2024/04/25

Bitcoin mining in Ethiopia: the good, the bad and the ugly


In the last few months, media have been buzzing about Bitcoin mining in Ethiopia. For Bitcoiners, it is part of the story of Africa as the new frontier in the much desired geographic diversification of Bitcoin mining - a perspective I agree with. In mainstream Western media, it's sometimes framed as yet another example of China in Africa. That framing, while not inaccurate, I think casts a geopolitical shadow that obscures the national perspective. Others portray it as a desperate attempt by Africans for a "quick fix" to foreign currency shortages -- not false but a bit condescending and missing the bigger picture.  So, let's shine a bit more light on it from the Ethiopian point of view (Shadow, light... sorry I couldn't muster some "dark clouds" to complete the trifecta of clich├ęs!) 

Full disclosure: I'm a co-founder of  QRB Labs, the first company to introduce Bitcoin mining to the country.  We've been quietly working since 2021 to do this the "right way" against tremendous odds.  But this post is not our company's story.  It's a skin-in-the-game opinion about how this industry should evolve for the benefit of the country. To highlight the good it can do. But also the risk of bad, and ugly.

The Good

First let's talk about the positive. Energy in Ethiopia and Bitcoin mining are a match made in heaven. 

In Ethiopia, electricity generation capacity is growing very rapidly. From 2GW in 2020 to over 10GW in the next couple of years. The Grand Ethiopian Renaissance Dam (which I've written about before) is the biggest and most famous step in that growth, but there are many projects contributing to it. All of course phenomenally good. Indeed, practically nothing is better for economic growth and broadly improving lives than electrification.  For comparison, the average Ethiopian has 1/50th the electricity of an American. So, until we get to 100GW at least, another 1000% growth, increasing generation is unquestionably necessary. 

But there's a catch. It is extremely difficult and expensive to deliver that energy to users. In the case of Ethiopia, some estimate that  $10B of investment and years of hard work are needed for transmission and distribution to catch up to generation. In the meantime, up to half of the generated energy remains unused. Which means the investment in generation takes longer to pay for itself. Meanwhile how do you finance the transmission and distribution? It's a huge chicken and egg problem, and it's unavoidable when there is rapid growth.  

In more developed countries, capacity may not be doubling or quadrupling but a similar problem exists with solar and wind power. Huge investments in supply are needed, but the demand may not match up with the supply, since consumption peaks don't line up perfectly with the times when the sun shines or the wind blows.  Whether caused by the difference between the time of generation and consumption, or by the distance, this is the problem of "stranded energy".

Now what if there was a way to make money from stranded energy? In Ethiopia, this revenue could help accelerate electrification! That's where Bitcoin comes in:   

"the competitive dynamics of Bitcoin mining are such that it shifts in time and space to the lowest available cost of electricity. This occurs not just by deploying hardware to various locations, but also by turning miners on or off instantly. This flexible demand-side support makes mining the ideal customer to balance variable supply...."  from "The Dynamics of Bitcoin Mining" by yours truly.

Thus the energy demand profile of data centers that host high energy computations makes them the perfect customer for Ethiopia's stranded energy. Bitcoin even more so than other data applications because: 

  • Bitcoin mining is location agnostic. It doesn't matter if it runs in Antarctica or the Sahara as long as it's connected to the Internet. 
  • It's also time agnostic.  Each hash computation is independent of the previous one. You can mine 24 hours a day, 12 hours a day, at random times. Of course miners, in order to be profitable, must be very good at making the complex trade offs between between energy cost and hardware utilization. But they don't inherently need 24x7 power. 
  • Further, contrary to common perception, it doesn't actually need very much bandwidth. The entire blockchain is still barely more than half a terabyte! 
  • And equally importantly, it's all public data. The entire world can see all the inputs to the miners. So there's no data sovereignty, legal information jurisdiction or cyber security issue.
  • Mining is purely infrastructure for running computers. There's no link between the locations of the miners and the users of Bitcoin. So Bitcoin mining doesn't depend on local regulations about money and financial services, legality of "cryptocurrencies" etc. 
For traditional data centers hosting say streaming video, social media or corporate IT,  cheap electricity is nice to have, but they also require some combination of high bandwidth, low latency, and a compatible legal system for privacy, copyright, finance etc. These are all areas where it is presently tough for Ethiopia to compete globally -- to put it mildly. But Bitcoin mining has in principle no disadvantage running in Ethiopia. 

Further, Ethiopia's electricity generation mix is over 98% renewable. And the other 2% is largely off-grid. So for a data center in Ethiopia, the energy is pretty much 100% "green" hydroelectricity. This is very desirable for the Bitcoin community. Bitcoin arguably doesn't have to be green, any more than ice cream or football. In fact proof of work is one of the most noble uses of energy in the world. But Bitcoin has a lot of enemies who, as I have written about before on this blog. hypocritically or ignorantly use energy as an attack vector.  So "greening" mining is good for Bitcoin globally, and Ethiopia is perfect for that.

So there you have it.  The good is amazing.  Accelerating electrification for economic development of Africa. Geographic diversification and greening of Bitcoin mining.  That is literally the mission statement of QRB Labs. And also why Ethiopia and Bitcoin mining are truly a match made in heaven.

