generate per
unit of energy. This results in a breakeven price for energy, below which miners know their machines will
be profitable, and above which it is effectively counterproductive and economically unfeasible to mine.

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Bitcoin prices drop, the rational, but less efficient miners will be forced to turn off their

machines while more efficient miners continue to be profitable.105

2.5.2 Country Share of Network Hashrate

The amount of computing power dedicated to mining Bitcoin in each country – a

“geographic distribution of Bitcoin’s total hashrate over time” (CBECI 2023).106 Critical

measurement of network decentralization, susceptibility to individual nation-state policy,

and thus a contributor to asset value.

Country share of network hashrate lies at the center of this paper’s main research

question: what happens when a single country – which serves as a base for the majority

of a DAO-based cryptocurrency’s operations – adopts policies to eliminate that

operation (i.e., mining)? We know from the previous section that Bitcoin quickly

bounced back from the loss of hashrate, but changes in country share of network hashrate

speak to how the geographic distribution of the main engine of Bitcoin changed as a

result of China’s ban. As seen in the previous section, non-China hashrate grew

significantly over time before and after the policy intervention, so this section includes

analysis of absolute levels of country hashrate as well. Increased distribution makes the

network less susceptible to the policies of a single nation-state. Decreased distribution

would suggest a troubling tendency for a so-called “decentralized” autonomous

organization to concentrate its operations.

These data are sourced entirely from CBECI estimates. Estimates are based on IP

addresses of mining facility operators shared with CBECI through mining pools which

105
This assumes a constant overall network hashrate. If network hashrate and mining difficulty drops low
enough, it can make older equipment more profitable again. As mentioned earlier, this occurred once
network hashrate bottomed out in July (Sigalos 2021), but less efficient miners were likely priced out by
drops in market value in June.
106
Their full methodology for estimating hashrate by country/region can be found on the CCAF website.

95
voluntarily participate in CBECI’s studies. Participating mining pools represent between

33%-38% of total network hashrate (CBECI 2022). This means use of VPNs to spoof

locations and representative sample size concerns are limitations to their methodology. It

seems unlikely that miners hashing illegally after the ban would voluntarily participate in

location disclosure. But CBECI takes several steps to protect miner identities, and

network latency associated with VPN use disincentivizes location spoofing.107

Figure 2.4. ex-ante Country Share of Network Hashrate (top)108

Figure 2.5. ex-ante Absolute Levels of Country Network Hashrate (bottom)

For most of the year preceding China’s cryptocurrency ban, the United States and

Russia were the only two countries which to consistently account for more than 5% of

global hashrate.109 China’s share of global hashrate began to decline in November 2020

as more hashrate came online in neighboring Kazakhstan and in the United States.

Kazakhstan added a little over 1 exahash (EH)/sec per month between October 2020 and

107
See Section 2.2.3 for a more detailed breakdown of how CBECI addresses methodological shortcomings
108
Raw data from CBECI (2023)
109
Malaysia accounted for roughly 5% until dropping off below 4% after January 2021.

96
April 2021 while monthly absolute hashrate tripled in the United States over the same

period. During the intervention period, China’s hashrate came offline completely by July

2021, leaving the United States as the new leader in global hashrate. U.S.-based hashrate

remained consistent in absolute terms between April and June 2021, but jumped

significantly beginning in July.

Figure 2.6 Intervention Country Share of Network Hashrate (top)

Figure 2.7 Intervention Absolute Levels of Country Network Hashrate (bottom)

The ex-post period brings about the most evenly distributed months of network

hashrate geographically since CBECI began tracking mining locational data. Canada’s

absolute monthly hashrate began increasing month-over-month in February 2021 and

accounts for a greater than 5% share of global hashrate by June 2021. China re-emerges

as a significant contributor of network hashrate in September 2021, but the U.S. remains

the new post-ban global leader. The U.S. share of hashrate never surpasses more than

38%, compared to China’s 65% share as the pre-ban leader.

97
 Figure 2.8 Ex-post Country Share of Network Hashrate (top)
Figure 2.9 Ex-post Country Share of Network Hashrate (bottom)

Absolute hashrate CBECI data suggests China-based mining was virtually non-

existent in July and August 2021 and then 30 EH/sec suddenly came back online in

September 2021. The amount of power and physical infrastructure required to support

mining that much hashrate means the likelihood that those operations shutdown, moved,

and subsequently returned is highly improbable (Kaloudis 2022). The more likely

explanation is that CBECI’s data collection methods lead to useful estimations of

geolocational mining distribution but fall short of meeting a reliable enough standard to

justify robust empirical support for causal analysis. In fact, this jump in China-based

hashrate in CBECI data prompted the Cambridge Center for Alternative Finance (CCAF)

to publish an article discussing the methodological tradeoffs inherent in their CBECI

estimates. CCAF (2022) admits “a comeback of this magnitude within the period of one

98
month would seem unlikely given physical constraints… Instead, a more likely

explanation lies within our top-down research methodology” and its vulnerability to VPN

and proxy services.

Still, CCAF maintains IP address tracking limitations usually “only moderately

impact” the validity of their estimates unless “sudden shocks” (CCAF 2022) occur which

alter miner risk tolerance and expectations. They argue China’s ban represents such a

shock which prompted “a non-trivial share of Chinese miners” (CCAF 2022) to operate

covertly with foreign proxies (high in network latency) until determining local proxy

services (relatively lower in network latency) offered sufficient protection from Chinese

state enforcement. This theory is supported by anecdotal evidence from several news

reports (Kaloudis 2022; Feng 2022; Browne 2022). Regardless of how exactly miners

obfuscate their locations, quantitative and qualitative evidence show large-scale mining

operations still exist in China, calling the ban’s efficacy and/or China’s enforcement

mechanisms into question.

2.5.3 Mining Pool Hashrate Distribution

The percentage of blocks on the Bitcoin blockchain mined by each mining pool, daily. Or

a market share of the most popular bitcoin mining pools. The true level of

decentralization of hashrate control. Critical measure of network security.

Pools act as a centralizing force upon an aspect of the Bitcoin network which is

meant to be decentralized. In theory, if a single pool or miner controlled enough hashrate,

it could act independently to conduct a 51% attack on the network or execute false

transactions. Therefore, it is critical that no single pool amasses too much control over

network hashrate for distributed consensus to serve its true purpose. Bitcoin has never

99
suffered a 51% attack. At the end of 2021, no mining pool controlled more than 17% of

the overall network hashrate. When one mining pool eclipsed 42% in 2014, several

miners joined other pools to prevent the possibility of a 51% attack (Blockchain.info;

Hajdarbegovic 2014).

Figure 2.10 Percentage of Blocks Won Daily by Major Mining Pools (author)110

Figure 2.10 shows the percentage of blocks won daily by major mining pools

from May 2020 through July 2022.111 While the share of blocks won by specific pools

certainly changes, the overall distribution remains consistent throughout the time around

China’s ban, with no single pool amassing more than 31.5% of network hashrate at any

time.112 Unless known mining pools announce and/or distribute their block rewards to

miners, there is no way of knowing who wins individual blocks by simply looking at

110
Aggregated by Blockchain.com (2023), pulled from the on-chain explorer and data from known mining
pools. Intervention period highlighted in yellow. Blockchain.com did not have data for daily blocks won
for Foundry USA during this time period. I pulled Foundry USA’s daily blocks won and added it to the
data set shown in these figures. Several mining pools, particularly those with a history of being based in
China, reported connectivity issues towards the end of 2021 (Gkritsi 2021). This may explain the sudden
drop off of reported blocks won by Poolin between October 2021 and January 2022.
111
Known pools with a low capacity to win blocks (<2 blocks per day on average) were excluded from
these Figures and analysis.
112
F2Pool hit the high mark for the time period in December 2020

100
native block information along the blockchain.113 Known mining pools are now so big

that the winners of most blocks are known. However, unknown or “stealth” miners have

captured most blocks since Bitcoin’s inception (Redman 2022). There is no way to

identify who these unknown block winners are, but it is highly unlikely that they

represent a single stealth pool.114

Table 2.4. Paired two-sample t-test: Non Top-4 Mining Pool Hashrate
ex-ante ex-post
Mean 50.13% 44.30%
Variance 0.0022 0.0037
Observations 365 365

Degrees of Freedom 364

T-Statistic 14.18048682
P(T<=t) two-tail 1.19925E-36
t Critical two-tail 1.966502569

Table 2.4 compares the means of the daily percentage of blocks won by all miners

outside the top four most dominant pools during the ex-ante and ex-post periods. Though

no single mining pool approached the 50% threshold, the top four mining pools became

more dominant after the ban. Prior to the mining ban, miners outside the top four mining

pools were responsible for half the blocks won compared to 44% after the ban. If this

trend continues, independent miners and smaller mining pools are less likely to win block

rewards and pressure to join a dominant mining pool will increase. However, there is no

reason to suspect China’s mining ban is responsible for this trend. Three of the top four

dominant mining pools during both the ex-ante (AntPool, F2Pool, and Poolin) and ex-

post (AntPool, F2Pool, ViaBTC) periods are based in China. AntPool and F2Pool

113
Bitcoin block information include software version, previous block hash, merkle root, timestamp,
difficulty target, and nonce (Gensler 2018). Miners can embed custom “dummy” data in blocks if they so
choose, so the blockchain often includes written messages that serve no real practical purpose.
114
Bitcoin forums are full of speculation on this topic. Because addresses and activity can be seen on-chain,
and the difficulty of controlling so much hashrate in a coordinated way without being identified, unknown
block winners cannot be controlled by a single pool.

101
remained in the top four during the ex-post period and Poolin continued to win a

significant number of daily blocks.115 ViaBTC, headquartered in Shenzen, China, was a

top-four miner during the ex-post period as well.116 So far, there is no indication that

China’s various cryptocurrency bans will force mining pool companies to relocate even

as these pools suspend services to IP addresses originating in China (Ashraf 2021).

2.5.4 Market Price

Daily closing price of 1 BTC, denominated in $USD. Store of value measurement.

In the early years after its inception, Bitcoin was mostly exchanged between early

miners, cypherpunks, and other cryptography enthusiasts. It was first listed on an online

exchange with a floating exchange rate in 2010 (Gemini 2022). Significant trading

volume and some mainstream curiosity led to Bitcoin’s first “bull market” run in 2011 as

price jumped from $1 to $30/BTC in just two months. In 2013, Bitcoin eclipsed

$1000/BTC in October after starting the year around $30/coin. There have been four bull

runs in Bitcoin’s history (2017, 2021 also), each characterized by parabolic rises in price,

followed by huge losses and volatility in price discovery. Still, even after pull backs,

Bitcoin has maintained higher prices than those prior to each bull run.

There are generally two schools of thought regarding Bitcoin’s market price

volatility around bull runs and crashes. The first has to do with Bitcoin’s built-in

limitation on supply inflation through the periodic halving (approximately every 4 years)

of block rewards, making it deflationary relative to fiat currencies and some other more

inflationary assets. Halving the reward also makes production more expensive, but lowers

115
AntPool is owned by Bitmain Technologies, a privately owned company with its headquarters still
located in Beijing. F2Pool officially lists their location as “decentralized,” but its headquarters was
originally established in Beijing. Poolin is also headquartered in Beijing.
116
Foundry USA, based in Rochester, NY, won the second-highest amount of blocks during the ex-post
period.

102
the rate of new Bitcoin entering circulation, triggering higher demand and higher prices

and preserving mining incentives in the process. Meynkhard (2019) refers to this as a

“halving effect” resulting in “halving cycles” which result in sustained increases in

market value after price discovery. Under this halving cycle theory, bull runs begin a few

months after the effects of halving are felt by the network. Then, Bitcoin overshoots its

true market value (due to temporary overexuberance and massive increases in trading

volume/derivatives) before settling back to some pre-bull market higher floor value.

Halvings occurred prior to three of the four bull runs (2013, 2017, 2021), but

others feel basic international macroeconomic trends, state policy, and other “black

swan” events are more causal in affecting Bitcoin volatility (Dion 2013; Borri and

Shakhnov 2019; Xie 2019). In 2013, a popular Japan-based Bitcoin exchange named Mt.

Gox was hacked (Dion 2013) and the Chinese government announced new

cryptocurrency regulations with warnings about “speculative assets” (Xie 2019) resulting

in nearly 50% drops in price from earlier highs. Borri and Shakhnov (2019) present

quantitative empirical evidence showing correlation between the “China shock” – a series

of policy implementations and announcements by the PBOC in late 2016 and early 2017

– and drops in Bitcoin trading volume and price.

103
 Figure 2.11 2021 Bitcoin bull run, China ban, and 2022 market price crash (author)117

The 2020 halving, 2020-2021 bull run, China’s cryptocurrency ban, followed by a

Bitcoin price crash and recovery, and a final price crash in 2022 has elements of both

theories (Figure 2.11). A Bitcoin halving occurs on May 11, 2020, a bull run begins

somewhere between August and November before prices reach six times their pre-

halving levels in February 2021. China’s cryptocurrency ban certainly corresponds with a

roughly 50% drop in Bitcoin market value in just over two months. But Bitcoin’s

immediate price recovery to pre-ban levels just a few months after the ban takes effect

calls into question what long-term effects this state policy intervention really has.

117
Raw data pulled from Yahoo! Finance trading charts. Yellow indicates intervention period. Green dots
show new pre/post intervention all-time highs, red dot shows post-intervention low point before recovery.

104
 Table 2.5a. Paired two-sample t-test: Bitcoin Price
ex-ante ex-post
Mean 24369.43 42954.46
Variance 326612577.57 107511232.74
Observations 365 365

Degrees of Freedom 364

T-Statistic -13.61034216
P(T<=t) two-tail 2.1794E-34
t Critical two-tail 1.966502569
Table 2.5b. OLS Trend Statistics
ex-ante ex-post
Slope 153.6106546 -47.46150598
Standard Error (slope) 3.977353895 4.516521816
R-squared 0.804271128 0.233250128
F-statistic 1491.606301 110.4268806
Residual sum of squares 23269614196 30006057505
Regression sum of squares 95617364038 9128031212

High variance, residuals, and standard errors in the t-test and OLS trends results

in Table 2.5 point to a great deal of volatility in Bitcoin price, particularly during the ex-

post period. The mean ex-post Bitcoin price is nearly twice that of the ex-ante period, but

ex-post OLS statistics point to no meaningful trend. The price drop from all-time highs in

November 2021 could simply mirror the same downside volatility and price discovery

which follows each bull run, but it corresponds with several macroeconomic trends and

newsworthy developments which might better explain the asset’s decline. Bitcoin saw

wider institutional adoption in 2021,118 giving it much more exposure to broader market

sentiment. As mentioned in section 2.4, Tesla’s announcement suspending Bitcoin as

payment for its products corresponds with a precipitous decline in Bitcoin market value

over a week before the PBOC announced China’s forthcoming cryptocurrency mining

ban. Additionally, the federal funds rate increased dramatically in 2022. Retreats away

118
From essay 1: 2021 was a significant year for institutional Bitcoin adoption. 14 publicly traded
companies ended the year with over 1000 BTC on their balance sheet (Radmilac 2022), including
Microstrategy and Tesla. Liberty Mutual Insurance (NYDIG 2021) and Fidelity Investments (Doyle 2021)
invested in Bitcoin mining and technology companies. Visa rolled out several cryptocurrency-related
products and reported $2.5 billion in payments by customers with “crypto-linked cards” in the first quarter
of 2022 (Holland 2022).

105
from risk-on assets towards cash and less volatile assets are typical in high and/or rising

interest rate macroeconomic environments (Litzenberger and Tuttle 1970). The tech-

heavy Nasdaq Composite Index also hit all-time highs in November 2021, followed by a

37% decline in 2022.

Volatility and several confounders make drawing causal links between Bitcoin

price and China’s cryptocurrency ban difficult. It is possible that the combination of

negative news around China’s ban and Tesla’s announcement played a role in

temporarily halting Bitcoin’s bull run which resumed in August 2021. But the

relationship between China’s mining ban and Bitcoin’s price drop is at best correlational

over the short-term.

2.5.5 Transactions per second

7-day moving average of average daily Bitcoin transactions per second. A dynamic

measure of transaction volume119 of native Bitcoin on the layer 1 blockchain – does not

include volume on various cryptocurrency exchanges or the layer 2 “Lightning” network.

A measure of Bitcoin’s use case as a medium of exchange.

Transaction volume speaks to Bitcoin’s viability as a medium of exchange.

Overall network hashrate dropped significantly following China’s ban on cryptocurrency

mining (Section 2.3.1). Because mining facilitates the execution of transactions, mining

bans might negatively impact the ability of the network to efficiently process

transactions. Also, the news of a major nation-state ban could lead to a loss of interest in

utilizing cryptocurrency as a medium of exchange. The drop in hashrate during the ban

corresponds with a significant decrease in transactions processed across the network.

119
This refers to Bitcoin’s use as a currency (i.e., the number of times Bitcoin moves between wallet
addresses)

106
Following the ban, transaction volume recovered significantly, but never reaching pre-

ban levels (Figure 2.12).

Figure 2.12 Average Daily Bitcoin transactions per second, 7-day moving average
(author)120

Table 2.6a Paired two-sample t-test: Transactions per second

ex-ante ex-post
Mean 3.570 2.943
Variance 0.147 0.128
Observations 365 365

Degrees of Freedom 364

T-Statistic 29.2410139
P(T<=t) two-tail 1.45542E-97
t Critical two-tail 1.966502569
Table 2.6b OLS Trend Statistics
ex-ante ex-post
Slope -0.0003 0.0005
Standard Error (slope) 0.0002 0.0002
R-squared 0.0086 0.0248
F-statistic 3.1612 9.2128
Residual sum of squares 53.1155 45.6004
Regression sum of squares 0.4626 1.1573

Figure 2.12 shows the 7-day moving average of the daily average of Bitcoin

transactions per second to present a smoother depiction of the metric over time, but the t-

test and OLS trend statistics in Table 2,6 use the daily averages only. OLS modeling

accounts for little variation in daily averages (r-squared) when removing the moving

average component. However, the t-test of the means indicates a significant difference
120
Raw data from Coin Metrics (2023). Intervention period highlighted in yellow.

107
between transactions per second before and after the ban. Before the ban, an average of

3.57 Bitcoin transactions were processed every second compared to just 2.94 during the

ex-post period (Table 2.6a).

The usage of Bitcoin as a payment system on the base layer is still a long way

away from all-time highs in December 2017, but it may have something to do with the

advent of Bitcoin’s ‘layer 2’ protocol, better known as the ‘Lightning Network.’ The

Lightning Network was invented to solve Bitcoin’s scalability problem and break the

Blockchain Trilemma by establishing a series of peer-to-peer micropayment channels

between users to facilitate payments and unburden the main blockchain (Poon and Dryja

2016).121 Because these transactions occur off-chain, reliable data on exactly how many

transactions occur is hard to approximate. One study estimates over 120,000 payment

channels opened between January 2018 and July 2019 (Lin et al. 2020), which would

help explain the drop in visible, on-chain transactions since 2018.

Several other factors could drive Bitcoin’s transaction volume. Transaction fees,

competing methods of value transfer (e.g., other cryptocurrencies), or even

macroeconomic factors might influence Bitcoin’s transaction volume. Still, there is at

least a very strong correlational relationship between China’s mining ban and a sustained

ex-post period of less transactions processed per second. If the relationship is causal,

reduced hashrate is unlikely to be the mechanism preventing more transactions.

Reductions in average daily hashrate during the intervention (~25%, see Section 2.3.1)

121
A full explanation of the Lightning Network is outside the scope of this essay, but users effectively
transfer Bitcoin locked up on the base layer to Lightning wallets and conduct peer to peer transactions on
layer 2. They can close these two-way micropayment contracts and transfer their funds back to the base
layer whenever they choose. Since lightning network transactions occur between two known parties on
their own private channel, they are not broadcast to the entire network and settle nearly instantaneously
without the need for energy-intensive PoW protocol.

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correlate with a similar reduction in average daily transactions processed per second

(~18%) over the same period. But if mining power acted as the limiting factor in

transaction processing efficiency, then the recovery in network hashrate to new all-time

highs would allow Bitcoin transactions per second to return to pre-ban levels.122 It is

more likely that some other factor – which may or may not have been triggered by

something related the ban – is driving less demand for using Bitcoin as a medium of

exchange.

2.5.6 Block Time

Daily average of time (in minutes) between completed blocks added to the Bitcoin

blockchain. A measure of Bitcoin’s effectiveness and efficiency in processing transactions

(medium of exchange); a measure of Bitcoin core software’s adaptability to changes in

hashrate using difficulty adjustments.123

Bitcoin transactions are organized into blocks by miners and then broadcast on its

distributed ledger for validation. Transactions are not finalized and settled until organized

into blocks and added to the chain. Bitcoin was designed to add a new block every 10

minutes. As hashrate changes, automated smart contract algorithms built into Bitcoin’s

core software protocol are designed to adjust the difficulty of mining a new block to try

to meet this 10-minute goal about every two weeks.

122
Additionally, the difficulty adjustments built into Bitcoin Core (discussed in the next section) are
designed to adjust for changes in hashrate to keep transactions processing efficiently.
123
Block time refers to how often a new block (which contains transaction data) gets added to the
blockchain. Each block has a data limit of 1MB. Originally, Nakamoto (2008) designed Bitcoin with no
data size limit per block. The limit was put in place so all miners would be forced to create and accept
blocks of the same size. This block size limitation impacts transaction rates, and other cryptocurrencies and
Bitcoin derivatives have adopted larger block sizes to increase throughput. The small block size requires
less bandwidth and storage capacity from validating nodes, presenting a blockchain design tradeoff.

