URSABLOG: Proof of Work

A long time ago, when I first started my career as a shipbroker in Liverpool, I was sent to look at a ferry belonging to the Isle of Man Steampacket Co which was alongside on the Pier Head. The purpose of the visit was to get a look at what ships look like, especially in the engine room and the other parts not normally seen by the public. I boarded, wearing a suit and tie (and probably carrying a briefcase – this was in the 1990s…) and looked very much the young professional. I might even have still had hair then too.

The crew, especially the chief engineer, were less than impressed. They wanted to know who I was, and why I was on board. Naturally concerned that I wanted to sell their place of work from underneath them, their antagonism was not tempered by my reassurances that it was just an educational exercise, and I wanted to know more.

“What you need to know son is a bit of hard work” said the chief engineer. Brandishing a calloused, oily hand missing the index and second fingers in my face, he emphasised his point: “That’s hard work!” He had a point. I almost lost a finger once, a couple of years ago, but I was making taramosalata and was unwisely fiddling around with a blender at the time. I am indeed a soft handed dilettante, and have never faced the wrath of the waves in any ocean to speak of. I have suffered at the hands of the shipping gods, but in ways that don’t directly affect my fingers.

I was ready to forgive the rudeness of the chief engineer then, and am even more willing to do so now, as I have recently celebrated, if that is the right word, the anniversary of twenty-eight years as a sale and purchase shipbroker. I do not mind the competition from younger and more energetic brokers, even if I preferred it did not exist. What I do mind however is the constant drip feed of suggestions from the techies that sooner or later shipbroking will be a thing of the past. The middleman (or woman) is an obvious target for those looking for quicker, safer, cleaner and, let’s face it, more modern way of business. I mean come on, it’s the 20’s!

A few years ago I was enjoying late afternoon drink in the garden of a friend of mine at his house, with his wife and her family. Amongst the company, a very friendly and happy company, were two evangelists of blockchain, and they had been filled with the spirit to convert us all into a new way of thinking. I have no objections to blockchain as such, as much as I can understand it, and I think it could actually further assist in shipping documentation, particularly bill of lading and documentary letters of credit (if not letters of indemnity, for obvious reasons). But they then starting talking about removing the need of shipbrokers in charterparties and ships sales, and that point I naturally switched off.

But I haven’t managed to block out blockchain since, especially as it’s main function these days, cryptocurrency, is everywhere. I am assuming that we are all aware of what Bitcoin is enough to have an opinion about it. I object to it, but if I am to be honest it was until very recently that I couldn’t really express why I found it objectionable. Indeed I have another friend who seems to have made a great deal of money out of it and has opened a bar on the proceeds. But it was, of all people, Elon Musk, that clarified my thinking.

Elon Musk is of course the eccentric demigod behind Tesla, and the guru of all things techie. Amongst many other things he, or Tesla (although they are much the same thing) had US$ 1.5 bill of the cryptocurrency in their corporate reserves, and had recently announced that people could pay for his cars in bitcoin. Then he changed his mind, and for environmental reasons no less.

Bitcoin has been a phenomenon, and most people are aware of the value (very high), and the volatility (very high). From a purely investment point of view, when everyone is talking about it – and I mean everybody in the world - it’s time to sell.. But few people seem to be aware of how bitcoins are made, or mined. It seems strange to call it mining, because that suggests that someone goes out with a spade and digs for them somewhere, but the reality – to me at least – is stranger and more perplexing, and troublesome from both a moral and philosophical point of view.

The enthusiasts of cryptocurrency suggest – in language I suspect to baffle, or at least to avoid further investigation – that bitcoins are rewards for completing “blocks” of verified transactions which are added to the blockchain. The reality is more prosaic: rewards are paid to those that can discover a solution to a complex hashing puzzle (don’t ask), a puzzle that cannot be solved by sitting down with a pencil and paper. It requires incredibly powerful computers running at full power all the time, ones that are expensive to buy, run and maintain. We are not talking about keeping your PC churning overnight, but something of a completely different scale. In fact a US company called Greenidge Generation Holdings (combining green with the image of future generations you will notice) has bought a decommissioned coal powered electricity generation station and converted it to LNG with the sole purpose of making electricity to mine bitcoins. Read that again. A power station to mine bitcoins.

