In my previous post on proof-of-work several commenters suggested that bitcoin, the biggest proof-of-work coin, is good for society because it spurs renewable energy production.
The full argument is worth reviewing. (See Nic Carter, here). Briefly, the supply of renewables like solar and wind is finicky and doesn't neatly overlap with demand. Luckily, bitcoin mining farms are flexible. They can shut down and turn back on quickly, consuming energy when it is plentiful (& cheap) and ducking & running when it is expensive. This miner-facilitated smoothing encourages power companies to install more finicky wind and solar power.
On it's surface this is a provocative argument. But if you read carefully it's a version of one of the oldest fallacies in economics: the broken window fallacy.
In the broken window fallacy, a boy breaks a shop window. Observing the flurry of economic activity ensuing from the mending of the broken window, the townspeople decide that the boy has helped the local economy. "Breaking stuff is good, let's do more of it!"
But we know that breaking stuff is not good for the economy. The economic activity devoted to fixing the broken window comes at the expense of economic activity that would have occurred otherwise, say repairing the shop's furnace or purchasing more inventory. Economists call this opportunity cost. The broken window parable forces us to recognize that the cost of any activity is all the things that could have been.
Let's bring this back to bitcoin. Bitcoin using up renewables isn't a benefit, it's a cost. There are many industries that can efficiently consume electricity in a staggered or interruptible manner, of which bitcoin mining is just one. If bitcoin miners use this electricity, then these other industries cannot.
And so bitcoin isn't good for society because it uses renewables. Rather, it should be judged whether it is the best use of renewables. Is the product a useful one? The market seems to think so.
What I've said up till now is just bog standard economics. Here's the more controversial bit:
I'd argue that bitcoin is NOT the best use of renewable/interruptible electricity.
What the average bitcoin owner values is bitcoin's up-and-down price movements. But fabulous amounts of renewable energy are not necessary to produce a volatile speculative vehicle. Unfortunately, most bitcoin holders aren't aware of the huge energy cost of maintaining bitcoin—they don't bear, or internalize, this cost.
If the bitcoin protocol were to shift to an energy-lite production method, or, alternatively, if bitcoin speculators were to swap into competing energy-lite coins, then users would still get to enjoy the same up-and-down experience—and other industries would be free to use the interruptible/renewable electricity liberated from bitcoin processing. That would be a good thing.
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