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 Table 2.7 Bitcoin Mining Difficulty Adjustments Around Intervention Period
Date Block # Difficulty % Change Average Block time (seconds) Average Hashrate
4/15/2021 679392 2.36E+13 1.92 589 1.68792E+20
5/1/2021 681408 2.06E+13 -12.61 687 1.47416E+20
5/13/2021 683424 2.50E+13 21.53 494 1.79249E+20
5/29/2021 685440 2.10E+13 -15.97 715 1.5048E+20
6/13/2021 687456 1.99E+13 -5.3 634 1.42678E+20
7/3/2021 689472 1.44E+13 -27.94 833 1.02781E+20
7/17/2021 691488 1.37E+13 -4.81 630 9.78715E+19
7/31/2021 693504 1.45E+13 6.03 566 1.03721E+20
8/13/2021 695520 1.56E+13 7.31 559 1.11286E+20

China’s ban triggered an unprecedented drop in hashrate (Figure 2.3). Since 2010,

automated processes in Bitcoin’s core software have routinely adjusted to small changes

in block time quite well.124 But the ban served as the most significant test of the difficulty

adjustment algorithms’ ability to adapt to a sudden drop in computing power dedicated to

adding blocks to the chain. An ineffective adjustment which does not sufficiently

compensate for a hashrate decrease could lead to two additional weeks of long waits for

transaction settlement. Block time stayed above 10 minutes from June 9th through July

6th, hitting an all-time high of 24.8 minutes between blocks on June 27th 2021 during the

intervention period, but the July 3rd difficulty adjustment (Table 2.7)125 succeeded in

returning block time to the 10-minute average rather quickly. July 6th saw an average

block time of 10.14 minutes, and a pre-ban pattern of average block time was restored

(Figure 2.13).

124
In the early days of Bitcoin when only Nakamoto and a few others were mining and working on Bitcoin
Core software updates, Bitcoin routinely saw block times exceeding 100 minutes.
125
Block difficulty and timing data pulled from Blockchain Explorer.

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 Figure 2.13 Daily Average Time Between Bitcoin Blocks (BitInfo Charts 2023)126

Table 2.8 Paired two-sample t-test: Average Daily Block Time (minutes)
ex-ante ex-post
Mean 10.054 9.858
Variance 1.456 1.012
Observations 365 365
Degrees of Freedom 364
T-Statistic 2.4675
P(T<=t) two-tail 0.0141
t Critical two-tail 1.9665

While the p-value of the t-test comparing the two periods indicates a statistically

significant difference of the means (95% confidence level), average daily block time

decreased by just 11.4 seconds between the ex-ante and ex-post periods (Table 2.8).

China’s ban on cryptocurrency mining led to an increase in average daily block time for

the months of May (10.4 minutes) and June 2021 (12.8 minutes), but these results

indicate the mining difficulty adjustment successfully compensated for the loss of

hashrate during the intervention period over the long-term.

2.5.7 Nodes Online and Nodes by Country

126
Red line (10-minute goal) and yellow highlighted intervention period added by author

111
Nodes online: Number of reachable nodes running Bitcoin Core software. Key measure

of decentralization and active interest in securing the Bitcoin network. Speaks to network

strength/security; asset value metric

Nodes by Country: Number of reachable nodes running Bitcoin Core software by

country. Measure of node geographic distribution; network susceptibility to nation-state

policy

For both nodes online and nodes by country, raw numerical data is unavailable for

statistical analysis. Figures 2.14 and 2.15 are taken directly from the Bitnodes website.

Bitnodes is a privately developed software which interrogates any nodes connected to the

Bitcoin network using a protocol message which is a request for information from each

node. 127 Bitnodes was developed and published online anonymously, and data on node

connections over time is not available for download. For this reason, analyses for these

sections are limited to visual inspections of the graphics posted on the bitnodes.io website

and are not included as evidence to support causal claims in this essay.

There are several stakeholders in Bitcoin’s governance. Miners conduct the PoW

algorithm hashing to compete for block rewards and process transactions while other

network participants run independent nodes capable of broadcasting and confirming the

validity of those transactions. Independently run nodes are critical to the trustless

consensus mechanisms which underpin value transfer without third party intermediation.

Node operators can facilitate the transfer of their own cryptocurrency to another address

and verify the transaction without the use of an exchange. They help secure the network

127
Bitrawr LLC is a company which provides Bitcoin network analysis and uses the same “getaddr”
protocol message as Bitnodes to estimate node activity. Their “bitcoin node distribution live map” yields
the same results as Bitnodes. Their raw data is also unavailable for download. I verified the “getaddr”
message functionality using a Bitcoin application programming interface (API). Similar methods for data
scraping node data from the Bitcoin network were used in Howell et al. (2023).

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by adhering to the consensus rules; validating blocks and transactions within blocks and

rejecting invalid transactions. Running a full node is relatively cheap (~$300) and each

node possesses equal power to validate and/or initiate transactions. Each node holds the

distributed ledger’s history of transactions and runs the Bitcoin core software to be

counted in this metric.128 For this reason, nodes are a measure of support for the Bitcoin

network. The geographic distribution of nodes running Bitcoin core software is important

in determining whether transaction validation is a global or regional effort. Much like

hashrate distribution by country, it is an indicator of how susceptible the network is to the

policies of a single nation-state.

Figure 2.14 Reachable Nodes (left, Bitnodes 2023)

Figure 2.15 Bitcoin Nodes by Country (right, Bitnodes 2023)

A visual inspection of Figure 2.14 indicates reachable nodes validating

transactions increased after the intervention. There were roughly 10,000 reachable nodes

from January 2020 through June 2021, but the total reached 15,000 by January 2022.

Several potential explanations for this change exist. It is possible that displaced miners

dispersed into smaller operations. But media reports indicate it took several months for

128
The “getaddr” message only receives responses from nodes running the same protocol version. Bitnodes
specifies their use of protocol version 70001 and explicitly states “nodes running an older protocol version
will be skipped.” (Bitnodes.io)

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many miners to find new homes (Ostroff and Yu 2021) and China-based IP addresses did

not account for a large proportion of known reachable nodes (Figure 2.15) before the ban

took effect. The expansion of cryptocurrency payment processors during this time may

also contribute to the rapid increase in online nodes. For example, BTCPay Server

provides a point-of-sale application for merchants to accept cryptocurrency payments

which Tesla briefly explored using to facilitate Bitcoin payments for their vehicles before

abandoning the idea in May 2021 (Harper 2021). The growing popularity of the

Lightning Network and other Bitcoin derivatives provides increased utility for the use of

nodes in facilitating micropayments.

While the overall distribution of nodes by country appears to be unaffected by the

ban, the number of “n/a” nodes increases dramatically after the ban. We now lack

location data on nearly half the nodes running Bitcoin core software. Howell et al. (2023)

point out a broader trend towards anonymization and privacy across several peer-to-peer

cryptocurrency networks with the increased use of “the onion router” (TOR) since 2021.

TOR is an open-source software for “executing programs as hidden services, shielding

the source IP address of the server running the application” (Howell et al. 2023, 5). Much

of the increase in online nodes in Figure 2.14 is from “onion” (TOR) coded nodes. In a

review of four different blockchain networks (including Bitcoin) Howell et al. (2023)

found that 54.3% of all nodes in 2021 utilized TOR.129 This makes node geolocational

analysis particularly difficult and offers further support for theories of increased IP-

spoofing measures discussed in section 2.3.2.

129
They found TOR supported 44.5% of Bitcoin (Layer 1) nodes and 68.7% of Lightning Network nodes.

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 Table 2.9 Summary of Bitcoin Network Metric Changes Around the Ban
Metric pre/post intervention change Suspected causal or correlational relationship
ban likely caused drop in network hashrate during
Total Network Hashrate robust recovery following intervention
the intervention period
ban likely contributed to and accelerated pre-ban
Country Share of Hashrate more distributed post-intervention
trends of growing absolute hashrate outside of China
Mining Pool Hashrate Distribution no change none
robust initial recovery after intervention, followed by may have contributed to short-term losses; no long-
Market Price
losses late in ex-post period term impact

Transactions per second less transactions after intervention correlational

causal impact over the short term before difficulty

Block Time no change
adjustment; no long-term impacts
Nodes Online* increase following intervention correlational
Nodes by Country* more distributed post-intervention correlational
*raw numerical data unavailabe. Graphic depictions only available through bitnodes.io

2.6 Miner Decision-making and Public Policy: Qualitative Analysis

Miners represent the most significant human decision-making element of

Bitcoin’s DAO governance. Like any DAO, the consensus rules governing most Bitcoin-

related operations are embedded into automated code (digital governance). But individual

miners control where and when they turn on their equipment. Though mining economics

(i.e., the price of energy) is the primary driver for these decisions, evidence is mounting

that anticipated regulatory environment is a serious consideration in miner decision-

making calculus.

In a spatial analysis of Bitcoin mining across the globe over time, Sun et al.

(2022) detect Bitcoin mining in 139 countries, with the greatest concentrations of

hashrate coming from areas with abundant and cheap energy production. They describe a

system of dynamic mining where large-scale miners are more willing than small miners

to relocate when regional energy economics change. But both favorable regulatory

measures (e.g., subsidies and tax benefits) and regulator attitudes were found to

“dramatically influence” (Sun et al. 2022, 5) movement decisions of major miners while

adverse policies drive them away. In particular, China’s ban spurred a new flurry of

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“spatial fluctuation and migration” (5) in which regulatory policy became more

influential in the miner decision-making process than before.

Several media reports indicate that dislocated miners from China packed up and

moved their operations across the globe to Texas (Feng 2021; Sigalos 2021; Rutwitch

and Feng 2022). Of course, the opportunity to capitalize on low energy prices is a

primary consideration. But in interviews, displaced miners also cite Texas policies

favorable to Bitcoin miners and a general positive disposition among prominent Texas

politicians as reasons for settling there. Texas has a deregulated energy market, low

barriers to entry for new businesses, and advantageous tax policies for industrial energy

producers and consumers.

Texas senators Ted Cruz and John Cornyn and Texas Governor Greg Abbott have

publicly expressed support for hosting Bitcoin mining in Texas, along with the CEO of

Texas’ energy grid manager, the Electric Reliability Council of Texas (ERCOT) (CNBC

2022).130 ERCOT runs a deregulated market where several market participants own

power plants and delivery energy through transmission lines they own as well. Contrast

this with markets in several states where utility companies have a monopoly on the

generation and distribution of electricity to end-users. These markets often feature

variable energy pricing based on demand dynamics, allowing miners to take advantage of

extended periods of low energy pricing (Hartley et al. 2019; Brown et al. 2020). Another

prominent feature of deregulated electricity markets is a robust, separate market for

demand response and ancillary services. Miners can be paid to provide a base load of

energy demand provided they are able to respond to grid operator instructions to curtail

130
Brad Jones, ERCOT CEO, made comments about how he believes cryptocurrency mining may actually
help develop and promote renewable energy and stabilize the Texas grid on CNBC’s Youtube Channel

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or shut down their loads. This changes the mathematical modeling for Bitcoin mining

profitability by adding the possibility for revenue generation through participation in the

ancillary services market.

CBECI lacks quantitative data on hashrate share of individual states within the

Untied States over time – it has only an estimate of where things stood as of December

2022. But a slew of media reports across several outlets point to miner migration within

the United States away from states like New York towards Georgia and Texas (Lonnroth

2022; Saul 2022; Hutton 2022). The tone among New York state regulators and

politicians changed in 2021 as an environmental push for curbing emissions led to

legislative efforts to expel cryptocurrency miners out of certain areas. Despite low energy

prices and cool weather favorable to mining, major miners like Foundry USA cite

“political and regulatory ambiguity” and “the possibility of a moratorium” (Saul 2022) as

reasons for moving away from New York as a base of operations. Months after Texas

Governor Greg Abbott made it clear he wanted his state to be the world’s leading

cryptocurrency mining location (Abbott 2021), New York Governor Kathy Hochul

signed a two-year moratorium on new permits for power plants housing cryptocurrency

mining equipment (Hutton 2022).131

2.7 Key Findings and Implications for Policymakers

Current approaches to cryptocurrency regulation across countries and jurisdictions

vary based on existing and precedent-setting regulatory frameworks, the domestic

cryptocurrency activity within each country, and each government’s general disposition

towards strict or flexible financial regulation (Blandin et al. 2019). Historically, the

United States and China have adopted different approaches towards currency and the role

131
New York is the first and only state to restrict Bitcoin or PoW-based mining by law.

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of the state in regulating new forms of value exchange. We should not expect the United

States to mirror China’s approach to cryptocurrency regulation, but policy analysts

should objectively consider the merits of their aggressive approach. The specific research

questions of this study are aimed at determining what impacts China’s mining ban had on

Bitcoin. But the macro implications of this essay speak to whether the policies of a single

government can influence the behavior, actions, value of a highly decentralized

autonomous organization. These findings include both analysis specific to Bitcoin as it

relates to the China ban and what it might mean for cryptocurrency policy more broadly.

1. Nation-state policies may impact cryptocurrency values over the short-term, but

evidence suggests cryptocurrencies like Bitcoin recover and retain their value over time.

First, there is little to no evidence to suggest the ban impacted Bitcoin as a store

of value over the long term. Other studies suggest the announcement of adverse state

policies in the past negatively impacted Bitcoin’s market price over the short-term (Borri

and Shakhnov 2019; Xie 2019). While the price of Bitcoin dropped after the ban was

announced, it recovered to new all-time highs within four months. Perhaps China’s 2021

mining ban had the same effect as other past announcements of adverse state policy. But

major news specific to institutional adoption of Bitcoin (i.e., Tesla’s announcement),

broader macroeconomic dynamics, and Bitcoin’s history of sudden downside price

volatility make determining causal mechanisms difficult in this case.

Nakamoto touted Bitcoin as an innovation in monetary policy which could offer

people a hedge against “the arbitrary inflation risk of centrally managed currencies”

(Nakamoto 2010). But the volatility in Bitcoin’s price action has made it so that only

long-term holders willing to endure massive unrealized gains and losses could possibly

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view it that way. Bitcoin has suffered price drops of 40% or more in a four-month span

seven times since 2011.132 Still, policymakers should not expect wild price swings to

threaten the long-term appeal of Bitcoin. Even if Bitcoin performs more like a speculative

stock than a true inflation hedge, its risk-adjusted rate of return over time has been strong

enough to keep long-term holders from selling their holdings (Radmilac and Van Straten

2022).133 Bitcoiners clearly see strong enough fundamentals to endure over 70% losses,

so market price cannot be the only metric of asset value, although it is the most obvious

place to start.

Hashrate is a key metric of network security in Bitcoin. Much of the asset’s value

is tied to whether Bitcoin works as intended. Aggregate network hashrate establishes a

threshold for mining control bad actors would need to add invalid blocks to the chain or

alter transactions. The distribution of both where that hashrate is based geographically

and how much individual mining pools control are matters of decentralization also

critical to network security. While multiple sources of quantitative and qualitative

evidence point to miners using proxy services to obfuscate their locations, China-based

miners were responsible for the majority of network hashrate throughout the pre-ban

period and the ban resulted in most of that hashrate coming offline for some time. Drops

in aggregate network hashrate occur during the intervention through some combination of

the loss of China’s hashrate (Table 2.3) and less efficient miners being forced offline due

to tightened profit margins as Bitcoin’s market value dropped. Top mining pools became

somewhat more powerful after the ban, but no single pool came close to controlling 51%

of total hashrate.

132
88%, 54%, 44%, 60%, 46%, 41%, 55% drops in 2011, 2014, 2015, 2018, 2021, and 2022 (twice)
133
Since 2014, Bitcoin has never lost value (in $USD terms) over a three-year span.

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 The rapid recovery of overall network hashrate during the ex-post period is the

most significant policy takeaway for consideration from this study. Increases in hashrate

based outside of China before the ban resumed during the ex-post period. Both CBECI

geolocational data and aggregate hashrate data show a robust and sustained recovery to

previous highs in just four months. Through some combination of rapid miner relocation

and increases in absolute hashrate already underway at the time of the ban, the broader

mining network supporting Bitcoin proved quite resilient.

This calls the limits of unilateral state action into question when it comes to

affecting geographically distributed DAOs. Bitcoin is far from immune to broader

negative economic market sentiments and further still from serving as a hedge against

inflation under a three-year time horizon. Macroeconomic trends, news regarding

institutional adoption, and/or nation-state policy still has a significant ability to damage

perceptions of Bitcoin’s value (i.e., market price), even as network fundamentals and

measures of its intrinsic value (i.e., network hashrate) remain solid. But impacting

network fundamentals like total hashrate would likely require coordinated action by

nation-states since the ability to locate nodes and mining operations which drive network

success anywhere help make DAOs resilient to geographically isolated policy.

Federalism presents special challenges to such coordinated action within the

United States. Policymaker attitudes towards cryptocurrency mining vary across states

and local governments (Section 2.6). We can expect states with deregulated energy

markets, relatively low energy prices, and crypto-friendly policy dispositions (e.g.,

Texas) to continue attracting cryptocurrency mining companies. Resilience in the market

value of Bitcoin makes it economically rational for miners to operate at maximum

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capacity most of the time.134 Absent some intervention, miners will continue to operate

their equipment so long as Bitcoin’s market value continues to facilitate high breakeven

energy prices. In such deregulated environments, economic incentives become the only

real governor of mining activity. Miners’ demonstrated willingness to relocate to crypto-

friendly regions means the current state-by-state, piecemeal approach to cryptocurrency

mining regulation in the United States may do little to affect country-wide mining

behavior over the long term. A White House Office of Science and Technology Policy

report on climate, energy, and crypto-assets recommended establishing “evidence-based

environmental performance standards” (OSTP 2022, 7) for cryptocurrency mining across

the country. Federal policymakers should move quickly to establish such clear guidelines

and consider disparate regional impacts as cryptomining becomes more entrenched in

certain states/localities than others.

2. Well-designed DAOs can embed adaptability measures (e.g., Bitcoin’s difficulty

adjustment) into their core software making them more resilient to adverse events (e.g.,

sudden loss of network hashrate).

Hashrate also plays a role in facilitating Bitcoin’s use as a medium of exchange.

Bitcoin’s ability to adapt to sudden, massive losses in hashrate is governed by the

algorithms in its core software. Difficulty adjustments occur every 2016 blocks, based on

the previous 2015 blocks, and difficulty “cannot be altered above [+300% change] or

below [-75% change] four times the current difficulty level” (Sergeenkov 2022).135 In

134
The higher the price of Bitcoin, the higher the breakeven price of energy (all else equal). It is
economically rational (i.e., profitable) to mine whenever energy prices are below the breakeven price of
energy. See Appendix A for more detail on determining the breakeven price of energy for Bitcoin mining
profitability.
135
This can be seen in the Bitcoin Core software (and viewed in Python) which can be found on the GitHub
website. For ease of communication, I reference a plain English translation provided in the Sergeenkov
(2022) article.

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theory, a policy intended to devastate Bitcoin’s ability to add new blocks and complete

new transactions would have to remove a tremendous amount of hashrate early in a 2016-

block cycle with near immediacy across several regions where Bitcoin operates.

China’s mining ban (while not designed to destroy Bitcoin completely) called for

an “orderly phasing out” (Zhang 2022) of cryptocurrency mining in the country. Even

with roughly half of Bitcoin’s hashrate coming offline, it took almost seven weeks to do

so, and enough hashrate existed outside of China to keep adding blocks to the chain

during the intervention period, albeit slower. Transaction volume decreased somewhat

following the ban, indicating reduced use of Bitcoin’s Layer 1 blockchain for final

settlement, but block time returned to normal less than a month after the cryptocurrency

mining portion of the ban formally took effect. In total, the ban appears to have no

discernible long-term effects on Bitcoin’s functionality as a medium of exchange.

Researchers and policy analysts at the Federal Reserve, Department of the

Treasury, and the Office of the Comptroller of the Currency should consider why people

continue to choose decentralized blockchain protocols as a method of value exchange.

The technology underlying cryptocurrencies like Bitcoin may facilitate efficiencies in

final settlement and cross-border payments (Gensler 2018; Casey et al. 2018; Onyx JP

Morgan 2021). This same technology can be leveraged for fiat currencies in the form of

CBDCs (e.g., China’s eCNY) and/or stablecoins and policymakers must consider the

advantages and disadvantages of each. CBDCs already face opposition in the United

States primarily due to financial privacy concerns.136 Both CBDCs and stablecoins may

also threaten the stability of the fractional reserve banking system (Yanagawa and

136
Senators Mike Lee (R-UT), Ted Cruz (R-TX) and Tom Emmer (R-MN) introduced three pending
legislative proposals designed to restrict or prohibit the establishment of a CBDC in the United States
during the 118th Congress.

122
Yamaoka 2019; Baer 2021). Rapid, widespread adoption of either CBDCs or stablecoins

could impact banknote deposit levels, reserve requirements, and lending costs

(President’s Working Group on Financial Markets 2021). But failure to provide a more

efficient settlement system for fiat currencies could lead to further adoption of

decentralized methods of value exchange outside the purview of state control.

3. The use of proxies and other technologies to obfuscate the locations of various

cryptocurrency network-related activities complicates geolocational data analysis and

presents a policy enforcement challenge.

CBECI’s data collection process suffers from some methodological limitations

and this study lacks fidelity on the sources of node activity reporting, but available data

indicates the Bitcoin network became more evenly geographically distributed in terms of

node and mining control (i.e., hashrate) after the ban. If this data is accurate, it indicates

the Bitcoin network is even less susceptible to the policies of individual nation-states

today. But there are several reasons to suspect geolocational data is unreliable, or

incomplete at the very least.

