Friday , January 28 2022
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A tax on proof-of-work

Summary:
The world is overpurchasing proof-of-work (POW) blockchains. How do we fix this? Let me quickly outline the argument for why the world is buying too much POW. Blockchains such as Bitcoin, Dogecoin, and Ethereum provide coin buyers with a special sort of security – proof of work. POW requires huge amounts of electricity, so much so that Bitcoin and Ethereum together currently use up more energy than Italy.It's not the energy-intensity of POW that's problematic. The issue is that the biggest buyers of POW coins – speculators and gamblers – care very little about POW security. What they value is the thrilling price movements that blockchain coins provide.*Coin gamblers also have the option of buying non-POW blockchains. Non-POW coins offer gamblers the same wild price movements as Bitcoin,

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The world is overpurchasing proof-of-work (POW) blockchains. How do we fix this? 

Let me quickly outline the argument for why the world is buying too much POW. Blockchains such as Bitcoin, Dogecoin, and Ethereum provide coin buyers with a special sort of security proof of work. POW requires huge amounts of electricity, so much so that Bitcoin and Ethereum together currently use up more energy than Italy.

It's not the energy-intensity of POW that's problematic. The issue is that the biggest buyers of POW coins speculators and gamblers care very little about POW security. What they value is the thrilling price movements that blockchain coins provide.*

Coin gamblers also have the option of buying non-POW blockchains. Non-POW coins offer gamblers the same wild price movements as Bitcoin, Dogecoin, and Ethereum. However, the security that these non-POW coins rely on requires far less electricity. 

On net, the world would be better off if all blockchain gamblers migrated away from POW coins and onto cheaper non-POW coins. The gamblers themselves would not be any worse off. They'd still get all the crazy up-and-down fun & entertainment as before. But the rest of us would benefit, since far less of the world's energy would be burned. That's what I meant at the outset when I said that we have a POW overpurchasing problem. Coin speculators are unwittingly over-gambling on energy-heavy POW blockchains and under-gambling on energy-lite non-POW chains.

Left to their own devices, it is unlikely that coin gamblers will migrate away from POW coins like Dogecoin and Bitcoin towards cheaper coins. (See here for why). Might it be worthwhile to adopt a policy that nudges speculators away from POW and into cheaper non-POW blockchains? 

A targeted tax on POW coins is one option. But how would we design this tax? I suppose we could tax people's holdings of POW coins while exempting their holdings of non-POW coins. Or we could tax POW coin purchases & sales on exchanges like Coinbase. Or would we could tax the POW miners.

The economics of taxation is not my strong point. So I'm going to farm this out the comments section: if we want to shift speculators away from POW blockchains, how should we design a POW tax?


*There is also a community of hobbyists and technologically-informed individuals who do indeed consume POW. That is, they can put out a coherent argument for what POW is and why they prefer it over other types of blockchain security. Unlike the gambling class, they are less interested in coin price fluctuations. But the size of the hobbyist community is dwarfed by the gambling class.

About Jp Koning
Jp Koning
Working in the bowels of the finance industry. Blogging about monetary phenomena is my side gig.

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