Dogecoin is currently using as much electricity as the entire state of Vermont, home to 620,000 people, tens of thousands of businesses, hundreds of schools and dozens of hospitals.
This constitutes a tragedy. Here's why.
Dogecoin is a dog-themed cryptocurrency that was introduced in 2013 as a joke. The total quantity of Dogecoins has jumped to $80 billion in value by 2021, although it has since fallen back to $15 billion.
Dogecoin functions primarily as a gambling tool. If people get the timing of their Doge purchases right, they can make life-changing profits in a very short period of time, no leverage required. There are also certain cultural and aesthetic reasons for holding Dogecoins. It's a meme. An icon. For long-time crypto veterans, Doge is a badge of their insiderness. It shows that they're in on the joke.
But why does it cost a Vermont's-worth of electricity – currently 5.5 terawatt-hours – to produce the Doge gambling experience and assorted Doge cultural material? After all, Vegas casinos provide far more of this sort of entertainment... at a fraction of Doge's total electricity cost.
What I'd suggest is happening here is a type of market failure. Doge is hugely expensive to run. (That's because it uses an energy intensive security method called proof-of-work, which you can read about here). But the casual gamblers and pop cultural aficionados who gravitate to Doge doesn't absorb any of Doge's costs. That is, they don't feel the expenses incurred to run the system. And so they over-gamble on Doge and overindulge on Doge memes. Put differently, the market is accidentally overproducing Dogecoin services.
Dogecoin owners don't feel the painful costs of running Doge because of mining rewards. Each minute, 10,000 new Dogecoins are created out of thin air and paid out to the agents (known as miners) that secure the Doge network.
These mining rewards don't come out of a Doge owner's personal wallet. So if you own some Doge, you never directly experience the costs of running the Doge system. Courtesy of the reward system, you're shielded. Both your Doge gambling habit and your imbibing of the Doge cultural experience are subsidized.
If a casino were to suck up Doge levels of electricity, customers would immediately feel these costs. The nightly rate for a hotel room would be epic, the vig would be huge, and it'd cost $10,000 to go see Celine Dion. This very expensive casino would rapidly go bankrupt.
But not Dogecoin. By using mining rewards to pay for electricity, Dogecoin escapes the casino's fate.
You'd think that Dogecoin owners might at least feel the pain of 10,000 new Dogecoins being created every minute to pay for electricity costs. After all, the miners who receive this reward need to sell those coins to meet expenses like salary and utility bills. Their continual selling should put pressure on Doge's price, and this constant pressure would hurt Doge owners, sort of like a casino room bill.
Not so. The entire stream of 10,000 Doge rewards is known ahead of time. The market therefore factors all future mining-related sales into Doge's current price. So if you own some Dogecoin you never experience anything akin to "sell pressure." It's already priced in. You get to consume Dogecoin as-if it was free.
And that's why Dogecoin constitutes a tragedy. Doge burns up Vermont-levels of electricity because, unlike a regular casino, there is nothing to stop it from doing so. Without a natural cost brake, users consume as much Dogecoin services as they want. If Doge owners did have to bear the true costs of Doge security, they'd quickly find a cheaper venue to gamble, and a thriftier source for meme culture. A Vermont's-worth of electricity would be saved.