This study illuminates several potential cryptocurrency policy enforceability

problems caused by widespread use of privacy-enhancing technologies (i.e., VPNs and

TOR). CCAF protects miner anonymity at the CBECI application programming interface,

recognizes VPN activity in their data (and adjusts estimates accordingly), and relies on

the network latency associated with VPN use to discourage IP address spoofing. But the

sudden re-emergence of 30+ EH/sec China-based hashrate in September 2021 points to

the limits of these measures in accurately accounting for VPN use. CCAF should provide

more details about these limitations and a sensitivity analysis of the parameters involved

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in determining their estimation if CBECI data is to be empirically useful to policymakers.

Policymakers should consider the use of VPNs and TOR to protect the locations of

miners (Section 2.3.2) and node operators (Howell et al. 2023) when crafting rules and

regulations. Any policy designed to limit or restrict mining and/or cryptocurrency

operations would require some degree of non-IP address-based tracking enforcement to

be effective.

Policymakers might also consider how to encourage honest and transparent

mining practices and data sharing. Use of TOR (Section 2.3.7; Howell et al. 2023) and

VPNs (Section 2.3.2) increased during the ex-post period, though this study lacks

evidence to support claims of a causal relationship between the ban and increased privacy

measures. The privacy of network participants was a chief concern for Nakamoto (2008)

and early cypherpunks working on Bitcoin (Champagne 2014). It is possible that adverse

public policy measures only further incentivize trends towards anonymity and discourage

data sharing transparency while putting cryptocurrency proponents on the defensive.

4. Despite the ability to obfuscate their locations, network participants still factor the

anticipated local regulatory environment into their decision-making calculus.

Though the results of this study suggest there is little correlation between China’s

cryptomining ban and long-lasting changes to the Bitcoin network, policy environment

clearly matters to many cryptominers. Evidence suggests some miners based in China

remained there after the ban; either shutting down operations temporarily and restarting,

or using proxy services to obfuscate their locations until they deemed it safe to return to

business as usual (CCAF 2022; Kaloudis 2022; Feng 2022; Brown 2022). But both

quantitative and qualitative evidence shows several major mining operations were

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dislocated by the ban and specifically sought a more favorable regulatory environment.

The United States saw an influx of displaced miners from China (Feng 2021; Sigalos

2021; Rutwitch and Feng 2022) and a migration within the country away from states with

unfavorable cryptocurrency policy dispositions (Lonnroth 2022; Saul 2022; Hutton

2022), simultaneously. Despite the ability to obfuscate their locations, local regulations

and policies still factor into Bitcoin miner decision-making (Sun et al. 2022).

Policymakers should consider the merits of more accommodative cryptomining policies,

including deregulated energy markets and low barriers of market entry for cryptomining

businesses (e.g., Texas). Cryptomining companies can provide jobs, stimulate regional

economic growth, and expand the corporate tax base. But these benefits must be weighed

against the potential negative impacts of cryptomining.

Understanding how digital assets and DAOs function and how they differ from

traditional financial instruments and institutions is key to the development of effective

policy. The results of this study point to the challenges even large, influential nation-

states face when unilaterally implementing policies designed to affect digital assets

governed by well-distributed networks. But this study examines policy impacts from the

perspective of the DAO. While the Bitcoin network survived and may have even grown

more resilient as a result of China’s ban, it is entirely possible that the ban served its

purposes in the eyes of the PBOC and Chinese Communist Party. Another study might

consider the ban’s effectiveness from that perspective, including an analysis of the kind

of capital outflows and renminbi circulation China sought to control two years earlier

with its State Administration of Foreign Exchange policy without a ban in place. Finally,

this study is mostly quantitative and limited to statistical analyses of newly developed

125
metrics for understanding how these new organizations work. The human element of

DAOs (e.g., Bitcoin miners) requires a closer qualitative look (e.g., deliberate, semi-

structured interviews) than the one included in this essay to unpack the relationship

between anticipated regulatory environment and decision-making considerations.

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 Essay 3

‘Green’ Bitcoin? Evaluating Proof-of-Work Mining as a Tool in the Energy Transition

Abstract:

Bitcoin’s high energy use and carbon footprint is a major part of the public

discourse around the world’s most popular cryptocurrency. In recent years, some Bitcoin

miners have made a concerted effort to align their operations with energy and

environmental policy goals. In Texas, several politicians at the local, state, and national

levels of government and Electric Reliability Council of Texas (ERCOT) leaders have

welcomed these miners, touting the benefits of incorporating flexible loads onto the

energy grid. Models and simulations suggest that flexible loads can provide grid stability

and incentivize the buildout of further renewable energy generation. But others caution

new loads may place undue burdens on a stressed energy grid. This study evaluates

several claims made about the potential benefits of proof-of-work cryptocurrency mining

using empirical data from the recent influx of Bitcoin mining on the Texas energy grid.

Results show most large Bitcoin mining data centers are in regions with high levels of

renewable power generation relative to the rest of the state while nearby wholesale

energy prices remain consistent with statewide trends. Additionally, evidence shows

Bitcoin miners are uniquely suited to participate in ERCOT’s “controllable load

resource” program – a demand response program requiring loads to cede a high degree of

control to grid operators. This essay provides policymakers with insights regarding grid

expansion, energy economics, and how to best incorporate flexible data centers into the

renewable-led energy transition, responsibly.

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3.1 Introduction

In recent years, Bitcoin proponents have made a concerted effort to recast proof-

of-work (PoW) cryptocurrency mining in a more positive and environmentally friendly

light. PoW mining effectively functions as a kind of highly flexible data center which can

be located anywhere.137 Renewable energy resources (e.g., wind and solar) are

intermittent, meaning their capacity to produce energy is mostly dependent on

environmental factors outside human control. Renewable generators often curtail output

when capable of producing more energy than the grid demands and/or can transmit.

Mining advocates argue these loads are uniquely positioned to address the increasing

curtailment and intermittency issues in electricity markets with high variable renewable

energy (VRE) penetration by acting as a consistent customer and consumer of cheap

energy for renewable power generators. This could improve renewable plant economics

and incentivize VRE growth (Carter and Connell 2021; Saylor et al. 2022). Furthermore,

several studies suggest adaptable data centers are particularly well-suited to participate in

demand response programs which can help provide grid operators with greater flexibility

and improve grid stability (Chen et al. 2014; Wierman et al. 2014; Hale et al. 2016;

Klinger and Szilvas 2020). Demand response programs are used by grid planners and

operators to provide financial incentives to energy producers and/or consumers to reduce,

increase, or shift their production or consumption.

The purpose of this study is to shed light on three questions regarding Bitcoin’s

long-term sustainability:

137
Mining proponents often refer to this as “location agnosticism” (Carter and Connel 2021). Since mining
equipment is small and miners require little more than internet and electricity, these data centers can be
highly modular and co-locate with any power generation source. I explain this concept in further detail in
section 3.2.2

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 1. Does Bitcoin mining incentivize renewable growth?

2. How does Bitcoin mining impact energy prices?

3. Does Bitcoin mining provide flexibility to grid operators?

Crypto advocates and energy experts have discussed how Bitcoin mining can incentivize

renewable growth and increase grid stability in articles, podcasts, and blogposts while

presenting little evidence to demonstrate whether this is happening in practice at a

meaningful scale. If in fact the Bitcoin network can lower its carbon footprint and

conduct mining sustainably over the long-term, the field lacks empirically based

assessments of whether its network of miners is currently well-positioned to align with

energy policy goals.

This essay begins with an explanation of the various theoretical arguments and

models for how PoW mining data centers might play a role in the transition to a

renewable-based energy grid. Next, I take a critical look at the academic literature around

Bitcoin’s sustainability. I find most published literature focuses on the energy

consumption associated with PoW cryptocurrencies and their potential negative effects

on the environment (e.g., pollution, e-waste, carbon emissions) while far fewer

cryptocurrency mining studies even consider its potential benefits. Finally, I look at

Bitcoin mining in Texas using geolocational data, wholesale electricity pricing, and

demand response data from the Electric Reliability Council of Texas (ERCOT) to

determine whether miners are well-positioned to incentivize renewable growth, describe

wholesale energy pricing trends before/after mining data centers came online, and

examine miners’ participation in demand response programs.

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 This work sheds light on the three questions above regarding Bitcoin’s long-term

sustainability and the energy economics associated with using flexible data centers in the

transition to a more renewably based grid. Methodologically, it offers a replicable

template for using publicly available data to determine the local impact of high loads on

electricity pricing beyond synthetic grid simulations (Li et al. 2020; Menati et al. 2022).

From a public policy perspective, the analysis, results, and conclusions of this study

could be considered in determining optimal wholesale electricity market design (i.e.,

regulated vs. de-regulated market structures) and PoW mining regulation and legislation.

3.2 Background and Theory

In April 2021, President Biden set an ambitious goal for the United States:

“achieve a 50-52 percent reduction from 2005 levels in economy-wide net greenhouse

gas (GHG) pollution in 2030” (Biden 2021) with the ultimate goal of a net-zero emission

(NZE) economy by 2050. Experts generally agree that both increased electrification

(electricity’s share of total energy consumption) and the decarbonization of that

electricity (the share of electricity sourced from high greenhouse gas emitters) are critical

to making meaningful progress toward NZE goals (Steinberg et al. 2017; Nadel and

Ungar 2019; Griffith 2022). In other words, power grids will need to be able to deliver

much more electricity to end users and utilize more renewable power generation to do it.

This section provides a background on the challenges associated with

incorporating more renewable power generation onto power grids in the United States.

The first two subsections focus on energy economics. Renewable growth is costly and

requires grid infrastructure expansion to avoid curtailment (3.2.1). I outline the

theoretical use case for how PoW mining can improve renewable economics during the

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energy transition (3.2.2). Renewable intermittency and increased reliance on electricity

also present grid stability challenges (3.2.3). This section concludes with a brief review of

electrical engineering research on the role interruptible data centers could play in

alleviating this problem by providing grid flexibility (3.2.4).

3.2.1 Renewable Power Generation Economic Challenges

Achieving net-zero emissions (NZE) through electrification by 2050 is a massive

undertaking. In the Electric Power Research Institute’s (EPRI) analysis of what it would

take for the U.S. to meet 50% GHG reduction by 2030 goals, it found electrification of

end-use sectors (transport, buildings, and industry) would need to accelerate rapidly to

reduce emissions (by 23-33% compared to the current reduction of just 2% from 2005

levels) and capacity additions to wind and solar power would need to double or triple

currently projected additions for the 2020s (EPRI 2021, 3-4).138 Texas leads the United

States on this front, adding 7352 megawatts (MW) of new wind and solar capacity in

2021 – more than the next four highest states combined (American Clean Power

Association 2022).

But high levels of VRE penetration come with economic challenges. The costs of

producing wind and solar have decreased as technologies improve over time (Creutzig et

al. 2017; Victoria et al. 2021). However, the “energy and capacity revenue potential for

wind and solar generation in a wholesale market environment” (Millstein et al. 2021,

1750) declines as it becomes more abundant in a market due to its low marginal cost,

particularly during peak production times. With few exceptions, researchers found

138
The rate would need to double or triple to achieve the 50% reduction by 2030 depending on assumptions
in the EPRI (2021) model. “Assuming electrification economics and technology improvements consistent
with earlier EPRI studies” (2) the rate would need to triple, but if we assume “additional technology and
policy drivers accelerate electrification by lowering the cost of electricity-using technologies” (2) the rate
would only need to double.

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regional transmission organizations (RTOs) and independent service operators (ISOs)139

with higher levels of wind and solar penetration levels see the largest reductions in

marginal wind and solar energy value (Millstein et al. 2021). This well-documented

economic trend is called VRE value deflation. If falling costs of renewable production

fail to keep pace with the declining value of marginal renewable energy in high

penetration markets, wind and solar may reach saturation points due to simple

supply/demand economic infeasibility.140 As renewable energy penetration increases,

integration costs for new projects increase as well, passing costs on to customers and

discouraging generator investment (Imcharoenkul and Chaitusaney 2022).

Wholesale electricity prices vary geographically depending on load patterns,

generation capacities, and transmission limits at each location. Locational marginal

pricing (LMP) reflects this dynamic value of energy across different pricing nodes (ISO

NE 2022). Energy-rich areas with low levels of demand and limited transmission

capacity often experience negative wholesale energy pricing. Regions with high VRE

penetration see a higher frequency of negative LMPs relative to the rest of the United

States (Seel et al. 2021). In theory, negative energy prices should result in the cessation of

energy production – it seems nonsensical for producers to pay consumers to take energy

it costs them to generate. However, generators may continue production due to the

physical constraints or prohibitive costs associated with ramping down and subsequently

139
RTOs and ISOs are the organizations and operators which manage electric grids. They are charged with
“providing non-discriminatory access to transmission” (FERC 2022) by the Federal Energy Regulatory
Commission (FERC).
140
Solar power in California serves as a prime example of the paradox of renewable energy value deflation.
The rapid influx of solar generation reversed the diurnal profile of energy pricing in California – prices are
now higher in the early evenings because solar accounts for nearly 40% of generation during the daytime
when electricity prices used to be highest (LBNL 2019; California ISO 2021). This concentration of
massive cheap, clean energy has suppressed energy prices during those hours of the day when solar is most
abundant, making it particularly susceptible to value deflation (LBNL 2019).

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restarting production. Various tax credits and subsidies allow renewable producers to

remain profitable despite paying the grid to take their energy when LMPs turns negative.

As such, continued development of new VRE projects and the profitability of existing

VRE plants is largely dependent on non-permanent subsidies and tax credits.141

Figure 3.1 Notional Example of Curtailment (author)142

The grid in Texas was originally designed for a small number of centralized

power stations placed in optimal locations. Geographic mismatches between the point of

abundant renewable energy generation and high demand load centers can only be solved

by increasing transmission capacity and/or storing surplus energy in utility-scale batteries

or other storage technologies (e.g., pumped-storage hydropower) to be used later when

the wind is not blowing, or the sun is not shining, and transmission lines are no longer

141
For example, the renewable electricity production tax credit (PTC) was first enacted in 1992 and has
been extended 12 times to help with the upfront capital costs associated with renewable plant production
(CRC 2021). The PTC was designed to decrease year over year from the date each facility began
construction. In 2021, producers received $18 per megawatt hour of wind energy produced at a qualified
facility (EIA 2021).
142
Figure 3.1 is an oversimplification of how power is produced and electricity is transmitted to demand
centers. All numbers are notional. Graphic is author-generated, but the idea for using this visual concept to
explain curtailment was drawn from a blog article titled “Bitcoin Mining and the Grid” by Blake King.

133
congested. But building out high-capacity transmission infrastructure is very costly143 and

can take over a decade to complete, while renewable plants may take just 2-3 years to

construct (NREL 2016). Estimates vary depending on assumptions and various modeling

inputs but building battery infrastructure to support 12-hour electricity storage for an 80%

renewable system could cost around $2.5 trillion (Shaner et al. 2018; Temple 2018).144 In

the absence of more storage or transmission, this excess energy gets curtailed and local

wholesale energy prices drop (Figure 3.1).145

Figure 3.2 (left). Distance Between West Texas VRE and Metro Areas (ERCOT 2022)
Figure 3.3 (right). Wind (blue) and Solar (yellow) Plants in Texas (author)146

West Texas is rich in wind and solar energy generation (Figure 3.3) but far from

the major electrical load demand centers in the east (Figure 3.2). Dallas, Austin, Houston,

143
The 15,575 circuit miles of transmission lines laid during Texas’ CREZ project cost an average of $1.1
million/mile (Cohn and Jankovska 2020)
144
NREL’s zero carbon by 2050 scenario required 932 GW (932,000 MW) in battery power capacity or
6097 GWh in battery energy capacity to support 94% renewable energy generation along with “significant
round-the-clock curtailment” amounting to “nearly 200 days with curtailment in all 24 hours” (Jorgenson et
al. 2022, 7). In another NREL study modeling hundreds of scenarios, Frazier et al. (2021) found storage
estimates ranging from 130 GW to 680 GW could be enough to support an 80% renewable energy grid by
2050 depending on cost reductions, technological advances in battery development, and multiple
combinations of power generation/transmission upgrades.
145
Excess supply does not necessarily always coincide with excess demand, but carbon emitting producers
may have to make up the difference closer to high load demand centers when it does, as seen in Figure 3.1.
146
ERCOT West Load Zone highlighted. Wind and Solar plant locations mapped using QGIS according to
EIA Form 860 data

134
and San Antonio all lie at least 250 miles away from where the vast majority of Texas’

renewable energy is generated (ERCOT 2022, 18). ISOs must set interconnection limits,

or a “maximum amount of power that a facility can inject into the grid,” (Kahrl et al.

2021, 14) for all generators; and VRE projects are often capable of providing more power

than the grid can accept. Additionally, transmission lines are limited by how much power

they can carry.147

In Texas, insufficient transmission infrastructure constrains VRE growth and

leads to congestion and curtailment.148 Congestion occurs when transmission lines are

overloaded (i.e., trying to deliver more power than lines are designed to carry). When

congestion occurs, ERCOT must rely on higher-cost generators closer to load demand

centers to reduce power flows while lower-cost generation options are available. ERCOT

defines transmission congestion as “the differences in costs of delivering electricity to

different locations” and calculates these costs based on “the difference between the

payments by loads at their locations and the payments to generators at their locations”

(Potomac Economics 2021, 19). Real-time congestion costs reached $2.1 billion by the

end of July 2022, matching total congestion costs for the entire year in 2021 (Potomac

Economics 2022).149 Because of Texas’ high (and growing) level of solar and wind

147
Point of interconnection (POI) limits are slightly different than transmission capacity limitations. POI
limits are outlined in interconnection agreements between grid managers and producers. Various power
lines have different current/amperage limits.
148
From 2005 to 2014, Texas identified competitive renewable energy zones (CREZ), or areas rich in
renewable energy potential targeted for transmission planning and development. CREZ policies were
designed to provide predictability and incentives for building renewable energy projects in the west.
Renewable development expanded so rapidly that ERCOT saw “a 150% increase in installed solar capacity
from 2020 to 2021” (ERCOT 2022, 11). Now, transmission infrastructure developed is already saturated
with renewable output. About 60% of Texas’ wind and solar resources projected to be operational on the
ERCOT grid by 2023 are planned for West Texas. This 38 GW of renewable energy in the west is “more
than double the designed capacity for the Competitive Renewable Energy Zone (CREZ) projects” (ERCOT
2022, 1).
149
These figures are especially alarming since Winter Storm Uri “accounted for almost one third of all of
the congestion costs [in ERCOT] in 2021” (Potomac Economics 2021, 20).

135
energy penetration, ERCOT’s 2023 projection of 6,700 GWh of wind and solar

curtailment due to West Texas export limits is projected to increase tenfold to about

67,000 GWh of curtailment by 2030.150 Solar power curtailment was once practically

nonexistent, but Texas has set a new record for curtailment of both wind and solar

production each year since 2017.

Finally, the United States has a transmission/distribution problem paired with an

administrative bottleneck at the point of interconnection. A massive influx of planned

renewable power plants have led to long interconnection queues or wait times between

when a generator requests and is granted interconnection to the grid for commercial

operation. These wait times “increased from ~2.1 years for projects built in 2000-2010 to

~3.7 years for those built in 2011-2021” (Rand et al. 2022, 21). PJM Interconnection (the

nation’s largest grid operator) faces an interconnection backlog so large they called for a

two-year pause on reviewing new projects (Bruggers 2022). This extends the time

horizon for VRE projects to see returns on investment.

3.2.2 How Miners Hope to Improve Renewable Economics

Proof-of-work (PoW) mining involves the application of computing power to

solve the SHA-256 algorithm (i.e., cryptographic puzzles) in hopes of winning the

subsidy associated with completing a block of Bitcoin transactions and adding it to the

blockchain. Application-specific integrated circuits (ASICs) are the individual machines

used to work through secure hash algorithms and “mine” Bitcoin.151 Miners organize into

pools, where they are compensated according to how much algorithm they “hash” or

150
This is a massive amount of wasted energy. For a reference point, DoE (2019) estimates 1 Gigawatt
hour is roughly equivalent to the amount of power 3.125 million solar panels or 364 utility-scale wind
turbines could produce in one hour.
151
ASICs vary by model, but individually they are each roughly the size of a shoebox.

136
contribute to solving the puzzle. Mining profitability is mostly dependent on the price of

Bitcoin (the reward for solving a block), the price of energy (the cost of powering

computing equipment), the efficiency/performance level of the mining equipment, and

network hashrate (how many others are competing).152 Miners can do little to affect

Bitcoin price, ASIC efficiency, and hashrate, so they are highly incentivized to seek out

the cheapest energy possible.

Bitcoin miners and some energy experts argue mining operations can serve as a

near-constant buyer of cheap energy – helping renewable generators avoid curtailment

and setting an energy “price floor” when LMPs go negative. Mining data centers are

highly scalable, allowing miners to provide precisely as much demand capacity needed to

soak up excess power generation.153 This level of scalability plays a role in Bitcoin

mining’s “unconstrained location agnosticism” (Carter and Connel 2021). Since miners

only need to be able to broadcast and participate in the blockchain network via cellular

data or satellite internet, they can co-locate with any power generation source. Mining

data centers are commonly housed in the equivalent of a shipping container that has been

optimized for computational processing. In fact, some companies build highly modular

containers outfitted with ASICs and a self-contained airflow system.154 These containers

can be transported directly to and co-located with sources of power generation,

eliminating the need for costly transmission lines and their associated electricity losses.

