Will Creators Choose to Create a Carbon-Free Economy?

Today’s post was written in collaboration with Jonathan Glick (@jonathanglick).

The carbon footprint of crypto — and, in particular, the carbon footprint of Bitcoin and NFTs — is receiving a lot of attention these days. Will crypto bring about an eco-pocalypse? Probably not. The rise of Proof-of-Stake, together with other advances, will dramatically reduce the energy intensity and therefore the carbon intensity of a lot of crypto activity. 

But simply avoiding being the cause of an ecological disaster is an uninspiring goal. Why isn’t the creator community that’s building in the crypto ecosystem aiming for something more profound — the creation of a carbon-free economy?

Carbon-Free: the Economy of the Future

With the threat of climate change looming, there are a number of critical tasks: decarbonizing the industrial economy, scaling the removal of CO2 from the atmosphere, and preparing to adapt to the changes to our climate that are coming no matter what we do.  

But, as we pay for the sins of the past, we should also build for the future. We should build a carbon-free economy that can expand, slowly at first, and eventually outgrow the legacy economy.

Where should we start? Well, of course we’d want to pick a sector of the economy that can be built on a carbon-free foundation. It should be a fast-growing sector. And, ideally, it would be a sector that lots of people are paying attention to — one that is shaping people’s ideas about what the future will look like.

In other words, the creator economy.

The creator economy is powered by a new generation of entrepreneurs who are building businesses by connecting directly to the communities they entertain, influence, teach, or sell products to. These entrepreneurs have no allegiance to traditional ways of doing business — e.g., they typically don’t have to defend legacy businesses built on top of fossil fuels. Importantly, influence flows both ways between these entrepreneurs and the communities they serve. Creators can nudge their customers in an environmentally-friendly direction and can be nudged by their customers in that same direction. And, of course, a lot of creators are monetizing digital goods and services which, theoretically at least, should be easier to create on a carbon-free foundation.

Imagine if, at the beginning of the industrial era, we had a choice of whether to build on a foundation of fossil fuels or renewables. We didn’t have that choice then, but we do now. Can we choose to build a creator economy on a carbon-free foundation and, in so doing, point the way to a better way of building? Absolutely.

What are the ingredients of a Carbon-Free Economy?

A carbon-free economy should have three characteristics. It should be fueled by carbon-free energy (duh). It should create things that people value. And, because we want it to one day be the economy, it should grow. What are the necessary ingredients to make this magic happen?

1) Consumers of Carbon-Free Products

Do consumers want to see a carbon-free future? Yes. However, it’s unclear how much of the market is willing to pay a premium for products simply because they are made using renewable energy.

Fortunately, the price of renewable energy has been dropping precipitously, so that in a growing number of categories it’s possible to be cost-competitive when you’re creating products with renewable energy, rather than with fossil fuels.

Increasingly, we are going to see comparable products at comparable price-points — but with radically different carbon footprints. When all else is in fact equal, it’s a good bet that more and more consumers are going to gravitate toward carbon-free products.

2) Creators of Carbon-Free Products

Who’s going to create these carbon-free products? It will be a mix of idealists who are concerned about climate change and realists who sense a business opportunity.

If we’re rooting for this carbon-free economy to grow, we’ll want influential people to lead the way — creators who will not only capitalize on demand for carbon-free products, but also drive demand via their capacity to influence.

Creators who are minting NFTs have the world’s attention. This is why they are getting more than their fair share of grief for their carbon footprint. But, so far, these creators are largely playing defense, in some cases standing down from minting NFTs, in other cases compensating for their emissions with offsets.

3) Products that are Carbon-Free

Why not go on offense, create carbon-free NFTs, and point the way towards a carbon-free future? Well, because it’s not so easy. The crypto process that makes NFTs possible requires computation, and computation requires energy. The source of this energy could be carbon-intensive or carbon-free, and right now we don’t really know when it’s one versus the other.

Would it be possible to build a blockchain whose nodes are exclusively powered by carbon-free energy? Definitely. The key problem to solve is verification. How do we verify that all nodes are in fact using renewables?

4) Trusted Verifiers of Carbon Freedom

Verification is difficult for a few reasons:

• Verifiers would need to be able to identify a node’s source of energy — and this information, at least for now, only exists off-chain.

• Verifiers would also need to confirm that the renewable attribute of the node’s energy usage was not sold as a REC or offset. (This is itself a problem that blockchain could solve, hopefully on top of a green blockchain.)

• Finally, we would need to have confidence that the verifiers themselves could be trusted.

Here we’re running into a specific instance of blockchain’s oracle problem. To solve it, we will likely need to rely on existing bodies that verify carbon neutrality in the offline world. Have ideas on the best approach? We’d love to hear from you.

5) Currency that is Carbon-Free

So far, in our imagined carbon-free economy, we have consumers who want to buy carbon-free products, and we have creators who are delivering products that are verified carbon-free. Now, the consumers need to pay the creators. For this, we need a carbon-free currency.

Much has been written about the carbon footprint of Bitcoin. Bitcoin’s defenders rightly point out that the legacy monetary system requires energy and results in carbon emissions, too. Fair enough.  

However, the legacy monetary system probably doesn’t have a path to eliminating its carbon emissions. Cryptocurrency does!

To get there, we need to solve three (admittedly) hard problems. The first is the verification problem discussed above. We’ll need nodes that are powered by carbon-free energy, and verified as such.

The second problem is incentives. How do we get miners to want to use carbon-free energy? Where the cost of carbon-free energy goes below the cost of fossil fuels, the cost reduction will be sufficient incentive to switch, presuming reliability is comparable, switching costs are zero, and the outlook for the prices is stable. But clearly we’re not there yet, or the carbon footprint of Bitcoin would already be zero.

Since we can’t completely solve it on the cost side yet, we’ll need to solve it on the revenue side with transaction fees that are charged for executing verified carbon-free transactions. Will the fees be enough to incentivize miners to focus on carbon-free mining? Only if they benefit from the transaction fees and if there’s sufficient demand for carbon-free transactions from creators and their end-customers.

The third problem is interoperability. It’s unrealistic to insist that people abandon their existing assets as they transition to a carbon-free platform. What if, instead, we could create green-wrapped tokens that would be backed by existing coins? The carbon footprint of the existing coins would shrink rapidly once they’re sitting idle, under the protection of a trusted custodian. If you’re interested in thinking through how to make this happen, be in touch. Or, if you know of people who would be interested…

The creator economy is rapidly evolving into a crypto-powered ownership economy. In the ownership economy, communities will no longer just consume goods and services offered up by creators. Instead, communities will actively participate in the creation of new businesses — and share in the benefits of ownership. Communities will have choices about which technologies to build on top of — strong technologies versus weak technologies, in Chris Dixon’s formulation. Our belief is that blockchains powered by verified carbon-free energy will emerge as the strong alternative to blockchains powered by an unknown mix of energy.

There are some who question whether criticism of crypto’s carbon footprint, like that offered above, is offered in good faith. After all, where’s the outcry over the carbon emissions of other forms of commerce? The truth is, we do need to create a carbon-free physical economy as well — and we could use many of the same principles described above in a physical context. More on this to come.

However, what makes crypto so interesting is not that it’s somehow worse than the physical economy. It’s that crypto has the potential to be so much better.

(Not the kind of green mining we’re envisioning.)