They think that this will make them money (it will cost them US$ 3,000 per coin with a value today of US$ 41,000 so the financials work) and they are probably right. But what else are they doing? What value are they creating for society? They are mining nothing from nothing, and burning huge amounts of electricity (and LNG) in the process. A few jobs here and there I guess, in construction, and computer and building/plant maintenance. The cost, environmentally, is huge.

The quest to mine bitcoin consumes more electricity than that consumed by the whole of Sweden. And if you think that Sweden doesn’t consume that much, then it also consumes more than Ukraine, which is not the most environmentally friendly country on the planet, at least not yet. And before you tell me that electricity can be generated by renewables, an LNG burning power station is not running on renewable energy.

So my moral and philosophical problem is that investing in mining bitcoin – and I would argue bitcoin itself – is more harmful than investing in coal, gas, and yes shipowning inasmuch that the latter create value of some sort, whereas mining creates no value of substance at all. If you think I am over reacting, imagine yourself enjoying a drink in the late afternoon under a tree in the village square. Some people turn up in a van selling nothing except some small machines that flash lights, and if you hold it the right way make a noise. A lot of people think these are cool, and then as the van runs out of these machines, the value increases and demand increases, and they are traded. A lot of money is spent, and a lot of noise created. You get sick of this, and leave the square. The next day you go for a coffee, but on arrival you decide against it. The trees have been poisoned or burnt by the poisonous exhaust of the van, the stream is polluted by the leaking batteries of the little machines left piled everywhere. And the van has moved on…

But bitcoin is cool, bitcoin is the future, bitcoin is ‘clean’. Shipping is dirty, and about to contort itself to try and be carbon neutral in the space of a generation because it can be regulated.  Bitcoin is not regulated, and this is indeed a selling point. Shipping has an essential function as we have been reminded over and over again in the last year or so. Bitcoin is not clean. And now it is not cool, as Elon Musk, of all people, has realised that to sell ‘clean’ electric cars and take bitcoin as payment is contradictory.

Bitcoin is a ‘proof of work’ coin, the work being solving the puzzles to unlock the coins in the blockchain. The work can only be done by expensive and powerful machines working at full power and consuming more energy a year than Sweden does. Is this work?

I think back to the chief engineer on the ferry in Liverpool. He though the fresh-faced idiot shipbroker in a suit was being paid for what he did not consider ‘real work.’ Whilst I have some sympathy with his point of view, shipbroking is hard work, and commission is not only a ‘proof of success’ payment, it is also most of the time a ’proof of work’ payment too, only the work requires something more than firing random numbers at a blockchain. But shipbrokers have a function and add value, even if it is not measured in sweat and blood, and I firmly believe that the market would be less efficient, less professional and more prone to corruption and distortion if they did not exist.

I do not object to the new just because I am old. I welcome innovations that improve our lives, but I am sceptical of the worship of the new for its own sake. Blockchain may be a great idea in many respects, but if bitcoin’s only physical attribute is to consume energy, and therefore harm the environment, then it not only has no value it has a negative value. Shipbrokers can be a nuisance sometimes, as many owners know, but the proof of work is in the completion, not the generation of heat for its own sake. Every shipbroker knows that effort does not automatically guarantee success.

It will be some time before charterparties and, God forbid, sale agreements are completed by blockchain, mainly because human beings, as Elon Musk has just shown, are complex creatures who are able to change their minds, something that even the most powerful of digital miners are still unable to do.

Simon Ward

www.ursashipbrokers.gr