152
See Appendix A for a full breakdown of mining economics. Network hashrate (defined in detail in
Essay 2) is the total amount of computing power dedicated to mining Bitcoin across the network.
153
One of the most advanced and commonly used ASICs currently is the Antminer S19 Pro with a power
consumption of 3.25 kw (Intellion Data Systems 2022). Thus, a shoebox and 3.25 kw represent the lower
bound of scalability for any Bitcoin mining data center using S19s with a theoretically unlimited upper
bound of the total number of available ASICs.
154
EZ Blockchain’s “EZ Smartbox” is one example

137
3.2.3 Grid Stability Challenges

By several estimates, meeting President Biden’s goals for decarbonization could

require electricity’s share of end-use energy consumption in the United States to increase

from 20% currently to 60% by 2050 (Princeton 2021; U.S. Department of Energy 2022;

Walton 2022). This effectively triples the United States’ reliance on the power grid. The

grid is a complex mix of varying levels of demand at different geographic points,

connected to various sources of power generation by transmission lines with varying

capacities. ISOs manage this complexity constantly using projections, modeling, and

adjusting to real-time data. The grid must maintain a nominal frequency of 60 Hz to

remain operational and avoid blackouts.155 Sudden losses of generation or dramatic,

unanticipated changes in load can cause the grid frequency to deviate from this nominal

value and trigger cascading failures (i.e., “rolling blackouts”) if left uncorrected over

certain time durations (Folgueras et al. 2017). Grid operators often get commitments from

commercial loads (i.e., large energy consumers) to reduce their power demand when

electrical supply frequency drops below acceptable limits in exchange for some form of

financial compensation in various demand response programs.156

The U.S. Energy Information Administration (EIA) projects the share of

renewable electricity generation in the United States will increase from 21% in 2021 to

44% by 2050, requiring more demand-side flexibility as VRE penetration increases (Pina

et al. 2012; Alizadeh et al. 2016; Olsen et al. 2020). In California where solar

155
A complete explanation of the dynamic set of factors that ISOs face in maintaining grid frequency is
outside the scope of this paper, but generally speaking the grid frequency cannot stray far from 60 Hz
without triggering blackouts or other destabilizing events. See Folgueras et al. (2017) for an advanced
discussion of grid frequency dynamics.
156
“Frequency response,” or a commitment for a load to reduce or eliminate consumption during an
underfrequency event is just one of several specific types of demand response programs.

138
photovoltaic (PV) penetration is high, grid managers keep a close eye on net load, or “the

difference between forecasted load and expected electricity production from variable

generation resources” (CAISO 2021, 1). Figure 3.4 depicts CAISO’s net load at each

hour of January 11th for years 2012 through 2020. The resulting net load curves show

how much controllable power generation CAISO must leverage to fill the gap between

variable generation resources and load demand across the system. These net load curves

grow increasingly steep each year as solar PV penetration increases. The “start” points on

the graph show when CAISO must begin dispatching flexible resources to meet demand

(i.e., net load curves ramp up). The “stop” points show when CAISO must reduce that

flexible generation. The lower the net load is in the early afternoon, the higher the risk of

overgeneration, so oversupply must be mitigated. As the curve ramps up in the late

afternoon, this signals a mismatch as electricity demand rapidly outpaces VRE

generation. As this happens, ISOs like CAISO require more flexible, controllable

resources on the demand side which can ramp up or down inexpensively to adapt to

changing grid conditions. (CAISO 2021).

Figure 3.4 “Duck Curve”: CAISO’s Net Load for Jan. 11, Years 2012-2020 (CAISO)157

157
Researchers projected the steepening curves would resemble a duck and coined the term “duck curve”
(Roberts 2016; 2018). Their projections were correct. In fact, net load fell even faster than predicted
(Breakthrough Institute 2021).

139
3.2.4 How Miners Hope to Stabilize the Grid

In theory, pairing renewable power generation with Bitcoin miners offers

tremendous economic benefits and potentially ensures Bitcoin is mined with clean power,

only. Miners can provide a source of revenue for projects stuck in interconnection queues

awaiting connection to the grid. But this implies a “behind the meter” Bitcoin mining

configuration, where miners draw power directly from renewable generators and not the

grid itself. In practice, most Bitcoin mining in the United States today is grid-

connected.158 Electricity from the grid can come from renewable or high carbon-emitting

power sources. Like any new load, grid-connected miners increase energy demands and

contribute to higher prices.

But mining proponents argue their data centers are uniquely positioned to provide

the kind of flexible base loads grid managers need to ensure stability. During mining,

each successive hash is statistically independent of the last, so the mining process is

perfectly interruptible without negating any work previously done or affecting any future

work yet to be complete. Frequency response is just one of many ancillary services (AS)

or demand response (DR) programs ISOs engage in with commercial loads to keep the

grid operational. Demand response constitutes any agreement between grid managers and

consumers to shift or reduce electricity demand in power markets to provide flexibility

and help balance the grid (IEA 2022).

Electrical engineering research supports arguments for the usefulness of

interruptible data centers in providing flexible base loads in various demand response

158
There are a few examples of large-scale Bitcoin mines operating with renewable energy sources
completely “behind the meter,” but overwhelming evidence suggests most mining occurs in grid-connected
configurations.

140
programs (Wierman et al. 2014; Patki et al. 2016; Klinger and Szilvas 2020).159

Interruptible loads were found to be highly competitive, cost-effective alternatives to both

storage as a compensation for renewable intermittency as grid capacity expands, and as a

planning reserve requirement reducing the need for natural gas during periods of peak

demand (Hale et al. 2016). A data center’s suitability to participate in demand response

programs correlates to the degree of flexibility and interruptibility it can tolerate,

suggesting fully interruptible Bitcoin miners could be more effective than typical data

centers in providing demand response. Researchers found potential profits and the

amount of control ceded to operators were positively correlated in the New York

Independent System Operator (NYISO) ancillary services market, while response time

requirements and potential profits were negatively correlated (Aikema et al. 2012). One

study found that more adaptable data centers capable of dynamic control can “decrease

their energy costs around 50%, while providing the ISOs and the society in general with

cost effective demand side reserves that render massive renewable generation adoption

affordable” (Chen et al. 2014, 105).

Using data centers as interruptible loads for grid stabilization is a novel idea

already underway in Singapore (Xia et al. 2015) and ERCOT has expressed the need for

similar controllable load resources (CLR) in Texas. Non-controllable load resources are

“blocky loads” that are triggered automatically by an underfrequency relay or manually

after an order from ERCOT to help with frequency response. ERCOT requires CLRs to

be capable of both base point following and primary frequency response (ERCOT 2022).

With primary frequency response, CLRs can drop load immediately and unilaterally to

159
Frequency response is a common demand response program, but the research reviewed in this section
covers several types of demand response.

141
bring frequency back into tolerance in the event of a generator failure and a massive drop

in frequency. But under base point following, grid operators tell resources how much load

to drop over a certain period. This type of load attenuation is more difficult to achieve

than basic emergency response.160

3.2.5 Summary

It is true that several synergies exist between Bitcoin’s incentive structure and

policy goals in the energy transition. Miners seek out cheap energy and the levelized

costs of wind and solar energy have decreased relative to carbon-emitting sources over

time (Lazard 2021). Early investment incentives in wind and solar projects decrease as

VRE penetration increases. Bitcoin mining can certainly provide another source of

revenue when renewable power would otherwise be curtailed or sold at low/negative

prices. As battery and transmission infrastructure buildout lags VRE generation,

controllable base loads provide grid operators with much needed flexibility – particularly

as the grid becomes increasingly dependent on intermittent sources of energy.

But if Bitcoin mining is to play a role in the energy transition, a sober assessment

of the gap between where mining is today and where this ideal, sustainable Bitcoin

concept would like to be is needed. Additionally, the feasibility of any partnership

between VRE power generation and Bitcoin miners is dependent on sensitivity analyses

of the factors which play a role in mining profitability: Bitcoin price, energy price, miner

efficiency, and network hashrate. More efficient ASICs increase the breakeven price of

energy (under which it is profitable to mine), but since this equipment is more expensive

160
ERCOT (2022) currently has eight such CLRs representing ~750 MW of controllable load – all of
which are bitcoin mining data centers. Compare this to ERCOT’s 7600+ MW of non-controllable load
resource capacity (only 650 MWs is data mining), as the level of control, technological sophistication, and
lengthy approval process makes CLR status more difficult to obtain.

142
than older, less efficient equipment it also requires more uptime to ensure profitability.

Simply stating Bitcoin miners will only soak up cheap, clean, and stranded energy is not

an accurate statement without attaching several caveats. Additionally, Bitcoin’s history of

rapid downside price volatility can quickly shrink mining profit margins or make mining

unprofitable. This changes the math for VRE investors factoring mining revenues into

their planning assumptions. Lastly, flexible base load still increases aggregate energy

demand for any grid. This can add stress on the grid and increase energy prices, so the

minute details of how such loads work in demand response programs matter.

The literature review that follows aims to provide an assessment of where Bitcoin

mining currently sits along the path to sustainability. Determining Bitcoin’s energy

consumption and its carbon footprint should factor into weighing its costs against

potential future benefits. Studies specific to the feasibility of the Bitcoin-VRE partnership

include sensitivity analyses of factors critical to Bitcoin profitability outlined above and

shed some light on the pros and cons operators must consider when welcoming Bitcoin

miners onto their grid.

3.3 Bitcoin’s Energy Use and Impacts – A Critical Literature Review

PoW cryptocurrency mining has attracted a great deal of negative attention and

critical analysis in academic circles for its high energy use. Largely in response to this

criticism, new cryptocurrencies have emerged intending to be less energy-intensive by

design, and others have made changes to make their existing protocols more eco-friendly.

Ethereum, the world’s second-most popular cryptocurrency, switched from a proof-of-

work (PoW) protocol to a proof-of stake (PoS) protocol with the expressed purpose of

making its network “less energy-intensive, and better for implementing new scaling

143
solutions” (Ethereum 2022) than its previous PoW system161 in September 2022. This

“Ethereum merge” left Bitcoin as the last major cryptocurrency to use the more energy-

intensive PoW protocol for validating/processing transactions and creating new coins

(i.e., mining).162 Bitcoin remains the world’s most popular cryptocurrency by market

capitalization and the amount of computing power dedicated to mining remains near all-

time highs historically despite major downside price volatility in 2022. Bitcoin’s

proponents insist that its energy-intensive protocol is critical to the security of its

network. Energy backs its value as an asset, and its use is a “feature, not a flaw”

(Bradford, Bloomberg 2022) in its design.

Still, Bitcoin mining’s long-term future in the United States depends in large part

on perceptions of its ability to minimize its carbon emissions; and the academic

community plays a significant role in shaping those perceptions. Several studies estimate

Bitcoin’s overall energy use (3.3.1) and its impacts on climate change (3.3.2). The White

House Office of Science and Technology Policy (OSTP) report on “Climate and Energy

Implications of Crypto-Assets in the United States” (2022) cites several of the studies

included in this literature review in its recommendations to policymakers. Evaluating the

quality of these studies (3.3.3) is of critical importance to formulating good policy. The

impacts Bitcoin mining may have on nearby communities are also relevant policy

considerations (3.3.4). Finally, I summarize the findings of other studies focused on the

161
A full explanation of the differences between PoW and PoS protocols falls outside the scope and focus
of this study. For a more comprehensive “Taxonomy of Blockchain Technologies,” see Tasca and Tessone
(2017).
162
Other PoW-based cryptocurrencies exist (see https://coinmarketcap.com/view/pow/), but the collective
computing power dedicated to mining these other cryptocurrencies are insignificant in comparison to
Bitcoin. As such, “Bitcoin mining” and overall “PoW mining” are colloquially equivalent, post-Ethereum
merge.

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economics of renewable-based Bitcoin mining (3.3.5) and its potential impacts on grid

stability (3.3.6).

3.3.1 Assessing and Projecting Bitcoin’s Overall Energy Use

Methods for estimating and/or projecting Bitcoin’s overall energy consumption

have evolved considerably over time. Early estimates suffered from a lack of precision.

Wide ranges were based on best available data, broad assumptions, and more

simulation/extrapolation than concrete empirical evidence. For example, O’Dwyer and

Malone (2014) published one of the earliest estimates of Bitcoin’s overall energy use

between 2009-2014 using historical data about Bitcoin’s mining difficulty and the

hashing efficiency163 of various mining hardware at the time. The range of energy

efficiencies for various hashing technologies yielded a wide estimate of possible overall

network power usage (0.1-10.0 GW per year).164

McCook (2014) was the first to use aggregate data about large mining pools to

estimate how much hashrate specific models of application-specific integrated circuits

(ASICs)165 were responsible for across the network and included this mix in an

estimation of overall energy consumption. His sensitivity analysis included different

hashing efficiencies and electricity prices and came up with a range of estimates much

lower than O’Dwyer and Malone’s but comparable to Vranken’s (2017) work years later.

Vranken considered capital expenditures and new research (Magaki et al. 2016) about the

use of several ASICs in specialized data centers in his estimations. Vranken found the

163
For a comprehensive explanation and mathematical model of Bitcoin mining economics, see Appendix
A
164
This is converted to TWh/year in Table 3.1 for consistent units across all estimates. With 8760 hours in
a year, 1 GW = 8.76 TWh.
165
ASICs are highly specialized Bitcoin mining hardware dedicated to solving the SH256 algorithm as
efficiently as possible.

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upper bound of O’Dwyer and Malone’s (2014) estimate to be “completely unrealistic”

(Vranken 2017, 5) placing his upper bound 95% lower than O’Dwyer and Malone’s

(Table 3.1).

More assessments of Bitcoin’s power consumption based on network hashrate,

mining hardware efficiency, and estimated share of network hashrate per hardware model

were published in 2018 (Bevand 2018; Krause and Tolaymat 2018; deVries 2018) but

deVries added a new, economic-based method for projecting its expected electricity

consumption in the future. Based on Hayes’ (2017) cost production model for valuing

Bitcoin, deVries assumed miners would hash until marginal costs equaled marginal

revenue. Since “market forces drive the industry toward an equilibrium whereby firms

will earn zero economic profit” (deVries 2018, 803), deVries argued the electricity and

production costs at equilibrium could be used to determine where Bitcoin’s electricity

costs were headed based on lifetime electricity use assumptions and production costs

associated with various ASICs.

A similar methodology is used in Digiconomist’s Bitcoin Energy Consumption

Index. Digiconomist is a self-described platform “dedicated to exposing the unintended

consequences of digital trends, typically from an economic perspective” (Digiconomist

2022). Its index seeks to measure Bitcoin’s yearly energy consumption in TWh/year

dating back to July 2017. Its process begins by calculating miner revenues, estimating

what percent of revenues are spent on electricity “in equilibrium” and then converting

those costs to electricity consumption based on another per kWh estimate of their

respective electricity costs.

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 Cambridge University’s Bitcoin Electricity Consumption Index (CBECI) is now

widely accepted by academics and Bitcoin enthusiasts alike as one of the most accurate

estimators of the Bitcoin network’s power demand (Carter 2021).166 CBECI includes

several parameters in its model and uses actual empirical data from Bitcoin mining pools.

Cambridge is quite transparent about the limitations of its methodology, assumptions

made, and what factors into its sensitivity analysis. Table 3.1 compares yearly estimates

of Bitcoin’s electricity consumption to CBECI estimates and shows the number of

citations for each study on Google Scholar.167 CBECI estimates are much lower than that

of Digiconomist’s index, deVries’ 2018 estimates, and O’Dwyer and Malone’s 2014

estimates.168 Studies concluding with high and low estimates of Bitcoin’s electricity

consumption (relative to CBECI) are both widely cited.

Table 3.1 Estimates of the Yearly Electricity Consumption of the Bitcoin Network Over Time (TWh)
Author/Source Year Citations (Google) Lower bound Estimate Upper bound CBECI
O'Dwyer and Malone 2014 654 0.876 26.28 87.6 4.79
McCook 2014 37 0.911 1 1.708 4.79
Krause and Tolaymat 2016 218 2.479 5.46
Bevand 2017 26 5.61 7.15-8.27 10.93 14.44
Vranken 2017 409 0.876 4.38 14.44
Digiconomist 2017 19 5.03 13.66 14.44
Krause and Tolaymat 2017 218 8.304 14.44
Bevand 2018 26 14.19 18.4 27.47 45.44
Stoll et al. 2018 268 48.2 45.44
deVries 2018 511 22.338 67.189 78.139 45.44
Digiconomist 2018 19 43.67 71.12 45.44
Digiconomist 2019 19 39.87 69.79 57.09
Digiconomist 2020 19 46.97 59.32 68.52
Jones et al 2020 8 75.4 68.52
Digiconomist 2021 19 28.85 134.76 104.89

166
Carter is a digital asset researcher, venture capitalist and Bitcoin proponent who uses CBECI in his
articles and studies. CBECI was featured by Bitcoin Magazine in 2019 as “what might be the most
statistically sound and feature-rich model on Bitcoin’s power consumption to date” (Harper 2019). CBECI
is cited several times in OSTP’s report on crypto-assets and the environment as well.
167
The CBECI estimate column in Table 3.1 offers a comparison point for each study’s estimate across all
years since CBECI is the only index providing estimates going back to 2014. The International Energy
Agency (IEA 2022) estimates 220-320 TWh of worldwide data center energy use (excluding
cryptocurrency mining) in 2021, or 1.1-1.4% of total electricity use. The U.S. Energy Information
Administration (EIA 2022) estimates the United States accounted for 3930 TWh of electricity consumption
in 2021.
168
CBECI’s Index is highly dependent on the “average electricity cost” assumption. Their default
assumption is $.05/kWh. All CBECI estimates cited in this essay use their default assumption.

147
3.3.2 Assessing and Projecting Bitcoin’s Impact on Climate Change

A group of climate researchers at the University of Hawaii set off a flurry of

debate with their study titled “Bitcoin Emissions Alone Could Push Global Warming

Above 2°C” (Mora et al. 2018).169 First, Mora et al. (2018) assumed entire blocks were

mined by a single model of ASIC or mining hardware and randomly assigned each

Bitcoin block mined in 2017 to one of 62 types of Bitcoin computing hardware and its

respective energy efficiency. Total carbon emissions were aggregated using the energy

mix of the host country (carbon emissions required per unit electricity) for each company

or mining pool winning a block multiplied by the estimated electricity required to mine

that block for all blocks in 2017.170 From there, the authors projected future Bitcoin

transactions based on the adoption rates of 40 different technologies and calculated

aggregate carbon emissions on a per-transaction basis (based on their estimated CO2

emissions/Bitcoin transaction in 2017). Their projections showed that assuming various

rates of technological adoption, Bitcoin alone could account for cumulative emissions

“likely to warm the planet by 2°C within only 16 years” (Mora et al. 2018, 1).

Krause and Tolaymat (2018) and Stoll et al. (2018) provided estimates of both the

Bitcoin network’s overall electricity consumption and its corresponding GHG emissions.

Much like CBECI methodology, Stoll et al. (2018) used known IP address locational data

169
The title of this two-page comment in Nature magazine was aggregated in blogposts, newspapers like
the New York Times, and digital climate journals from several prestigious universities. It is heavily cited
and was included in OSTP’s 2022 report on “Climate and Energy Implications of Crypto-Assets in the
United States.”
170
Mora et al. (2018) used “known server locations” of Bitcoin mining pools claiming blocks in 2017 and
then applied carbon emissions (metric tons CO2e/GWh) of the host country/countries of those known
server locations. Mining companies may locate their headquarters or servers in one or a few locations, but
mining pools usually combine hashing power from individual miners across the globe. They assumed all
blocks won by 10 mining pools (including the most popular pools in the world at the time) were hashed
entirely in China, but this is not the case. (See Essay 2, Section 2.2.3 and 2.5.3 of this dissertation series for
more details on how mining pools work)

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to estimate the geographic distribution and subsequent energy mix of the network’s

hashrate. Krause and Tolymat (2018) provided a range of potential emissions based on

various energy mixes not necessarily based on known geographic distribution of network

hashrate. Jiang et al. (2021) found carbon emissions from China-based Bitcoin mining

alone exceeded the footprint of several small countries and encouraged policy

interventions to confine PoW mining operations to low carbon-emitting regions.

CBECI’s Digital Assets Project Lead Alexander Neumueller (2022) combined

Cambridge’s empirically based estimation of Bitcoin’s overall electricity consumption

with its geographical data regarding miner IP addresses and several studies estimating

regionally specific electricity mix profiles to estimate yearly Bitcoin GHG emissions

since 2011. They found 2022 emissions were set to decline year over year for the first

time in the digital asset’s history. Their “best-guess” figure of Bitcoin’s 2022 carbon

footprint represented roughly 0.10% of global GHG emissions, comparable to that of

countries like Nepal and the Central African Republic (Neumueller, CCAF 2022). Most

notably, Neumueller found that recent increases in mining hardware efficiency led to a

drop in the network’s annual electricity consumption while network hashrate continued to

increase, where prior to January 2021, hashrate and electricity consumption generally

moved in concert with one another.

