How is El Salvador mining Bitcoin with volcanoes?

Bitcoin, the New Legal Currency in El Salvador

About a month ago, the government of El Salvador introduced an economic policy unseen elsewhere in the world: it turned Bitcoin into an official legal currency in the country. Legalisation was only the first step, though, and the country is still transitioning toward widespread use of the coin, and the population’s distrust of this new technology and the applications that come with it along with the currency’s volatility are some of the main obstacles to be overcome in this path.

However, president Nayib Bukele is not discouraged by that, and is still investing into turning El Salvador into a Bitcoin powerhouse. His latest endeavour in this direction caught everyone by surprise, but it’s an ingenious use of the country’s natural resources: mining bitcoins using volcanoes.

The energy problem

Mining bitcoins can take a lot of energy. Bitcoin runs on proof-of-work, meaning that the mining process involves solving a non-trivial computing problem. It takes brute force to solve it, that is, the computer has to try every possible combination in order to figure out the correct one. As a consequence, the price of bitcoin and the number of miners tend to be tied to the cost of energy use.

In a small underdeveloped country such as El Salvador, that becomes a greater problem. Mining is needed to get more coins into the economy, as well as a source of foreign currency for international trade, but the government also needs to supply electricity to its citizens, and importing power from its neighbours can make it uneconomical. So, how can this be dealt with?

Volcano land

El Salvador has around 20 volcanoes, most extinct, but some still active. Volcanoes are basically an infinite source of heat. Heat is what is used to power the thermal power stations, such as the ones that run on coal or petroleum derivatives. When the heat source comes from beneath the ground, that makes it a geothermal station.

While it’s still a kind of thermal source of electricity, it doesn’t involve burning up fuel, so there is no generation of pollutants, and it also doesn’t depend on fuel being available. The volcano lava is pretty much infinite.

Geothermal energy is not new in El Salvador, and volcanoes have been used to power the country for a long time now, along with hydroelectric energy.

What changed?

The difference is that now El Salvador has added to one of its geothermal stations a section dedicated to just mining bitcoins. The government installed 300 ASIC machines inside a station, in partnership with one of the country’s electricity companies, La Geo. Being so close to the source, it means that the higher demand of power is not going to cause bigger loss of power in transmission lines, meaning greater cost-benefit.

El Salvador already has to buy some of its energy from neighbouring countries, and this new power usage can increase their need, but it can also provide a new source of income for the government too, and this income will likely be used to expand the country’s generation of electricity. Similarly, China’s recent crackdown on bitcoin mining and transactions can also turn El Salvador into a mining safe haven, greatly contributing to the country’s economy.

The future

Right now, investments on mining may be a kind of short term investment. While the use of clean energy makes it less concerning for environmentalists and the general public, especially in El Salvador, the push away from proof-of-work and into alternative methods of transaction approval is still very real and very strong.

Ethereum is bound to start transitioning to proof-of-stake in December, even though it faces resistance from many miners. If the transition is successful, Bitcoin may also follow it afterwards, turning bitcoin mining obsolete. While that means one less source of income to the Salvadoran government, it also means more energy available, and Bitcoin will continue to be legal tender, but then hopefully a bit more stable and accessible to the population of the underdeveloped country.