We were told earlier this year that the reason bitcoin was surging was because the institutions had arrived. They wanted to buy it for their corporate treasuries, and they wanted to buy it on behalf of their clients. 

But now that institutional narrative has brought with it a countervailing force. It turns out that the institutions also want to be mindful of their ESG duties (that’s environmental and social and governance to those of us who aren’t fluent in corporatese.) Being ESG friendly means investing in things that don’t release large amounts of carbon into the atmosphere—which is the opposite of what bitcoin does. 

So the institutional narrative as it stands is at an impasse. The obvious way to get around it is if institutions can be told that bitcoin is somehow not generating country-sized volumes of carbon emissions. The task is to green bitcoin. 

Naturally, Elon Musk managed to personify this narrative shift in less than six months. He went from a symbol of corporate innovation endorsing bitcoin’s technological superiority to a concerned ESG-er, fearful of its carbon emitting properties.  

Musk began by boosting bitcoin’s price when he purchased it for Tesla’s treasury in February (and, crucially, tweeting about it). Then he signaled the start of a bear run for the cryptocurrency by ending Tesla’s commitment to accepting bitcoin for its electric cars in May. 

The reason, Elon said, was that bitcoin wasn’t green enough. However, he relaxed his position recently by saying he would resume bitcoin payments at Tesla once miners get at least half their energy from clean sources. Bitcoin duly rose nearly 10%. 

You see, Musk’s idea is just one way to get green bitcoin—and it’s perhaps the least effective way to green the cyber coins. Instead of thinking of bitcoin as green and not-green, or clean and dirty, a more helpful framework is to place the greenness of bitcoin on a spectrum.

This was the framework explained to me by Daniel Hwang, a member of a new group that’s working on bitcoin’s carbon footprint. The Blockchain Infrastructure Carbon Working Group includes a number of companies, including F2Pool, the world’s largest bitcoin mining pool. Hwang has a day job as an analyst at F2Pool and its sister company, Stakefish, but is spearheading the carbon initiative. Here’s my best attempt at relaying the green bitcoin spectrum:

At one extreme, you can get brand-new, virgin bitcoin, sprung from the coinbase, from miners who are using only renewable energy. This is Elon’s green bitcoin. At the other end of the spectrum are carbon offsets. You calculate the carbon cost of a mining operation and then buy carbon credits to offset this cost. This is what the fund manager One River did when it struck up a deal with the carbon credits-on-a-blockchain startup Moss. One River buys Moss’ MCO2 tokens and then burns those tokens to achieve the carbon offset. This is greened bitcoin, but with a delay. The coins are only green when the carbon credit token is burned.

A third way, with potentially the most impact, is now being developed. It would “green” bitcoin without the lag-time of the carbon coupon, and without the infrastructure adjustments of Musk’s clean-energy solution. This third method will rely on what crypto people like to call “crypto economic incentives”—which is often just paying people for doing a thing. But if it works, it could instantly green deposited bitcoin, make everyone money for everyone involved—and potentially create a profit motive for buying carbon offsets for industries beyond bitcoin. 

This new system is what Hwang and his working-group colleagues are developing. It’s still being fleshed out, but Hwang was eager to share the ideas. Here’s how it could work:

In short, this system could hook up bitcoin to the decentralized finance platforms on Ethereum and other smart-contract protocols, to create a sort of perpetual-motion machine that demands ever more dirty bitcoin, and buys ever more carbon credits. 

Many caveats and details remain to be settled, such as the quality and source of the carbon credits, and whether the wrapped token could gain sufficient traction in lending markets to generate yield. But the idea relies on a simple premise: Miners are probably the most financially driven actors in the bitcoin ecosystem. This is why offering miners the chance to make more money could tilt the balance in favor of Hwang’s greened bitcoin.

Miners are engaged in what CoinDeks has called “a resource war of attrition” where they must constantly balance the cost of mining rigs and the cheapest electricity against the price of bitcoin—all while engaged in a computational race against one another. In good times, like earlier this year, miners enjoy fat profits as the bitcoin price outpaces other factors. In downturns, miners take the brunt of the bear market, paying for electricity and maintenance even as they sell the bitcoin they earn at a loss. 

If the system devised by Hwang and Co. works, it could harness the energies of speculation endemic in the crypto markets and unleash them on the carbon markets. This could create a spiral of speculation and yield-generation that leads to ever more bitcoin and carbon credits being fed into the system, in the hopes of chasing ever higher yields. “There is no ceiling, technically,” Hwang says. “You can have the narrative switch from ‘Bitcoin is killing the world’ to ‘Bitcoin is saving the world.’” 

Whether Hwang and his colleagues can harness crypto’s animal spirits in service of a cooler planet remains to be seen. What’s clear is that the mindset and tools that grew a worthless digital currency to a $2 trillion market in just over a decade are now being applied to greening Bitcoin.

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