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 Table 3.2 Estimates of Yearly GHG Emissions of the Bitcoin Network (MtCO2e)
Author/Source Year Citations (Google) Estimate
Mora et al. 2017 250 69
Neumueller*** 2017 0 7.65
Masanet et al. 2017 46 16
Calvo-Pardo et al. 2017 6 2.8
Foteinis 2018 49 43.9
Krause and Tolaymat** 2016-'18 218 3-13
Calvo-Pardo et al. 2018 6 16
Stoll et al. 2018 268 21.5-53.6
Jones et al. 2018 8 16.632
McCook 2018 37 0.6
Kohler and Pizzol 2019 58 17
Digiconomist 2018 19 33.5
Neumueller 2018 0 23.92
Houy 2019 29 15.5
Calvo-Pardo et al. 2019 6 15
Jones et al. 2019 8 24.567
Neumueller 2019 0 28.13
Jones et al. 2020 8 37.132
Neumueller 2020 0 34.37
Neumueller 2021 0 56.29
Jiang et al.* 2021 43 25
deVries et al. 2021 42 65
Jones et al. 2021 8 37.256
Jiang et al. 2022 43 52
Digiconomist 2022 19 64.86
Neumueller 2022 0 48.35
Jiang et al. 2023 43 106
Jiang et al. 2024 43 130
*Jiang et al. (2021) estimated Bitcoin GHG emissions for just China in the year
2021, and projected subsequent years through year 2024
**Krause and Tolymat estimate total emissions from Jan '16-Jun'18
***Neumueller's study was recently posted (at the time of this writing) as a part
of CCAF's broader efforts to track Bitcoin's usage and emissions with CBECI

Table 3.2 lists the wide range of estimates resulting from these studies.171 OSTP

(2022) cites and includes several of these estimates in their report on the climate

implications of crypto assets. If reducing or eliminating Bitcoin-related emissions is a

policy goal, this wide range of estimates makes framing the scope of the problem rather

difficult. One solution to this problem is to evaluate the merits of each study’s

methodological approach and the validity of their baseline assumptions (Section 3.3.3).

171
Greenhouse gases vary in their contribution to warming. MtCO2e refers to million tonnes of carbon
dioxide equivalent for a common measurement across gases. IEA (2022) estimates global energy-related
carbon dioxide emissions were 36,300 million tonnes in 2021. Mulligan and Heyman (2019) estimate
global gold mining accounted for 100.4 MtCO2e in 2018.

150
Policy analysts should consider establishing a standard for emissions estimation. The

OSTP (2022) report outlines the need for “evidence-based environmental performance

standards” (7) for mining issued by the Environmental Protection Agency and

Department of Energy, but establishing valid methods of measurement and estimation

should be the first steps in setting such standards. Calvo-Pardo et al. (2022) propose

comparing the merits of top-down and bottom-up approaches to estimation to establish a

standard for Bitcoin-emissions literature. Top-down approaches begin with network

aggregate measures of Bitcoin’s usage (e.g., total network hashrate) and then assign

weights for emissions input estimation (e.g., mining efficiencies, power usage

effectiveness, mining facility types) according to market share estimates. Bottom-up

approaches begin with determining the hashrate contributions of miners in each specific

location and then aggregating.

3.3.3 A Critical Look at Studies of Bitcoin’s Energy Consumption and Climate

Impact

Cambridge launched CBECI with data-driven estimates in mind – partnering with

Bitcoin miners in lieu of making assumptions and overreliance on simulation and

theoretical modeling. Neumueller (2022) lamented the abundance of “cherry-picked data

points” (1) and the dearth of objective, nuanced research regarding Bitcoin’s

environmental impact. He found two sides too obsessed with “vying for interpretive

authority to sway public opinion in their favour and persuade policymakers” to appreciate

and communicate the complexities involved with measuring Bitcoin’s environmental

footprint.172

172
Though surprisingly, Ciaian et al. (2022) found environmentally conscious investors were actually more
likely to have exposure to crypto-based assets in their portfolios than their peers.

151
 Neumueller arguably understates the lack of objectivity and intellectual

transparency in Bitcoin research. Hass McCook (2014) is a self-described “Bitcoin

evangelist” who vastly underestimated Bitcoin’s energy consumption. Methodologically,

O’Dwyer and Malone (2014) were not measuring “the energy consumption of Bitcoin

mining” so much as they were reporting how dependent any estimate was on assumptions

and/or data about the energy efficiencies of mining equipment. Presenting their findings

in Ireland, they claimed their study “shows that the power currently used for Bitcoin

mining is comparable to Ireland’s electricity consumption” (1) although their results

yielded a massive range of possible network electricity consumption (0.1-10GW).173

Digiconomist was founded by Alex deVries. Digiconomist claims to provide “further

substantiation” of the methodology used in its Bitcoin Energy Consumption Index in

“peer-reviewed academic literature” hyperlinked to other articles written by DeVries in

which he cites Digiconomist data. DeVries’ studies (2018; 2022) are peer-reviewed and

published in online journals but cite data from an index he created which lacks detailed

explanation about its inputs, assumptions, and estimation methodology. As such, both

Digiconomist’s index and deVries consistently overestimate Bitcoin’s carbon footprint

and energy consumption relative to CBECI and other studies.

The alarming findings found by Mora et al. (2018) elicited several scathing

critiques.174 Houy (2019) took issue with the “inclusion of unprofitable mining rigs” (1)

in the very first step of the Mora et al. (2018) estimation methodology and found the

exclusion of this basic rational assumption of only mining when profitable led to an

173
O’Dwyer and Malone (2014) argued this estimate of 3 GW was plausible assuming miners would only
operate profitable equipment at an energy cost of $0.10/kWh – the lower bound of industrial rates in
Europe in 2013, ignoring the possibility of mining occurring elsewhere (e.g., China).
174
Houy (2019), Dittmar and Praktinknjo (2019) and Masanet et al. (2019) published direct replies to Mora
et al. (2018) in the same journal where it was first published.

152
overestimation by a factor of 4.5. Dittmar and Praktinknjo (2019) criticized the Mora et

al. (2018) “demand scenario” and the ignorance of “fundamental constraints imposed by

the transaction-processing capacity of the Bitcoin network” (1).175 Masanet et al. (2019)

replicated the Mora et al. study and found they made several mistakes in addition to using

a fundamentally flawed methodological design from the outset. Masanet et al. argued the

study’s demand scenarios lacked plausibility, credibility, failed to meet the standard of

“analytical rigour and transparency,” (1) and warned their results “should not be taken

seriously by the public, researchers or policymakers” (2).176

Broad, unexplained assumptions and a lack of replicability in research on Bitcoin

and the environment are common. In “Bitcoin’s Growing e-Waste Problem,” DeVries

and Stoll (2021) offer no explanation for assuming a short lifecycle for ASIC mining

equipment despite evidence that old hardware models account for a significant portion of

network hashrate (Saylor et al. 2022). Jones et al. (2022) used “methods described in the

existing literature in this space” (6) citing Goodkind et al. (2020)177 and Krause and

Tolaymat (2018) in their estimates of the network’s overall electricity usage but offered

no elaboration regarding how they came up with the “average efficiency of BTC mining

rigs” (Jones et al. 2022, 6) used in their equation. Their supplementary data on emissions

factors, mining locations, and energy mix came directly from deVries (2022) with no

further elaboration.178

175
Dittmar and Praktinknjo (2019) found the Mora et al. (2018) demand scenario effectively required
global electricity generation to triple over the next five years, compared to just a 17% increase in global
electric power capacity over the previous five-year period.
176
Masanet also put forth their own estimate for Bitcoin GHG emissions (Table 2).
177
Goodkind et al. (2020) was written by the same three co-authors as Jones et al. (2022): Goodkind, A. L.,
Jones, B. A. & Berrens, R. P.
178
They also offered no explanation for their selected GHG emissions damage coefficient

153
 This critique of existing literature estimating Bitcoin’s overall energy use and

emissions impact yields three takeaways for policymakers. First, more cooperation

between researchers and miners is needed to generate the most accurate possible

estimates. CBECI uses as application program interface (API) which allows mining pools

to report data anonymously (CBECI 2022). Incorporating empirical data into estimates is

not a panacea to estimation problems – CBECI’s locational data is susceptible to IP-

address spoofing measures (e.g., virtual private networks) – but it helps limit the number

of assumptions and parameter estimates in the model. Second, academics should be more

explicit about the limits of their estimation methodologies and more transparent about the

precision of their results. Almost all the studies and indexes reviewed here fail to include

robust sensitivity analyses. Finally, knowledge of how the Bitcoin network actually

works in practice can help us identify which studies include nonsensical assumptions and

therefore yield estimates that should not be taken seriously. For example, understanding

the circumstances under which it is economically profitable for a Bitcoin miner to operate

informs which mining equipment should be feasibly included in both top-down and

bottom-up estimations.

3.3.4 Assessing Bitcoin Mining Impacts at the Local Level

One objective of this study is to determine wholesale energy pricing impacts as a

function of distance from major Bitcoin mining locations. While several studies have

estimated aggregate costs of cryptocurrency mining, less research has focused on its

localized impacts. Greenberg and Bugden (2019) conducted a case study of a

cryptocurrency “boomtown” dissecting qualitative data (e.g., newspapers, public

comments, public meeting records) to find common threads in the local debate around the

154
costs and benefits of hosting large-scale miners. They found citizens were concerned

about much more than potential increases in their electricity bills, suggesting that studies

like this one which focus solely on economic impacts may ignore critical elements of a

more comprehensive benefit-cost analysis. Taking a quantitative approach, Roeck and

Drennen (2022) conducted a life cycle inventory and analysis of a single natural gas

power plant dedicated to Bitcoin mining. Their focus on a single plant enabled them to

develop a clear and replicable research design, yielding precise results and conclusions

based on data-driven analysis. They found a fossil fuel generator solely dedicated to

Bitcoin mining was very profitable and a significant contributor to GHG emissions in a

state trying to meet difficult emissions reductions goals.

One criticism of overly restrictive mining regulation is that it can shut out much-

needed jobs in struggling communities. Benetton et al. (2021) incorporated employment

among several other considerations into a broader benefit-cost analysis of cryptomining

penetration in upstate New York. They found that cryptominers caused high electricity

bills for residential households and small businesses, crowded out the local economy, and

created fewer new jobs relative to other similar industries. Points about both relatively

limited job creation and higher electricity bills are substantiated by other research on the

local impacts of PoW mining (Congressional Research Service 2019) and basic energy

economic theory – all else equal, a sudden increase in demand without new supply should

cause higher prices, particularly in deregulated retail electricity markets. But their

“crowding out” conclusions were based on results that local fixed asset investments and

labor market wage levels declined due to cryptomining entrants by just 0.36% and 0.68%,

respectively (Benneton et al. 2021).

155
 Benneton et al. (2021) is one of the most econometrically rigorous works on the

topic but still suffered from a flawed instrumental variable methodology and a lack of

understanding about the economics of PoW mining. Their stage 1 estimation tried to

capture “the elasticity of location-based marginal price to the price of Bitcoin" (15) with

the idea that large spikes in Bitcoin price cause an exogenous shock to electricity demand

due to cryptomining. They found each “10% increase in the price of Bitcoin is associated

to a 1.4% increase in the location-based marginal price” (16) suggesting increased mining

as the causal mechanism between the two. Assuming they behave as rational actors,

miners will run at full potential so long as they can operate below a certain breakeven

point based on Bitcoin price, network hashrate and price of electricity.179 Subsequent

increases in Bitcoin price (all else equal) will not cause such miners to suddenly turn on

more ASICs.180 Additionally, changes in wholesale locational marginal pricing do not

necessarily cause a corresponding change in retail electricity bills. Extensive literature

suggests that wholesale prices “pass-through” to retail prices at rates below 100% across

several energy markets (Mirza and Bergland 2012; Mulder and Willems 2019; Brown et

al. 2020).

3.3.5 Studies of Paired Bitcoin Mining with Renewable Energy Generation

This essay explores whether Bitcoin mining might incentivize renewable growth.

Academic interest in renewable-based cryptocurrency mining began internationally in

2019. An exploratory qualitative case study showed hydro, solar, wind, and geothermal

sources powered mining operations for three European-based companies (Govender

179
In some markets where miners can participate in ancillary services, they may choose to turn off even if
mining would be profitable (below breakeven point) due to demand response incentives. For a
comprehensive explanation and mathematical model of Bitcoin mining economics, see Appendix A.
180
Unless the Bitcoin price jumps so high as to make less efficient ASICs profitable at the new breakeven
point.

156
2019). Semi-structured interviews revealed these miners were certainly motivated to

protect the environment, but cheap renewable energy prices enabled profit maximization

and served as the primary driver of eco-innovative business models. DeVries (2019)

largely dismissed the possibility of sustainable Bitcoin mining using renewable energy

over the long term based solely on a brief analysis of hydro-based mining in southwest

China and aforementioned faulty assumptions about ASIC utility and lifecycle longevity.

Several studies have used quantitative models and simulations to consider the

possibility of improving renewable power generation economics by pairing solar and

wind plants with PoW mining rigs. Shan and Sun (2019) looked at Bitcoin mining as a

potential solution to increasing solar photovoltaic (PV) power curtailment in California.

They determined the optimum number of mining rigs needed to minimize curtailment at

solar PV generation sites across California and calculated potential mining profits using

curtailed energy based on the daily market price of Bitcoin. Two later studies took a more

generalized approach as business researchers in Rio de Janeiro paired notional Bitcoin

mines with wind projects (Bastian et al. 2021) and a group of engineers from the Institute

of Electrical and Electronics Engineers (IEEE) did the same for solar photovoltaic (PV)

projects (Eid et al. 2021). Both studies ran various simulations and found mining

enhanced project profitability and could bolster early investment incentives. Findings

from Eid et al. (2021) even suggested pairing solar PV projects with Bitcoin mines was

more profitable than battery storage due to relatively lower capital costs.

Like Shan and Sun (2019), Niaz et al. (2022) ran simulations for mining curtailed

energy within a specific regional independent system operator (ISO) but focused on

Texas. However, their study used empirical data regarding curtailments, Bitcoin price,

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and network hashrate at an hourly level and considered optimal mining scenarios from

the perspective of the ISO (maximize use of curtailed renewable energy) and the investor

(maximize profits). Most importantly, their sensitivity analysis and Monte Carlo

simulations found a floor price of Bitcoin for which mining curtailed energy would still

be profitable due to Bitcoin’s history of massive and unpredictable downside price

volatility.181 Much like Eid et al. (2021), Niaz et al. (2022) also found Bitcoin mining was

more profitable than battery storage options due to their relative costs.

Finally, this study limits its scope to examining Bitcoin mining with solar and

wind power. Early evidence suggests mining cryptocurrency off flared gas may greatly

reduce GHG emissions (Vazquez and Crumbley 2022) and mining using carbon capture

technologies may also be profitable (Niaz et al. 2022).182 Opportunities exist to study the

economics of PoW mining using hydroelectric and Ocean Thermal Energy Conversion

(OTEC) power as well.183

3.3.6 Studies of Bitcoin Mining Impacts on Grid Stability

The second major research question of this essay is whether Bitcoin mining

contributes to grid stability. The studies above assumed grid-independent Bitcoin mining

from the perspective of renewable-only generators. But most Bitcoin mining today is

done in “front of the meter,” meaning miners draw power from the grid. This limits the

usefulness and applicability of these studies beyond hypothetical consideration. Grid-

181
They found the price would need to stay above $6800/BTC. This is of critical importance because at the
time the study was submitted, BTC was trading at ~$40,000 and has since dropped as low as ~$16600.
182
Exxon has a pilot project with Crusoe Energy to run Bitcoin mining data centers off excess or flared gas
in North Dakota (Malik 2022).
183
Hydroelectric Bitcoin mining is happening in several locations around the world. Nathaniel Harmon is
an oceanographer exploring the possibility of building an OTEC-based Bitcoin mine in Hawaii.

158
connected Bitcoin mining cannot guarantee the use of curtailed renewable energy only

and raises concerns about grid stability and higher prices during periods of high demand.

Fridgen et al. (2021) conducted net-present value evaluations of renewable plants

paired with two kinds of flexible data centers: one used for machine learning (Amazon

Web Services) and the other for Bitcoin mining. They found pairing both types of

flexible data centers with renewable plants boosted their net present values when

compared to their standalone applications, but they argued Bitcoin mining data centers

were particularly well-suited to provide demand-side flexibility, contribute to grid

stability and participate in demand response (DR) programs. This argument was based on

other scholarship about the relationship between data center flexibility and ability to

participate in DR (Santana-Viera et al. 2015; Bai et al. 2016; Thimmel et al. 2019). But

like the studies outlined above, the Fridgen et al. (2021) analysis focused primarily on the

energy economics of data centers and renewable plants. A great deal of scholarship

explaining how flexible data centers and interruptible loads offer solutions for renewable

intermittency exists as well (Wierman et al. 2014; Xia et al. 2015; Hale et al. 2016).

Energy experts and crypto enthusiasts have discussed potential synergies between DR

and cryptomining data centers, but few rigorous studies have focused specifically on

cryptocurrency uses in DR.

Advances in synthetic grid modeling make it possible to simulate the addition of

various types of loads and predict certain grid outcomes. Texas’ deregulated energy

market and standalone grid (separate from the Eastern and Western Interconnections)

makes it ideal for detailed synthetic grid development and DR analysis (Li et al. 2020).

Rhodes et al. (2021) used a capacity expansion model designed for high-renewable power

159
systems (Johnston et al. 2019) to model the optimal energy mix for the Texas grid under

various scenarios of increased data center demand throughout the state.184 Wind and solar

capacities were highest and natural-gas capacities were lowest in scenarios with more

data center flexibility.185 They found additional inflexible data centers resulted in more

carbon emissions than a base case with no additional data centers while more flexible data

centers could “result in a net-reduction of carbon emissions from the base case” and

“increase the resiliency of the grid by reducing demand during high-stress times”

(Rhodes et al. 2021, 3).

Bruno et al. (2022) found that adding Bitcoin demand to a “long-run equilibrium

capacity investment” (2) model of the Texas grid increased renewable capacity and

carbon emissions as generation from natural gas plants would also have to increase along

with renewables to keep up with demand. However, another version of the simulation

allowing miners in the model to participate in demand response programs nearly

eliminated the additional carbon emissions. Menati et al. (2022) added new

cryptocurrency mining loads of varying sizes across several locations on a synthetic

Texas power grid and looked at outcomes in terms of locational marginal pricing (LMP)

and DR profits for cryptomining facilities. Adding new mining loads increased average

LMPs statewide and created large price fluctuations. However, LMP increases were

highly dependent on the location of the new notional mine, the amount of added capacity,

and were most pronounced during the warmest hours of the day during summer

184
The software for this specific model was developed by Johnston et al. (2019). Rhodes et al. (2021)
define a capacity expansion model as “an optimization program that makes decisions about the operation,
retirement, and construction of power plans, transmission lines, and other electric grid assets.” (4)
185
With “flexibility” defined as the data center’s capability to shed load quickly in response to increased
demand

160
months.186 Ultimately, the location of cryptocurrency mines had “decisive impact”

(Menati et al. 2022, 9) in determining costs and benefits to the Texas grid. However, they

also found integration into Texas’ price-driven DR markets incentivized cryptominers to

reduce their loads to maximize profits when electricity prices were high. In sum, their

findings emphasized the nuance involved with incorporating new high-capacity loads

onto electrical grids and the importance of future coordination between grid operators and

cryptominers to ensure the greatest societal benefits.

3.3.7 Summary

Using CBECI as the standard, most studies have overestimated the Bitcoin

network’s aggregate energy demand, historically. Bitcoin’s energy consumption in 2022

(107.6 TWh) was comparable to 2021 levels (104.9 TWh), marking the first time mining

did not consume vastly more electricity year-over-year in the asset’s history, despite

record high hashrate (CBECI 2022). Context and perspective matter in framing this

amount of power use. The Bitcoin network consumes more power in a year than at least a

dozen countries, but less than 10 individual U.S. states. Value judgments of what

constitutes a good use of energy are highly subjective. Those who feel cryptocurrency is

a worthless endeavor see its energy consumption as obviously wasteful, just as those who

do not celebrate might find Christmas lights wasteful.187

To this end, the field could benefit from more comparative studies of the energy

costs associated with securing various economic networks.188 Bitcoin proponents argue

186
LMP increases were also geographically dependent. Some regions saw little to no increase in LMP after
adding Bitcoin demand while others saw massive increases.
187
Christmas lights consumed an estimated 3.5 TWh for the month of December 2020 (Conca 2020).
188
McCook (2014) compared Bitcoin’s estimated energy use and carbon footprint relative to that of the
banking system, gold mining/recycling, paper currency minting, etc. and found Bitcoin’s consumption and
environmental impacts to be the lowest relative to the others. However, as previously mentioned, McCook
is a self-described “Bitcoin evangelist.”

161
expending energy to derive value is the whole point of its existence – it serves as the very

forcing function the asset’s security depends upon. Digiconomist, DeVries (2019), and

even OSTP (2022) have used a per-transaction basis for comparing Bitcoin to other

methods of value exchange (e.g., credit card transactions) while completely ignoring the

existence of Bitcoin’s Layer 2 (“Lightning” Network) protocol where most smaller

Bitcoin transactions now occur.189 Future research might consider Bitcoin’s scalability

through the lens of the Lightning Network and compare its energy requirements to the

legacy banking system and other means of value exchange.

More qualitative assessments of Bitcoin mining impacts (Greenberg and Bugden

2019) are needed to ensure all costs, benefits, and positive/negative externalities not

captured in quantitative data are considered in crafting digital asset public policy. The

field also desperately needs more rigorous and objective assessments of Bitcoin’s carbon

footprint. Accounting for less than 0.5% of the world’s electricity consumption, the

suggestion that Bitcoin could be solely responsible for a 2°C rise in average global

temperature in just 16 years defies logic, yet the Mora et al. (2018) study is cited ad

nauseum in warnings about Bitcoin’s environmental impact. More studies of behind-the-

meter mining (Roeck and Drennen 2022) and more precise analyses of energy mix based

on mining location can improve the precision of rigorous GHG estimates (CBECI 2022).

Policymakers might also consider ways to compel miners to share their data to increase

transparency and improve these estimates.