The Bad

But an electricity grid is a very complex beast. You can have too much energy in one place and too little in another at the same time.  When you have too much, it's  a waste. And where there's too little, consumers suffer outages which have negative economic and other consequences. In addition, both excess and shortage can cause costly damage to infrastructure. The best way to balance that is to manage the demand, through price and quantity allocation.

In the case of Ethiopia, while the people at the power company are dedicated to doing the right thing, historically it has not had the independence to manage pricing and demand as it needs to. By contrast, the airline, even though it is also state owned, has a long history of independence, allowing it to mange routes, schedules and prices on a purely commercial basis. This allows it to succeed in an extremely competitive and complex international industry.  But electricity prices have historically been dictated by politics.  Thus, when it comes to the relationship between the energy producer and Bitcoin miners, they don't have the full flexibility to achieve true win-win pricing.  Consumer utility pricing is understandably more difficult to change. But at the wholesale level, the producer should be allowed to make stranded energy cheap, and conversely to charge higher prices where there's lots of demand, whether it is from data centers, factories or households.  

Without modernized pricing from the supplier, the risk is that Bitcoin miners who don't particularly care about the long term of the country can rush in  with demand in the wrong places, and destabilize the grid. Not because they are particularly evil or greedy. But just like water flows to the bottom of a valley, Bitcoin miners will go to where they can get energy at a good price. In this almost perfectly competitive industry, the purest embodiment of survival of the fittest, the typical buyer can't afford to think for the seller.

The only solution is incentive compatible pricing. Rational, non-political, and based on supply and demand. Further, it is crucial that the pricing not be based on the industry, or what the energy is being used for. Electricity is fungible. So price discrimination by type of application never works well. If one industry  gets lower rates than another, it creates perverse incentives, where one will disguise itself as the other, and cause complexity in enforcement. This is also true for Bitcoin mining. Instead, energy should be commercially  negotiated based on quantity, location and time. Let the buyers find their niche. In a fair rational environment, Bitcoin demand will naturally stabilize and benefit the grid, and  monetize excess capacity to help long term electrification. And when the country's transmission and distribution infrastructure is fully developed, when industrial and consumer demand can use all of the electricity being generated, then Bitcoin miners will not be able to pay the same price as factories or households. We should be happy to declare mission accomplished and look for cheap power somewhere else.

Another potential Bad is that Bitcoin mining can easily get politicized in Ethiopia. People who don't understand the subtle win-win dynamics may complain that Bitcoin is taking power from the people. Or based on superficial nonsense about "cryptocurrencies", especially in a bull market, assume Bitcoin miners are rich and should pay high prices. Such interference risks killing the goose that lays the golden egg. If handled correctly, mining is a tough global competition for miners but an easy win for local energy producers. But mishandling could very quickly kill a historic source of revenue.

Initially, the government made the mistake of temporarily blocking Bitcoin mining equipment imports in 2022 while it tried to come up with new regulations. Then in 2023, it implemented rules about Bitcoin mining as "cryptography" rather than "energy". But in fact, mining involves no encryption in the conventional sense of trying to keep information secret. The computation is basically just a hash function with public inputs and public outputs. It's just a race between miners to get the output faster.  (Even transaction validation, which usually is not even on the miner but in the pool, only involves checking signatures which anyone can do -- no secrets). At one point we were even told that only foreign companies could participate in this industry, which is unconstitutional! Fortunately, over the last couple of months, these errors are getting understood and things are moving in the right direction.

The Ugly

An unfortunate side effect of taking the wrong regulatory approach is potential for corruption.  Bitcoin miners are not all idealistic. Even when they are so inclined, competition is so fierce there's always a temptation to look for legal short cuts. On top of that, many foreigners come with a "this is Africa" attitude. Translation: corruption is a natural feature of the landscape. So they try bulldoze their way in with bribery. If it doesn't work, they try the next place. If it works, they exploit it as fast as possible, and when it inevitably blows up, just pack up and move to the next hunting grounds.

For many countries, oil wealth turned into the infamous "resource curse", undermining governance and even being negative for economic development. In the worst cases, it goes beyond bribery to outright theft: taking the energy and not paying for it. This is a danger with Bitcoin for electricity-rich countries too. Kazakhstan, Angola, and some other countries have experienced this ugly side. Fortunately, there's no evidence of this occurring in Ethiopia yet, but it is perhaps the greatest theoretical danger.

The best way to avoid this is for the government to eschew regulatory micromanagement. Rather than trying to control it through hardware imports, or make it political, or treat it as cryptography, or have too many stakeholders at the table, it should allow this industry to naturally find a win-win buyer-seller relationship with energy. This means allowing flexible electricity capacity allocation and pricing.  

The government's focus should be on monitoring the bigger picture: that the energy security of the country is not compromised. So rather than trying to regulate the details of what miners do, the government should require the power company to regularly report on overall high and medium voltage demand by region, generation and transmission capacity, and provide assurances that supply and demand are sustainably managed across all industries and regions.

Conclusion

So there are a few ways things could go wrong. It's important to understand them. But part of me fears that I have given ammunition to the haters. I hope I've struck the right balance.  Reviewing this post, I see I've devoted a lot more words to the good than to the bad and ugly. And that is as it should be.  We face a historic opportunity for two things I care deeply about: Ethiopia and Bitcoin. May both live long and prosper!

P.S. This post is months overdue! And it's too long. To quote Mark Twain: “I didn't have time to write a short letter, so I wrote a long one instead.”

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