189
Layer 2, commonly called the “Lightning Network,” is a protocol built on top of Bitcoin’s base layer
designed to alleviate the base layer’s scalability issues. Transactions on the Lightning Network occur off-
chain between two parties for very low fees and near-instantaneous settlement compared to the base layer.
A full explanation of this layer 2 protocol is outside the scope of this essay and it is so new that few
academic studies examining the network exist (Lin et al. 2020; Seres et al. 2020). A network explorer has
been developed by ACINQ, a Bitcoin technology company https://explorer.acinq.co/

162
 In a systematic review of academic literature related to sustainable development

goals and cryptocurrencies, Mustafa et al. (2021) found most literature was

disproportionately focused on cryptocurrency energy requirements and its negative

environmental impacts. They identified a “clear gap in the literature that focuses on the

possibility” (1152) of various cryptocurrency use cases to help reach sustainable

development goals. The purpose of this study is to help fill that gap. Theoretically based

research, project simulations, and synthetic grid modeling are good tools for planning and

forecasting, but the field lacks rigorous empirical assessments of mining impacts.

3.4 Research Design

This study is designed to use empirical data to describe Bitcoin mining’s role in

renewable energy development and grid stability efforts. ERCOT’s market structure and

the recent influx of new Bitcoin mining make Texas a great location to study these

relationships and test my research questions (3.4.1). I then describe how available data

can be used to test each question, and how certain data limitations may impact the

strength of the results and conclusions of this study (3.4.2).

3.4.1 How Texas Tests the Questions

Following China’s cryptocurrency ban, many displaced miners chose to relocate

to Texas because of its low energy prices and friendly regulatory environment (Feng

2021; Sigalos 2021; Rutwitch and Feng 2022). The goal of this work is to provide

empirical assessments of grid-connected Bitcoin mining’s sustainability in renewable-

rich Texas to explore potential impacts in practice as opposed to modeling them. Rhodes

et al. (2021) did not consider potential negative effects of increased data center load

capacity. I try to capture those negative effects by looking at wholesale energy price

163
changes near new Bitcoin mining data centers. Bruno et al. (2022) “abstracted away from

the details of the miners’ operational decisions” (15). Menati et al. (2022) admitted “it is

rightfully possible that mining facilities apply more sophisticated load control strategies”

but assumed mining facilities consumed “a fixed amount of loads for all time steps” (6)

for the sake of simplicity in the model. But we should expect miners to respond to real-

time (RT) and day-ahead market (DAM) price signals and adjust their loads accordingly

to maximize profits. Pulling actual LMP data captures miner behavior and responses to

dynamic pricing, in practice. Data on participation in AS and DR markets shows how

miners currently engage in grid stability efforts and what can be done to maximize

benefits of available programs.

Question 1: Are miners in Texas positioned to incentivize renewable growth?

Drawing a causal relationship between Bitcoin mining and renewable investment

incentives is difficult for several reasons. A number of factors influence investment

decisions that are hard to measure, there is a significant lag between the decision to build

a power plant and when that plant is registered in publicly available data, and

comprehensive data on power purchase agreements (PPAs) are limited.190 But the

regionally-skewed distribution of Texas’ renewable power capacity allows us to examine

whether Bitcoin miners are geographically positioned in regions with disproportionately

high amounts of renewable energy. Of course, when drawing power from the grid, there

is no guarantee of what type of energy is being consumed. However, west to east export

constraints due to insufficient transmission infrastructure in Texas are well-documented

190
PPAs are contracts between power generators (sellers) and large energy consumers (buyers) to help
finance and build renewable projects.

164
(ERCOT 2022), and low LMPs capture the costs of congestion (Singh et al. 2010;

Ahmadi and Lesani 2014).191

ERCOT lacks interconnection to other grids and effectively operates independent

of the eastern and western interconnections which bind the rest of the continental United

States together. It is unique in that it effectively functions as a self-contained, intrastate

only, deregulated energy market. Generators sell energy on the wholesale market while

retail electricity providers (REPs) compete to buy this energy, and then sell/deliver it to

end-users with the “power to choose” their electric providers (Brown et al. 2020).192 One

feature of this system is relatively high price caps and low price floors compared to other

RTOs/ISOs.193 This allows a wide range of high and negative wholesale energy prices to

exist simultaneously across different locations which can be flagged to signal congestion

constraints.

Question 2: What do energy prices look like before and after Bitcoin mining data centers

come online?

Suppose grid-connected Bitcoin mining does incentivize renewable growth. If it

also leads to substantially higher energy prices, miners and renewable producers stand to

gain as other local consumers pay more for their electricity. This question explores

whether grid-connected Bitcoin mining in renewable-rich areas is truly a win-win for

191
Commuter traffic congestion pricing in Singapore is an instructive analogy for LMP pricing on electric
grids. Singapore’s electronic road pricing (ERP) system charges motorists a fee for driving in highly
congested areas. These fees adjust in real-time according to the amount of congestion. In the same way that
different ERP rates indicate different amounts of traffic across time and space, LMPs are a proxy for
congestion on electricity grids.
192
The Public Utility Commission of Texas’ “Power to Choose” system allows consumers to query
potential REPs on their powertochoose.org website. Consumers can pick plans that best suit their needs
depending on who services the area they live in.
193
The FERC manages price caps for other RSOs/ISOs through the issuance of formal orders. For example,
Order No. 831 set a $2000/MWh hard cap and further restrictions on any market prices above $1000/MWh
that do not apply to ERCOT because it is “not subject to the Commission’s jurisdiction under… the Federal
Power Act” (FERC 2022). ERCOT has had price caps as high as $9000/MWh in 2021.

165
miners and producers, or if a win-win-lose dynamic is more at play when considering

local stakeholders.

Texas’ competitive retail pricing approach to energy markets is designed to

maximize efficiency leading to lower prices for most consumers relative to the U.S.

average (Stoft 2002; Hartley et al. 2019). Wholesale electricity price changes do not

“pass through” perfectly to retail and residential customers as REPs factor wholesale

price volatility into retail quotes by charging risk premiums (Brown et al. 2020). Still,

evidence suggests increased competition in Texas forces REPs to reflect wholesale

(marginal) costs in their prices (Hartley et al. 2019) and retail quotes decrease as

customer switching activity increases (Brown et al. 2020). For the purposes of this study,

this means immediate LMP changes are an imperfect proxy for the prices

retail/residential customers see. However, wholesale volatility does price into retail in

other ways, so a large sample of LMPs over longer periods of time should capture the

impacts of various exogenous shocks (i.e., increased base load due to Bitcoin mining).

Question 3: Does Bitcoin mining provide flexibility to grid operators?

West Texas sees a relatively high frequency of low and negative wholesale energy

prices, with limited periods of extremely high energy prices typically due to weather

events causing massive amounts of supply to come offline simultaneously. For example,

in 2021, average hourly prices in the West Load Zone (LZ) were single digit or negative

($/MWh) almost 20% of the time while prices over $50/MWh occurred less than 10% of

the time.194 Most of the extremely high pricing (>$100MWh) occurred during Winter

Storm Uri in February 2021.

194
Average wholesale electricity prices in the United States vary by region, but prices above $50/MWh
would generally be considered higher than average. Average wholesale energy prices in the United States

166
Figure 3.5 Hourly Wholesale Energy Price Frequency in West Texas in 2021 (author)195

This high frequency of tail-end pricing provides two methods of determining

whether Bitcoin miners help stabilize the grid: 1) DR participation rates; and 2)

examining miner activity during tail-end events (e.g., major winter storms). In demand

response programs, consumers are compensated for scaling back consumption when

electricity is scarce or providing a kind of insurance to grid operators as controllable base

load. ERCOT has a separate, robust DR market with large amounts of publicly available

data about its participants. If in fact Bitcoin miners are uniquely suited to provide grid

stability, we should see evidence of their participation in various DR programs, but

specifically in those requiring highly flexible and controllable loads. Also, regardless of

DR participation, we should expect to see miners voluntarily curtail their consumption

during high energy pricing events. If miners are rational economic actors and mining is

were as low as $27/MWh in January 2021 and as high as $41/MWh in July 2021 (Thomas 2021; Wood
Mackenzie 2021).
195
Author generated from “Historical RTM Load Zone and Hub Prices” data files (ERCOT 2022)

167
both highly interruptible and highly responsive to real-time price changes, miners should

shut down their ASICs when electricity costs rise above certain breakeven prices.196

3.4.2 Data Collection

Bitcoin miners are not required to publicly disclose the precise location of their

operations. Cross referencing publicly available satellite imagery with returns from basic

internet keyword searches, YouTube videos, news articles, information from mining

company websites and quarterly earnings reports yielded 11 major mining sites across 8

different towns/cities (Table 3.3).197 Mining operations needed a capacity of at least

20MW for inclusion in the sample. The level of fidelity on when each site is operating

and at what capacity varies depending on the amount of information available and the

responsiveness of each company to inquiries and requests for further information. The

conclusions which can be drawn regarding the impact(s) of each mining site vary to some

degree depending on that level of fidelity. What is/is not known about each location and

how it may affect these conclusions is explained in detail in Appendix B.

Table 3.3 Bitcoin Mines in Texas

Company Name Location Load Zone Lat Long Size
Riot Blockchain Whinstone Rockdale South 30.573 -97.078 450 MW
Bitdeer Alcoa Rockdale South 30.567 -97.069 300 MW
Lancium Fort Stockton Clean Campus Fort Stockton
West 30.900 -102.926 25 MW
Lancium Abilene Clean Campus Abilene West 32.503 -99.790 Unknown online
Argo Blockchain Helios Afton West 33.778 -100.876 200MW
Poolin/Bitmain Poolin Data Centers Pyote West 31.553 -103.119 Unknown online
Layer1 Technologies Layer1 Pyote Pyote West 31.553 -103.119 Unknown online
Genesis Digital Assets Genesis Pyote Pyote West 31.553 -103.119 150MW
Compute North Big Spring Data Center Big Spring West 32.226 -101.516 25 MW
Compute North (Marathon Digital) Upton County McCamey West 31.255 -102.244 40MW
Core Scientific DME Denton Energy Center Denton North 33.216 -97.210 22 MW

U.S. Energy Information Administration (EIA) Form 860 information is used to

determine regional energy mixes. EIA-860 collects details on power plants and

196
Again, this price point depends on Bitcoin price, network hashrate, and ASIC efficiency
197
See Appendix B for details on information sources regarding capacity (size) and locations

168
generators including, but not limited to, their locations (lat-long), nameplate capacity, and

generation type. Any existing and proposed power generators that are grid-connected

with the ability to draw/deliver power to the grid and a nameplate capacity of 1 MW or

greater are required to fill out EIA-860.198 Precise coordinates allow me to plot generator

locations on geographic information system (GIS) software to see where renewable

generators are relative to the locations of major Bitcoin mines. Nameplate capacities of

these generators show how much active power generation comes from renewable sources.

Recent LMP pricing data are publicly available on the ERCOT website and

ERCOT makes historical LMP data available to researchers by request. LMP data show

LMP name, time, and price, but ERCOT does not publish coordinates for their LMPs.

However, LMP names and locations are shown on ERCOT’s real-time market pricing

map. Exact coordinates can be determined and plotted on GIS since LMP settlement

points (SPs) are visible on publicly available satellite imagery.199 Finally, I create an

aggregate dataset of LMPs by settlement point name, location, and price organized into a

5-minute interval time series for years 2017-2022.200 Using GIS, I build regional

wholesale energy pricing profiles over time to determine whether proximity to a Bitcoin

mining data center impacts price.

198
Plants can consist of several generators at the same location, so each plant is assigned a unique
identification code and multiple generators can share the same plant code. I sorted by generator type first,
and then used plant codes to assign generators coordinates for entry into GIS.
199
NOTE: Brown et al. (2020) LMP nodal coordinate data used with permission. Brown et al. (2020) data
was then updated for 2022 since some LMPs are eliminated, several names and locations of LMPs are
changed, and some LMPs are added periodically.
200
Data stops October 2nd for the year 2022. Final locational time series data set includes only LMPs
common to each year. Descriptive statistics section includes all LMP pricing data from each year.

169
 To examine miner participation in grid stability efforts, my quantitative data are

limited to what miners were willing to share.201 ERCOT established controllable load

resource (CLR) qualification requirements in 2020 and Lancium shared a limited data

sample (July-August 2022) of how their software works with Bitcoin mining to meet

CLR standards. I use a model for determining the dynamic breakeven price for Bitcoin to

show when miners were likely economically motivated by market conditions to curtail or

shutdown operations. Finally, qualitative data from news articles, quarterly earnings

reports, and interviews shed light on the pros and cons of ERCOT’s current DR market

structure as it relates specifically to Bitcoin mining.

3.5 Results

This section first shows where large, grid-connected Bitcoin mines are located in

Texas relative to different types of power generators and regional energy mixes across

the state (3.5.1). It also covers how often settlement points near these major Bitcoin

mines experience negative LMPs. I then examine whether the presence of an active

Bitcoin mine correlates with higher nearby wholesale energy prices relative to the rest of

the region/state (3.5.2). Finally, this section concludes with a look at how one data center

(Fort Stockton) behaves as a controllable load resource in real time (3.5.3).

3.5.1 Geographic Positioning of Bitcoin Mining Relative to Incentivizing Renewable

Growth

For the year 2021, Texas had a total of 928 unique plants with 1737 generators.202

Each individual plant has a unique location. A single plant can also host multiple

201
ERCOT publishes DR market participation by qualified scheduling entity (QSE) and load resource
names, but I was unable to determine which QSEs/load resources represent Bitcoin miners.
202
ERCOT manages most of the state’s energy balancing, but a few small regions to the north, west and
east do not fall under its balancing authority.

170
generators of varying types at the same location. EIA recognizes 18 forms of generator

technology that exist in Texas and most active generators (933) still use natural gas-based

technologies.203 416 generators in Texas fit the EIA definition for renewable technology

and 78% of these generators are wind (212) or solar (111).204 For decades the Permian

Basin has been a powerhouse for U.S. domestic oil and gas extraction and production, but

it is now one of the most popular locations for renewable projects. Of ERCOT’s six

major load zones (LZs) depicted in Figure 3.6, the West LZ has the highest percentage of

renewable plants by far (Figure 3.3, Table 3.4).205

Table 3.4 Power Plants in Texas (2021)

All Plants Wind Solar Other Renew Total Renew % Renew
Location
Texas* 928 168 107 41 316 34%
West Load Zone 278 128 40 0 168 60%
North Load Zone 181 14 27 9 50 28%
South Load Zone 206 41 20 14 75 36%
Houston 152 0 3 1 4 3%
CPS 24 0 10 2 12 50%
Austin 14 0 1 2 3 21%
*820 Plants under ERCOT Balancing Authority

Figure 3.6 (right) ERCOT Load Zones (ERCOT 2022)206

Most major Bitcoin mining facilities (8/11) are in the West LZ near this abundant

and expanding bastion of renewable energy. The three concentric rings around each red

dot seen in Figure 3.7 capture the local energy mixes within 25km, 50km, and 100km of

203
EIA recognizes: Battery, Hydroelectric, Coal (Steam), Hydroelectric, Flywheels, Landfill gas, 4 forms
of natural gas, nuclear, wind (onshore), 2 forms of petroleum, Solar PV, Wood/Biomass, and 3 forms of
“other” technology
204
Wind, solar PV, hydroelectric, wood/biomass, and landfill gas are considered renewable energy
technologies by the EIA. In Table 3.4 and GIS mapping, hydroelectric, wood/biomass, and landfill gas are
categorized as “other renew”
205
The two very small LZs, Lower Colorado River Authority and Rayburn Electric Coop, were included in
the South and North LZs for the sake of simplicity in GIS mapping. Table 3.4 includes active plants only
(EIA-860 tracks retired and proposed plants as well).
206
Some of Texas (gray areas in Figure 3.6) fall outside of the ERCOT region. ERCOT accounts for 75%
of the Texas land area and delivers 90% of electricity used across the entire state (ERCOT 2023).

171
each mining data center.207 Geographic proximity is only a proxy for the likely source of

a grid-connected data center’s power, so I consider both the quantity of nearby generators

by type (Table 3.5) and the local energy mix surrounding large mines (Table 3.6). Table

3.5 shows the number of generators within those rings by each power generation

technology type according to EIA data. EIA-860 also reports the precise nameplate

capacities (measured in MW) of each generator. Table 3.6 provides a breakdown by

capacity for a more accurate depiction of the renewable energy mix within each ring. It

shows the wide range of clean and carbon-based mining occurring in the state. For

example, Lancium aptly titles their data centers in Fort Stockton and Abilene as “clean

campus” facilities, sourcing almost all power from 100% renewable sources nearby.

However, the two Rockdale data centers demanding the highest power capacities of all

mining facilities in the state still pull from a disproportionately high non-renewable

energy mix. Wind, solar and other renewable sources generated 31% of electricity

ERCOT-wide in 2022 (Irfan 2023). 8 of the 11 Bitcoin mining data centers in this study

are in regions where renewables accounts for at least 60% of power capacity within

100km Table 3.6).

Figure 3.7 Example of Select Data Centers with Energy Mix Concentric Rings (author)
207
Figure 3.8 is just an example depicting three data centers, but this proximity-based data collection was
done for all Bitcoin mining facilities.

172
 Table 3.5 Number of Power Plants Near Bitcoin Mining Facilities by Energy Technology
Technology Type Wind Solar Other Renew Total Renew All % Renew
Location Distance within
Ft. Stockton 25km 0 0 0 0 4 0%
West LZ 50km 3 4 0 7 14 50%
100km 6 18 0 24 49 49%

Upton County 25km 1 4 0 5 8 63%

West LZ 50km 6 10 0 16 22 73%
100km 11 17 0 28 53 53%

Pyote* 25km 0 0 0 0 4 0%
West LZ 50km 0 4 0 4 14 29%
100km 5 16 0 21 56 38%

Big Spring 25km 5 0 0 5 7 71%

West LZ 50km 10 0 0 10 14 71%
100km 36 8 0 44 69 64%

Abilene 25km 1 0 0 1 3 33%

West LZ 50km 10 1 0 11 14 79%
100km 30 4 0 34 45 76%

Argo 25km 2 0 0 2 3 67%

West LZ 50km 6 0 0 6 9 67%
100km 19 1 0 20 36 56%

Denton 25km 0 1 0 1 7 14%

North LZ 50km 1 5 3 9 34 26%
100km 4 12 5 21 83 25%

Rockdale** 25km 0 0 0 0 2 0%
South LZ 50km 0 1 0 1 7 14%
100km 0 7 3 10 56 18%
*3 mining facilities in Pyote
**2 mining facilities in Rockdale

Table 3.6 Power Capacity Near Bitcoin Mining Facilities by Energy Technology (MW)
Technology Type Wind Solar Other Renew Total Renew Total All Types % Renew
Location Distance within
Ft. Stockton 25km 0 0 0 0 8.8 0%
West LZ 50km 292 700.2 0 992.2 1001 99%
100km 820.2 2779.6 0 3599.8 4236.5 85%

Upton County 25km 278 880 0 1158 1158 100%

West LZ 50km 1187.7 1840.5 0 3028.2 3028.2 100%
100km 2212.1 3156.3 0 5368.4 7934.2 68%

Pyote* 25km 0 0 0 0 456.9 0%

West LZ 50km 0 685 0 685 1171.6 58%
100km 787.2 3146.9 0 3934.1 6560 60%

Big Spring 25km 477.5 0 0 477.5 709.5 67%

West LZ 50km 1142.7 0 0 1142.7 1374.7 83%
100km 6533.7 1298.8 0 7832.5 10508.1 75%

Abilene 25km 200 0 0 200 202.4 99%

West LZ 50km 2191.6 200 0 2391.6 2394 100%
100km 5742.8 725 0 6467.8 6472 100%

Argo 25km 407.3 0 0 407.3 407.3 100%

West LZ 50km 678.7 0 0 678.7 678.7 100%
100km 3050.5 240 0 3290.5 5160.8 64%

Denton 25km 0 2 0 2 227.6 1%

North LZ 50km 180.1 75.1 118.4 373.6 623.6 60%
100km 528.2 125.4 228.2 881.8 10179.7 9%

Rockdale** 25km 0 0 0 0 590.6 0%

South LZ 50km 0 144 0 144 734.6 20%
100km 0 208.7 131 339.7 10566.8 3%
*3 mining facilities in Pyote
**2 mining facilities in Rockdale

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 The most interesting finding relating to the geographic positioning of Bitcoin

mines has to do with their proximity to SPs with a high frequency of negative LMPs.

Negative LMPs are most frequent in the West LZ by a wide margin, consistent with

ERCOT concerns about regional congestion (Potomac Economics 2022).208 Negative

LMPs occurred an average of 6,394 times per SP (i.e., individual LMP location) across

Texas in 2021.209 Frequency of negative LMPs for SPs within 100km of Bitcoin mine

locations was much higher, indicating that most mining data centers are well-positioned

to provide demand during periods of depressed pricing (Table 3.7). The probability of a

negative LMP from the miner sample (SPs within 100km of a Bitcoin data center) was

56.3% higher than the ERCOT-wide average. Four of the eight locations (Fort Stockton,

Upton County, Pyote, and Afton210) saw negative wholesale energy prices at twice the

frequency of the statewide average.

Table 3.7 Frequency of ERCOT negative LMPs in 2021

Settlement Points Count Average Median Min Max
ERCOT ALL 783 6394 3516 10 27450
within 100km of:
Fort Stockton 15 13165 13206 11922 14507
Upton County 21 12910 12833 11630 14507
Pyote 14 12312 12076 11630 13850
Big Spring 33 11253 11209 9975 12714
Abilene 21 10290 10292 8814 11427
Afton 12 20556 24482 8780 27450
Denton 17 3820 2452 15 7061
Rockdale 18 2724 2928 2102 3043

Only two of eight data center locations, Rockdale (South LZ) and Denton (North

LZ) are in regions with a below-average frequency of negative pricing. Denton’s negative

208
Of the five major load zones, the West LZ was responsible for 61% of negative LMPs, followed by the
South LZ with 26%.
209
LMP observations taken at 5-minute intervals throughout the entire year.
210
SPs around Afton have the highest frequency of negative LMPs of any SPs in the entire state.

174
LMP frequency is below the state SP average, but above the median. But SPs around

Rockdale certainly have negative pricing less often than the rest of the state. It is possible

that the combined power draw of the two large Bitcoin mining facilities in Rockdale has

reduced the frequency of negative LMPs. However, SPs around Rockdale have

historically had a lower frequency of negative LMPs relative to the rest of the state, even

before Riot Blockchain and Bitdeer built their mines. In 2018 well before either facility

was built, SPs within 100km of Rockdale saw negative LMPs an average of 422 times,

compared to the statewide average of 2449 occurrences.

3.5.2 Bitcoin Mining Impacts on Wholesale Energy Prices

Average wholesale energy prices remained relatively consistent across Texas

between 2017 and 2020 (Table 3.8). A massive jump in mean wholesale energy prices in

2021 can be mostly attributed to Winter Storm Uri. Dropping LMP observations during

the storm decreases the average 2021 LMP by ~$34/MWh.211 Still, average wholesale

prices increased significantly from 2020 to 2021 even after correcting for both Winter

Storm Uri and hot summer months. While a great deal of new Bitcoin mining came

online during this period, a 66% jump in Texas natural gas industrial prices in Q4 2021

accounts for this rise in wholesale energy prices (Webb 2022; EIA 2022).212 Persistent

elevated natural gas prices combined with increased demand during hot summer months

led to a continued increase in average wholesale energy prices in 2022 (Figure 3.8).213

211
Observations were dropped from February 12 th through February 18th
212
Jan.-Sep. ’21 average price (excluding February for Winter Storm Uri): $3.66/thousand cubic feet; Oct.-
Dec. ’21 Average price: $6.09/thousand cubic feet (EIA 2022)
213
ERCOT even asked Texans to keep thermostats set above 78 degrees to help keep energy demand down
during the hottest summer days (Ferman 2022).

175
Table 3.8. ERCOT Average Locational Marginal Prices
Time Period N Mean Median Min Max Variance Std. Dev.
2017 646 26.45 25.52 16.37 47.40 30.54 5.53
Summer 638 28.05 27.57 20.03 38.27 3.24 1.80

2018 655 30.10 29.36 21.25 284.98 168.23 12.97

Summer 643 36.32 33.65 19.23 1167.41 2166.88 46.55

2019 677 29.56 28.82 -21.43 150.43 116.80 10.81

Summer 656 43.99 44.54 21.77 74.46 19.84 4.45

2020 715 20.55 20.34 7.95 132.11 69.88 8.36

Summer 686 21.12 20.48 14.35 113.94 38.47 6.20

2021* 783 34.32 35.34 16.33 50.45 20.13 4.49

(w/Uri) 783 78.31 83.37 16.33 133.34 261.54 16.17
Summer 753 34.18 34.88 23.48 47.82 4.76 2.18

2022* 808 59.59 59.22 15.43 96.28 93.07 9.65

Summer 802 95.67 100.42 51.70 119.26 150.46 12.27

Figure 3.8 (right) ERCOT Average LMP and Natural Gas Price Over Time (author)

Historically, the West LZ where most major Bitcoin mining is now located had

higher wholesale energy prices relative to other regions in the state, particularly during

the winter months. Figures 3.9-3.12 compare ERCOT settlement point prices214 (SPP)

across load zones. Q4 2019 and Q1 2020 average SPPs in the West LZ were twice as

expensive as the other five major ERCOT load zones. More recently, this trend changed

significantly as VRE penetration has increased in the region. The West LZ had the lowest

average SPPs of all LZs in five of the last seven quarters (Q1 2021-Q3 2022). Still,

pricing differences between the West LZ and the rest of the state are small. The average

West LZ SPP was just $3/MWh and $4/MWh lower than the rest of the LZs for 2020 and

2022, respectively.215

214
Settlement point prices are another measure of real-time wholesale energy pricing. They are measured in
15-minute intervals and reflect what price energy settles or closes at, where LMPs are measured in 5-
minute intervals and represent the marginal cost of producing additional energy.
215
Data only available through Q3 2022.

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 Figures 3.9-3.12 Average Settlement Point Prices by Load Zone, 2019-2022 (author)

To examine wholesale energy pricing near large-scale Bitcoin miners, I took the

yearly means of LMPs within 25km, 50km, and 100km of each data center location from

2017-2022.216 Figures in Appendix B show these average LMPs compared to the ERCOT

wide averages for the same time periods. Comparisons of LMPs at different distances

allows us to see whether proximity to high demand mining data centers affects average

wholesale energy prices. Information about when data centers come online allows for

before/after comparisons of energy pricing trends. If proximity impacts prices, we should

expect to see the 25km (red) and 50km (purple) trend lines to be higher than the 100km

(blue) on the charts after the point in time where mines become operational.

However, the level of fidelity regarding how much capacity is online and when

varies between the various locations. Mining companies are not required to report when

216
Again, LMP data stop October 2nd, 2022 and only include observations from LMPs common across the
entire timeframe for comparison purposes. 2021 data reflect dropped observations from Winter Storm Uri
(February 12th through February 18th)

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they are online and how much power they draw.217 For those loads coming online late in

the time series, it is harder to draw ex-post conclusions about their pricing impacts.

However, comparing ex-ante (pre-operational) LMP trend data to the ERCOT-wide

average is still useful in assessing whether regional wholesale energy pricing played a

significant role in choosing mining locations as opposed to regulatory concerns (i.e.,

partnerships with local governments/municipal authorities).

A full breakdown of my findings based on each individual location is available in

Appendix B. Overall, I find that proximity to Bitcoin mining data centers has no

correlation to changes in wholesale energy prices. Including LMPs falling within 100km

of an active data center lowers average price more than $1/MWh compared to the 25km

& 50km proximities at just three of eight locations, while average prices actually increase

with distance from the data center at two locations. Additionally, only three data centers

were built in regions with historically low wholesale energy costs. In fact, four data

centers were built at locations with higher locational marginal prices relative to the

ERCOT average since 2017. In 2022, LMPs around all five “green” data centers (>60%

renewable energy mix, see Table 2.6) are lower than the ERCOT average, whereas LMPs

near carbon-based data centers are closer to the ERCOT average.

Still, yearly averages may not effectively capture pricing dynamics when system

demand is highest. In May 2022, ERCOT released a statement imploring customers to

conserve power “by setting their thermostats to 78-degrees or above and avoiding the

217
ERCOT also does not make this information publicly available. Most of the information regarding when
facilities came online was pulled from publicly available sources: press releases, earnings reports, news
stories, and even Chapter 11 filings (Compute North). I reached out to each company to confirm the
data/information I found, comment on the study, and participate in a semi-structured interview. Few
responded at all, and only one company (Lancium) chose to confirm publicly available information and
share some additional data.

178
usage of large appliances (such as dishwashers, washers and dryers) during peak hours

between 3 p.m. and 8 p.m.” due to “unseasonably hot weather driving record demand

across Texas” (ERCOT 2022). Figure 3.13 shows average LMPs for all SPs within

100km of a Bitcoin mining facility during peak demand hours (3PM-8PM) from May

through August 2022. Five locations saw average LMPs at or below the ERCOT-wide

average, and seven locations averaged LMPs at or below the ERCOT-wide median

settlement point LMP. The breakeven price of energy for major high-efficiency miners

throughout most of this period was well below average wholesale energy prices across all

regions.218 The rational economic miner would turn off their equipment above this

breakeven price, but would still contribute to increased demand up until this price point.

Table 3.9 summarizes descriptive statistics and the results of a two-tail t-test comparison

between average LMPs for all ERCOT SPs and all SPs falling within 100km of a Bitcoin

mining data center during this same high demand period. The mean LMP for SPs near

Bitcoin mining facilities was slightly higher (~$2/MWh) than the ERCOT-wide average.

However, the median LMP for SPs near these data centers was lower than the ERCOT

median and t-test results indicate there is no meaningful difference between the two

group means.

218
The average breakeven price of energy for Bitcoin mining profitability with a S19 Pro miner was around
$125/MWh during this period. The breakeven price of energy for profitable Bitcoin mining is dynamic. It
depends on mining equipment and Bitcoin market/network conditions (i.e., ASIC model, market price, total
network hashrate). I elaborate on the breakeven price model in Appendix A.

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 Figure 3.13 Average LMPs During High Demand Hours, May-August ’22 (author)

Table 3.9 Statistical Comparison of LMPs: High Demand Summer '22 ($/MWh)
ERCOT ALL SPs SPs w/in 100km BTC
Mean $145.93 $147.90
Median $151.11 $146.38
Minimum $30.00 $121.32
Maximum $217.77 $178.15
Variance $1,351.31 $103.67
Observations 802 110
t Stat -1.22
P(T<=t) two-tail 0.22
t Critical two-tail 1.96

It is possible that companies hosting new loads in the early stages of coming fully

online are too small to impact nearby electricity prices. But the most interesting finding

of this study is that proximity to massive mining loads has almost no correlation to higher

average wholesale energy prices over the course of an entire year. Riot Blockchain hosts

the largest cryptocurrency mine in North America less than a mile from Bitdeer’s

170MW mine in Rockdale, Texas (Sigalos 2021). Both facilities were operational with a

combined capacity of at least 470MW when Bitcoin’s price hit all-time highs and all

Chinese-based hashrate fell offline in 2021, making it even easier and more profitable to

180
mine Bitcoin. Yet, LMPs within 25, 50, and 100km of Rockdale were just $1/MWh

higher than the ERCOT-wide average in 2021, continuing a trend for the region of LMPs

at or near ERCOT yearly averages. However, the average LMP for the 17 SPs within

100km of Rockdale were $15.69/MWh higher than the ERCOT-wide average during the

high demand hours (3PM-8PM) of Summer 2022 (Figure 3.13).

3.5.3 Bitcoin Mining Impacts on Grid Flexibility

Any Bitcoin facilities participating in wholesale or AS markets must be registered

under a qualified scheduling entity (QSE). QSEs must meet certain qualification

requirements to submit schedules and bids for their load resources to participate in

various demand response programs. QSEs are often separate entities which act as

qualified representatives of cryptocurrency miners, participating in these markets on their

behalf (Menati et al. 2022). ERCOT makes data available on demand response

participation on day-ahead market disclosure reports. But data are sorted by “load

resource name” and/or QSE name (depending on the report). Load resource names are

made up of alphanumeric characters, but neither the type of load nor who owns that load

is clear from the load resource name. ERCOT provides a list of QSEs, but it is not clear

which QSE might represent a Bitcoin mining data center and mining companies were

generally unwilling to share this information with me for this research.219 Without the

ability to match bitcoin facilities to QSE or load resource names, there is little useful

quantitative data from ERCOT beyond statewide trends in demand response program

219
I reached out to each company owning a Bitcoin mining data center referenced in this paper and the
Texas Blockchain Council to try to match QSE and load resource names to mining operations. Several
companies did not respond to my requests for information at all, and those who did were unwilling to
provide the necessary information to tie ERCOT DAM data to their specific mining loads.

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participation rates, which say nothing about Bitcoin mining impacts on grid flexibility

efforts.

ERCOT sheds some light on the unique ability of data centers to qualify as

controllable load resources (CLRs). CLRs distinguish themselves from non-controllable

load resources (NCLRs) with the capability to precisely follow and respond to security

constrained economic dispatch220 (SCED) base point instructions over short intervals.

This involves adjusting power consumption up or down every few seconds

commensurate with real-time grid operator instructions. NCLRs and other demand

response participants merely shift blocky loads in response to economic incentives

(ERCOT 2022). In year-end reports on demand response for 2021 and 2022, Bitcoin

mining data centers were the “first substantial amount of conventional load to participate

in the AS market as a Controllable Load Resource” in 2020 (ERCOT 2021) and are still

the only loads to meet CLR requirements today (ERCOT 2022).221

This kind of flexibility benefits both grid operators and cryptocurrency miners

adjusting to real-time changes. Ancillary services are sold in day ahead markets and

delivered in real time. For example, ERCOT maintains certain load resources as

responsive reserve services (RRS) to restore grid frequency “within the first few minutes

of an event that causes a significant deviation from the standard frequency” (ERCOT

2005). If an RRS-participant load sells a day-ahead ancillary, they must be online and

available if called upon by ERCOT. If a black swan event occurs with a large mismatch

between the AS clearance price and a much higher real-time price, these load resources

cannot “sell back” the ancillary services they bought in the day-ahead market; they must

220
ERCOT (2023) defines SCED as “the real-time market evaluation of offers to produce a least-cost
dispatch of online resources”
221
ERCOT added three new CLRs in 2021 and sixteen in 2022

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consume energy at the real-time price to stay compliant with their ancillary sale (Helman

2021).

Lancium’s CLR software dynamically adjusts its power use to real time pricing

changes and/or grid operator instructions. This allows its Bitcoin mining data centers to

avoid high prices and turn down consumption during periods of high system-wide

demand. Figure 3.14 shows Lancium’s Fort Stockton active power consumption

compared to real-time energy prices in LZ West and Figure 3.15 shows the comparison to

ERCOT system-wide demand. Predictably, we see Fort Stockton drop electricity

consumption dramatically during periods of high real time prices during a hot week in

mid-July. 222 These large drops in power consumption typically correspond to increases in

system-wide demand as well. Lancium’s software automatically curtailed mining when

the price of power was above Bitcoin’s breakeven price.

Figure 3.14 Fort Stockton Electricity Use vs. LZ West Energy Prices (author)223
222
The breakeven price for Bitcoin mining profitability with a S19 Pro miner was around $125/MWh
during that week. This is based on a model for determining the breakeven price of energy depending on
mining equipment and Bitcoin market/network conditions (i.e., ASIC model, market price, total network
hashrate). I elaborate on this breakeven price model in Appendix A.
223
Figures 14 and 15 are author-generated from raw data provided directly to the author from Lancium.
Lancium provided their active power use during July and August 2022, only.

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 Figure 3.15 Fort Stockton Electricity Use vs. System Wide Demand

High degrees of flexibility and mining partnership with grid operators also enable

miners to rapidly offload power demand in response to certain grid conditions. Figure

3.16 shows how Fort Stockton miners dropped 50MW of power consumption within

seconds during an underfrequency event in January 2022. ERCOT CEO Brad Jones

touted the utility of Bitcoin mining in providing grid flexibility in March 2022 saying,

“cryptocurrency [mining] is very unique in that way in that all of the loads can come off.

Most other data centers, whether Microsoft or any other data center provider like

Amazon, they all have customers to serve every other day so they can’t just turn off – but

these cryptocurrencies can” (CNBC 2022). In February 2021, Winter Storm Uri led to

widespread power loss, several deaths, and economic losses exceeding $200 billion in

Texas (ASCE 2021). The following winter, virtually all industrial Bitcoin mining shut

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down ahead of Winter Storm Landon to relieve pressure on the grid (Gkritsi 2022).224

The Texas Blockchain Council (TBC) worked directly with ERCOT to ensure Bitcoin

mining was part of the solution, and not a contributor to the problem in 2022. In a letter

to Texas Governor Gregg Abbot, TBC wrote “Just as important as the positive market

signals we send to generators is our unique ability to immediately shed load when

ERCOT demands it. This sort of demand response has and should continue to be a

powerful tool in any grid management strategy” (Wright 2022).

Figure 3.16 CLR Response to Underfrequency Event (Lancium 2022)

3.6 Discussion

Power grids are complex systems wherein supply, demand, and pricing vary over

time and space. The results of this study rely on quantitative empirical data to describe

the state of the ERCOT grid relative to the presence of large Bitcoin mining data centers.

Most of these data centers are positioned in regions with a relatively high proportion of

224
While Winter Storm Uri was more severe than Landon, less than 100,000 Texans lost power during
Landon, and power was able to be restored much faster because there were no rolling blackouts leading to
grid failure.

185
renewable energy and a high frequency of negative wholesale energy prices (3.5.1). But

whether this incentivizes further development of renewable generation requires causal

analysis (3.6.1). Time series data also indicate no correlation between these data centers

and wholesale energy prices, but policymakers should consider retail markets and other

factors impacting local communities (3.6.2). Lastly, some evidence from Fort Stockton,

Texas suggests Bitcoin mines are particularly well-suited to function as highly flexible

data centers. But more empirical data on widespread miner participation in demand

response programs is needed to conclude Bitcoin mining helps provide grid flexibility in

a meaningful way (3.6.3).

3.6.1 Does Bitcoin mining incentivize renewable growth?

The high concentration of renewable energy and saturation of transmission

infrastructure in West Texas pre-dates the inflow of most new Bitcoin mining hashrate in

the state. Nearly all the mining power analyzed in this study came online after 2020. It is

still too early to conclude that the arrival of new Bitcoin mining causes further growth of

new renewable projects that would not have been developed otherwise. Future EIA Form

860 data on both “proposed” and “operable” generators could allow for a quantitative

study (e.g., difference in difference) comparing renewable growth trends before and after

the arrival of new Bitcoin mining. Of course, such studies would require more concrete

data on precisely when these data centers came online (as well as how much power they

use) to draw a causal relationship. If data on power purchasing agreements (PPA)

between cryptocurrency miners and power plants were publicly available, hybrid project

research studies (Bolinger et al. 2021; 2022; Gorman et al. 2022) could be conducted as

well.

186
 If anything, it is more likely that the causal link has run in the opposite direction:

saturation of renewables leads to congestion and a higher frequency of low and negative

wholesale energy pricing which entices Bitcoin miners to set up nearby. The results of

this study demonstrate that most Bitcoin miners in Texas choose areas with

disproportionately high levels of renewable energy relative to the rest of the state. It

stands to reason that the presence of flexible data centers in these regions provide a

consistent and reliable customer of excess renewable energy during low pricing events.

Former ERCOT CEO Brad Jones said, “crypto has found a way to come into our market

and take some of that excess wind in off-peak periods… we can use that cryptocurrency

to soak up the excess generation and really provide a home for more wind and solar to

come to our state” (CNBC 2022).

Still, the largest mining data centers by capacity are in Rockdale, Texas; a region

low on renewable energy capacity. Grid-connected power consumption draws from the

energy mix of the region (Table 2.6). If cryptocurrency mining incentivizes further

energy production in renewable-rich areas, it does the same in high carbon-emitting

regions. Evidence suggests Bitcoin mining provides a customer for carbon-emitting

power plants (Roeck and Drennen 2022; Millman 2022) and creates fewer new jobs than

other industrial energy consumers (Benetton et al. 2021).

Cryptocurrency mining’s utility to society writ large is a normative question. A

libertarian viewpoint might suggest that value-based judgments on who should be

allowed to consume carbon-emitting energy constitutes governmental overreach. An

environmentally conscious observer might deem any incentive for carbon-emitting

growth unacceptable. The results of this study suggest energy-intensive data centers can

187
improve the economics of renewable projects as curtailment and congestion continue to

grow in regions with high VRE penetration like West Texas. An “all or nothing” policy

approach to cryptocurrency mining fails to recognize either the costs or benefits of its

utility in facilitating the transition to a net-zero economy. A policy “middle ground”

exists where grid-connected mining in renewable-rich regions can be incentivized.

Policymakers can also encourage behind-the-meter cryptocurrency mining co-located

with renewable or low-carbon-emitting generators.

3.6.2 How does Bitcoin mining impact energy prices?

This study yields little evidence to support claims that Bitcoin mining

significantly impacts nearby wholesale energy prices most of the time. Results suggest

exceptionally large data centers like Rockdale may contribute to higher nearby energy

prices during periods of high system-wide demand (Figure 3.13). But convincing causal

claims to that end would require demand data from these large data centers at the hourly

time interval. If these miners were to provide such data, researchers could identify

exactly when they curtail energy consumption relative to the dynamic breakeven price of

energy for Bitcoin miners, nearby wholesale energy prices, and system wide demand as

seen in seen in the analysis of Lancium data in section 3.5.3 (Figures 3.15 and 3.16).

Surprisingly, high regional wholesale energy prices relative to the rest of the state

do not appear to factor into miner decision-making calculus on where to locate their data

centers. For example, Fort Stockton, Upton County, and Pyote, Texas are all within

100km of one another. Regional LMPs were higher than the ERCOT-wide average prior

to new Bitcoin mines becoming operational, but lower than the ERCOT average in 2022

when all data centers were online (see Appendix B).

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 However, these results do not speak to the retail customer experience. Subsequent

studies might look specifically at whether retail electricity pricing is similarly unaffected

by nearby mining data centers by analyzing REP data (Hartley et al. 2019). Like

Greenberg and Budgen’s (2019) case study of a cryptocurrency “boomtown,” other

studies should look at localized cryptomining impacts beyond energy prices. Finally,

while cryptocurrency adoption is growing, the number of U.S. adults who use it is still

small (Faverio and Massarat 2022). A full cost-benefit analysis must consider that

negative externalities of carbon-based mining (e.g., pollution, emissions) affect those

who have no interest in utilizing or investing in cryptocurrency.

3.6.3 Does Bitcoin mining provide flexibility to grid operators?

Evidence supporting the use of cryptocurrency mining in ERCOT’s demand

response programs and ancillary services markets is limited but supports theoretical

claims regarding highly flexible loads as demand-side grid stability solutions to

intermittency issues. Without transparency from cryptomining companies in sharing their

QSE and/or load resource names, researchers have no way of quantitatively and

empirically assessing DR/AS participation rates. Still, the fact that cryptomining data

centers in Texas are the only loads to qualify for CLR certification supports claims that

these interruptible loads are uniquely suited to partner with grid operators in efforts to

boost grid flexibility in real time. Data shared from Lancium (Figures 3.14-3.16)

demonstrate how quickly these loads can reduce power consumption and aid in frequency

response. More hourly electricity consumption data sharing from mining companies

could show skeptics how natural, built-in economic incentives (i.e., high energy prices)

189
are in fact causing these data centers to scale back operations during periods of peak

demand.

There is also the question of whether the ERCOT demand response programs

cryptominers participate in are too expensive, market-distorting, or pass on unnecessary

costs to Texans when that money could be used to develop more transmission or battery

storage to cope with renewable intermittency. A report by the Tech Transparency Project

(2022) found “Bitcoin miners may collect as much as $170 million a year from programs

that pay large energy consumers for their willingness to shut down” (3). However, this

claim (and others made throughout the report) was unsubstantiated by empirical data and

no explanation was given for how this total yearly figure was calculated. Still, it is clear

from SEC filings that miners like Riot Blockchain (Rockdale, TX Bitcoin mine owner)

participate in demand response programs where they “opportunistically sell electricity

back to ERCOT in exchange for cash payments, rather than providing the power to our

customers during these peak times” (Riot Blockchain Inc 2021, 11). This occurs when

cryptominers like Riot Blockchain enter into contracts which lock in electricity prices at

specific rates ahead of time to avoid tail-end event volatility. While it received no

revenue from demand response in 2019 and just $9 million in 2020, Riot Blockchain

reported it was entitled to receive $125.1 million for its power sales during Winter Storm

Uri, alone (Riot Blockchain Inc 2021).

A report on the costs and benefits pairing cryptocurrency mining with demand

response efforts finds a “win-win range of curtailed hours when both the utility and

crypto miner are better off than the status quo of no coordination and no demand

response” (Wright and Shaban 2022). This range depends on miner revenue factors like

190
cryptocurrency price, hashrate, and mining equipment efficiency, and grid conditions for

the utility (i.e., grid manager). Optimum hours of mining curtailment which maximize

utility wholesale value differ from that of the miner’s optimum level of curtailment hours

to maximize revenue, but a wide “win-win” range exists, nonetheless. Furthermore,

Wright and Shaban (2022) find wholesale energy prices correlate with grid emissions,

therefore emissions reductions are possible when grid managers issue “an emissions

intensity signal” to “modulate crypto load and contribute to reducing grid emissions.”

In sum, the results of this study suggest there is potential for Bitcoin and

cryptocurrency mining to provide flexibility to grid operators, though collaboration is

critical to mutual success. Limited data shared from Lancium demonstrates how miners

react to price signals in real time and assist grid managers during underfrequency events

within seconds. Grid managers like ERCOT should be transparent with their customers

about the costs and benefits of demand response programs, and those costs/benefits

should be considered alongside alternatives like increased transmission and utility-scale

battery storage to facilitate energy arbitrage. Additionally, policymakers should insist on

transparent data sharing practices regarding demand response participation rates.

3.7 Conclusion

…the more demand to the degree that its flexible – that it can turn down whenever we
need the power for other customers – is fantastic. We can use that cryptocurrency to soak
up the excess generation and really provide a home for more wind and solar to come to
our state. And at the same time, it reduces their consumption during periods where we
get tight and we need the power for other customers. Now what we have to do in Texas is
figure this thing out. Its new. The solar is new, the batteries are new, and this
cryptocurrency is new. We have to find a way to utilize it within our system most
advantageously… we have to figure out ways to make sure we’re putting them at the right
location and that we can build out our transmission grid to accommodate them.
- Former ERCOT CEO Brad Jones (CNBC 2022)

191
 This essay set aside normative arguments for or against the utility of

cryptocurrencies in favor of an objective exploration of how the world’s largest and most

energy-intensive cryptocurrency might serve as a tool in the energy transition. The scope

of this study is narrowly focused on a single energy grid – isolated from the Western and

Eastern Interconnections. The Texas deregulated approach to electricity markets differs

from most states. Subsequent studies might consider how the specific structures of

ERCOT’s energy pricing, demand response programs, and ancillary services market work

in concert with PoW mining that may not be applicable to the rest of the United States.

Blanket statements from cryptocurrency enthusiasts touting PoW mining data

centers as a panacea for renewable energy development and grid stability fail to capture

the nuance of what is at stake for grid operators and the customers who rely on it.

Academic studies suggesting the elimination of Bitcoin mining might help prevent the

world from a climate catastrophe are similarly biased and wildly misleading. In Texas,

cryptocurrency miners have demonstrated the ability to provide a constant customer for

cheap or often-curtailed energy in areas of high VRE penetration without significantly

impacting wholesale energy prices. Limited empirical work suggests they are capable of

functioning as interruptible data centers grid operators can partner with to make energy

grids more flexible under the right circumstances. Both are needed to facilitate a

transition to the green grid of the future which will power the net-zero economy.

Utility-scale battery storage and transmission infrastructure are essential, long-

term solutions to a reliable energy grid. But they are also expensive (Desing and Widmer

2022), time-consuming (Cohn and Jankovska 2020), and natural resource-intensive (Xu

et al. 2020). If managed properly, PoW- based cryptocurrency mining can serve as one of

192
many helpful solutions in the energy transition. Natural economic forces disincentivize

miners from using power when it is expensive and needed most. But a deregulated

market approach to electricity generation and delivery should not constitute an

unregulated one. Carbon-based cryptomining results in negative externalities leading to

market failures which regulators must compensate for. I propose three specific policy

prescriptions to ensure a “win-win” relationship between cryptominers and grid

customers in deregulated markets:

1. Mandate transparent sharing of cryptomining load and demand response participation

data

Researchers need access to data for analysis and grid operators must insist on

maximum transparency from and coordination with mining companies. Understanding

the relationship between the grid and cryptocurrency mining requires a high degree of

literacy in energy economics and the fundamentals of how proof-of-work consensus

mechanisms work in practice. With data transparency, researchers can produce more

studies that help citizens better understand the costs and benefits of incorporating more

cryptomining data centers along the power grid. Sharing detailed time series demand data

could allow studies like this one to include regressions drawing more causal relationships

between a data center’s load and nearby energy prices in real time.225

2. Grid operators in deregulated energy markets like ERCOT should establish shut off

criteria for non-essential loads like cryptocurrency miners – particularly during periods

of high demand.

Relying on the free market to regulate cryptocurrency miner demand works when

the breakeven price of energy for mining profitability is low. Economically rational

225
The data shared from Lancium (seen in Figures 3.15 and Figure 3.16) is a great example of this.

193
miners will turn off their equipment when energy prices are too expensive relative to the

revenue potential of mined Bitcoin. But the price of Bitcoin can surge rapidly, raising the

breakeven price of energy and creating a revenue incentive for miners to keep ASICs

running despite high prices and a high level of overall system demand. Without

participation in demand response, such miners could add to the risk of grid failure and

rolling blackouts which threaten the wellbeing of millions.

Thus far, the Texas Blockchain Council has voluntarily worked with ERCOT

managers to ensure large-scale miners shed load and relieve pressure on the grid when

needed. But there is no requirement for cryptominers to join the TBC or follow ERCOT

instructions. Based on a risk assessment of projected grid conditions, ERCOT could

establish a ceiling price of energy or system demand above which cryptomining and other

non-essential uses of power are not permitted when economic conditions (i.e., the

breakeven price of energy for cryptomining) fail to provide natural disincentives to

operating mining equipment.

3. Incentivize mining in regions with a high proportion of renewable energy for grid-

connected miners.

While most large-scale miners in Texas are in regions with relatively high

percentages of nearby renewable power generation, the largest mining operations in the

state are in regions which rely heavily on carbon-emitting energy sources (Table 3.6).

Policymakers can incentivize renewable growth by encouraging (or requiring) miners to

place their load demand in regions rich in renewable generation. Conversely,

policymakers can impose disincentives for mining in heavy carbon-emitting regions in

the form of a carbon tax on companies running data centers in these regions.

194
 Lastly, this study focuses on grid-connected Bitcoin mining in a deregulated

energy market that lacks connection to the Western and Eastern Interconnections. This

effectively creates a unique situation where Texas is the only state which does not have

the ability to draw significant amounts of power from other states (Oxner 2022). The

external validity of the findings of this study may be limited as energy regulation and the

structure of demand response/ancillary services markets vary by state and ISO/RTO.

Subsequent studies might examine energy pricing around PoW cryptocurrency mining in

different types of energy markets and policymakers should consider the costs and benefits

of energy deregulation. Studies focused on data centers co-located with renewable

generators sourcing power behind-the-meter could shed light on further opportunities for

mutually beneficial, sustainable cryptomining in the energy transition.

195
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 Appendix A: A Basic Model of Bitcoin Mining Economics and Demand Response

Profitability

Hypothesis #1: In a perfectly free market, energy pricing serves as the primary driver of

whether miners turn on or off

H1a: Miners turn on when the price of energy is below their breakeven price; or

H1b: Miners will turn off when the price of energy is below their breakeven price

provided they can make more money participating in demand response / ancillary

services

Factors/terms to understand in determining the breakeven price of energy:

Bitcoin Price ($USD/BTC): Each block that is mined yields a mining reward or block

subsidy – a certain amount of Bitcoin awarded to the miner. The value of this reward

depends on the market price of BTC

Electricity Price ($USD/kWh): Mining requires electricity. Miners pay for power

consumption over time

Network Hashrate (TH/s): the amount of computing power across the network

dedicated to mining and the processing of transactions. Hashrate is effectively a measure

of the amount of “guesses” being generated to solve a block. Related to mining difficulty

(below)

Hardware (ASIC) Hashrate (TH/s): the rate at which individual hardware miners –

known as application-specific integrated circuits – can solve the SHA-256 algorithm

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Hardware efficiency (W/Th): The amount of power each individual ASIC needs per

hash solved

Difficulty (numerical internal score): Bitcoin’s built in “goal” is to have blocks mined

ten minutes apart. The difficulty of solving a block adjusts commensurate with the

amount of hashrate or mining effort dedicated to solving blocks. Difficulty can be found

in block headers

Transaction Fees (BTC): All BTC transactions include a fee to be paid to miners.

Setting higher fees can incentivize miners to include transactions in blocks faster than

those transactions with lower fees. They are denominated in BTC

Hypothesis re-stated mathematically:

Miners will turn off during hour “t” if: 𝑃𝐵 (𝑡) < 0 | 𝑃𝐵 (𝑡) < 𝑃𝐷𝑅 (𝑡)

Given:

𝑃𝐵 (𝑡) – profit/loss for mining Bitcoin during hour “t”

𝑃𝐷𝑅 – profit for participating in some DR (demand response) or AS (ancillary service)

program during hour “t”

How do we find 𝑃𝐵 (𝑡)? “The profit/loss for mining Bitcoin during hour t”

𝑃𝐵 (𝑡) = 𝐵(𝑡) − 𝑒(𝑡) where:

𝐵(𝑡) is the revenue Bitcoin generates per MWh in hr. t ($USD)

𝑒(𝑡) is the cost of electricity per MWh in hr. t ($USD)

“The difference between BTC revenue per MWh in hr. t and electricity cost per MWh in

hr. t”

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The per MWh profit/loss for mining Bitcoin during hour t is the individual miner’s share

of the block reward for the hashing they contributed relative to the overall network

hashrate multiplied by the price of Bitcoin, divided by the power consumed (ASIC

wattage)

𝐻𝐴
𝐵𝑇𝐶(𝑡) ∗ 𝑏𝑟 ∗ 𝑏ℎ ∗
𝐻𝑁 (𝑡)
𝐵(𝑡) =
𝑊𝐴

𝐵𝑇𝐶(𝑡) – Bitcoin price avg. during hour t ($USD)

𝑏𝑟 – block reward (BTC)

𝑏ℎ - blocks each hour (constant at 6 due to BTC automatic difficulty adjustment

algorithm)

𝐻𝐴 – ASIC hashrate (TH/hr.)

𝐻𝑁 (𝑡) – average network hashrate during hour t (TH/hr.)

𝑊𝐴 – ASIC wattage (MWh)

Now for our second important term: 𝑃𝐷𝑅 “Profit/loss from participating in DR or AS”

Bitcoin mining data centers could participate in wholesale markets, AS, or as an ERS

(emergency response service) demand response program. ERCOT defines ancillary

services as services “procured to ensure sufficient resource capacity is on-line, or able to

be brought on-line in a timely manner, to balance the variability that cannot be covered

by the 5-minute energy market.”226 ERCOT outlines three types of AS:

226
https://www.ercot.com/files/docs/2021/12/02/18_2022_ERCOT_Methodologies_for_Determining_Mini
mum_AS_Requirements.pdf

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 1. Regulation Service: Regulation Service is capacity that can be deployed every 4

seconds to maintain frequency (i.e. balance supply & demand) between 5-min

dispatch intervals.

2. Responsive Reserve Service (RRS): RRS is procured to ensure sufficient capacity

is available to respond to frequency excursions during unit trips.

3. Non-Spinning Reserve Service (Non-Spin): Non-Spin is capacity that can be

started or interrupted within 30 minutes to cover net load (load – wind - solar)

forecast errors, replace loss of generation capacity, address risk of net load

ramps, or when there is a limited amount of capacity

Grid managers need AS on the supply side: responsive generation resources to come

online or scale back production to adjust for changes in demand. But AS is also needed

on the demand side:

1. Emergency Response Service (ERS) – qualified loads which can be made

available for deployment. ERS decreases the likelihood of system-wide load

shedding (rolling blackouts) by paying qualified scheduling entities (QSE) to

coordinate with residential, commercial and industrial participants to reduce

consumption227

2. Load Resources - Customers who are capable of changing their load in response

to an instruction and can meet certain performance requirements. Can participate

in both AS and real-time (RT) markets. In the ERCOT markets, the value of a

Load Resource’s load reduction is equal to that of an increase in generation by a

generating plant. Load Resources in SCED submit bids to buy power "up to"

227
https://www.ercot.com/services/programs/load/eils

230
 their specified level, and are instructed by ERCOT to reduce Load if wholesale

market prices equal or exceed that level. Load Resources that are scheduled or

selected in the ERCOT Day-Ahead AS Markets are eligible to receive a capacity

payment regardless of whether they are actually curtailed.228

A. Non-Controllable Load Resource (aka Load Resource other than

Controllable Load Resource, Load Resource controlled by high-set under

frequency relay)

B. Controllable Load Resource

A Load Resource capable of controllably reducing or increasing consumption

under Dispatch control by ERCOT. Requires base-point following and

primary frequency response

– QSE submits a “Bid to Buy” which represents the energy price above

which the CLR will drop Load.

– The CLR then gets dispatched economically by the Market Management

System.

3. A customer may decide independently to reduce consumption from its scheduled

or anticipated level in response to price signals or high demand on the ERCOT

system. This is known as Voluntary Load Response. Depending on how the retail

contract with their Load Serving Entity (LSE) is structured, these customers may

have the opportunity to benefit financially during periods when wholesale market

prices are high.229

228
https://www.ercot.com/services/programs/load/laar
229
https://www.ercot.com/services/programs/load/vlrp

231
 Appendix B: Section 3.5.2 Detailed Results

Denton Average LMPs

2017 2018 2019 2020 2021 2022 5yr.
25/50km 20.34 22.07 24.10 13.84 24.70 57.20 27.04
100km 22.54 27.36 27.47 18.49 34.31 59.28 31.57
ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

Core Scientific’s Denton facility is the major Bitcoin mining data center in the study from

the North LZ. The exact location is visible on Google Maps imagery and the address is

public knowledge available online (Gaudet 2022). SEC Filings confirm 22MW were

operational with plans to scale to 300MW.230 Core Scientific filed for bankruptcy in

December 2022 (Yerak et al. 2022). Average LMPs around the facility were lower than

the ERCOT average both before and after the data center came online. LMPs within 25

and 50km are consistently lower than LMPs withing 100km.

230
Form 10-Q; Commission File #001-40046

232
Rockdale Average LMPs
2017 2018 2019 2020 2021 2022 5yr.
25/50km 23.57 28.60 28.57 19.85 35.60 61.92 33.02
100km 24.23 28.75 28.69 20.15 35.63 59.83 32.88
ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

The location of Riot Blockchain’s “Whinstone U.S.” location is well-publicized online as

the largest bitcoin mining facility in North America. Riot Blockchain’s website provides

information as to precisely how much capacity came on when, beginning in Q3 2021.

Bitdeer is less transparent about their facility, but timing of when their active capacity

came online is available in SEC filings. The Bitdeer location is a former aluminum

smelting plant (according to several media reports) and is clearly visible on Google Maps

imagery. Despite the amount of active Bitcoin mining, LMPs around Rockdale are very

similar to the ERCOT-wide average.

Abilene Average LMPs

2017 2018 2019 2020 2021 2022 5yr.
25km 21.92 26.59 26.84 17.54 32.62 54.03 29.92
50km 22.07 26.79 26.76 17.06 32.25 54.38 29.88
100km 22.13 26.76 26.93 17.41 32.18 54.29 29.95
ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

Lancium Inc. publicly announced breaking ground on the “Abilene Clean Campus” data

center in November 2022, but it is not active. It is included in the study to determine

whether prices or grid energy mix factors into miner location decision-making. The exact

location of the data center is available on their website. In the case of Abilene, local
233
LMPs are consistently lower than the ERCOT-wide average and almost all generators

within 100km of the Abilene Clean Campus site are renewable (Tables 3.5 and 3.6).

Afton Average LMPs

2017 2018 2019 2020 2021 2022 5yr.

25km 18.90 23.64 24.61 14.23 30.00 54.10 27.58

50km 18.97 23.77 24.62 14.33 29.60 53.35 27.44

100km 18.37 23.14 24.07 13.20 28.16 52.30 26.54

ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

Argo Blockchain’s Helios data center is located in Afton, Texas. It publicly announced

200MW would be operational as of Q2 2022 and 200MW were confirmed operational as

of May 2022 when Argo was acquired by Galaxy Digital Holdings (Galaxy 2022). The

data center is co-located to a wind farm and Youtube videos provide imagery which can

be matched to lat-long on Google Maps for the exact location. Most of the nearby

generator capacity (64% within 100km, 100% within 50km) is renewable (Table 3.6) and

nearby LMPs have consistently been lower than the ERCOT average, before and after the

Argo facility came online.

234
 Pyote Average LMPs

2017 2018 2019 2020 2021 2022 5yr

25km 25.06 35.52 64.39 46.89 30.87 56.95 43.28

50km 25.06 35.52 69.73 46.90 30.68 56.98 44.14

100km 25.07 46.32 65.12 44.37 30.73 56.27 44.65

ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

Poolin, a subsidiary of Bitmain, runs North America’s “first fully operational hydro

cooling data center” in Pyote, Texas according to Bitmain’s website. The exact location

is unknown, but Pyote is a very small town so the estimated location is rather precise.

The amount of active capacity is unknown, but a Poolin job listing for a “data center

facilities manager” in Pyote says the position would involve managing one of two

300MW data centers there. A report from the Washington Post indicates Layer1

Technologies opened a mining plant in Pyote in 2020, though active capacity and precise

location are unknown (Brown 2021). Genesis Digital Assets posts location imagery and

construction status updates on their data center in Pyote on their website. It will have a

capacity of up to 300MW when complete. Exact dates for active capacity is unknown, but

it was active in some capacity as early as August 2022 according to their website. LMPs

235
near Pyote have been more expensive than the rest of ERCOT before 2021, but are just

below the ERCOT average since then.

Big Spring Average LMPs

2017 2018 2019 2020 2021 2022 5yr
25km 22.41 28.26 27.59 18.12 32.54 55.71 30.77
50km 22.41 28.34 27.64 18.61 33.96 57.72 31.45
100km 22.37 26.99 27.21 17.82 32.71 55.55 30.44
ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

Compute North began launching the first large data center in this study in 2018. Details

on the timeline of the launch and capacity of this facility were available when the

Compute North website was active prior to filing for bankruptcy in September 2022

(Texas Southern District 2022). Some details are still available in a Texas Monthly news

article (Gallaga 2021). Foundry Digital LLC confirmed 11MW were still active at the

time of their purchase of the Big Spring facility in November 2022 (Foundry 2022).

LMPs near Big Spring have been consistently lower than the ERCOT average.

236
Fort Stockton Average LMPs

2017 2018 2019 2020 2021 2022 5yr

25km 28.73 40.63 79.96 62.51 30.86 56.30 49.83

50km 32.99 95.96 84.08 62.77 30.86 56.36 60.50

100km 26.22 47.73 46.11 32.37 30.95 53.36 39.46

ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

All details and data on Lancium’s Fort Stockton facility from this study were confirmed

by an active employee of Lancium and used with permission. Like Lancium’s Abilene

campus, the energy mix near Fort Stockton is predominantly from renewable generators.

But unlike the Abilene facility, LMPs near Fort Stockton were higher than the ERCOT

average when Lancium broke ground on the facility, indicating nearby wholesale energy

prices played little role in the decision-making process.

237
 Upton County Average LMP

2017 2018 2019 2020 2021 2022 5yr

25km 21.33 27.95 35.62 21.94 31.05 47.83 30.95

50km 21.73 27.50 29.23 18.91 30.95 51.81 30.02

100km 22.94 28.91 37.18 25.21 30.92 53.71 33.14

ERCOT avg. 26.45 30.10 29.56 20.55 34.32 59.59 33.43

The location of Compute North’s Upton County facility can be seen on Google Maps.

Details on the timeline of the launch and capacity of this facility were available when the

Compute North website was active prior to filing for bankruptcy in September 2022

(Texas Southern District 2022).Though the facility had a capacity of 280 MW, only

40MW were active as of Q2 2022 according to their exclusive client for this site,

Marathon Digital (Gkritsi and Ashraf 2022). LMPs around the facility actually dropped

below ERCOT averages after the facility came online.

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