• Luke Levine

The Electricity Problem. Bitcoin is a Guzzler.

"Bitcoin consumes more energy than Switzerland" is an eyebrow raising headline. It wouldn't be untrue either. One of the biggest arguments against the future growth and adoption of Bitcoin is amount of electricity it consumes. It's energy intensive. It certainly isn't environmentally friendly.

Can you quantify this? Yes, you can. The University of Cambridge have released a real time tracking tool for the network's electricity usage. The tool and the complex methodology behind it is available here. The aim is to provide a neutral, reliable platform for use by policy makers, regulators, researchers, media etc.

Firstly, why does Bitcoin need so much power?

My previous post on the blockchain shed some light on the role miners play in keeping the network secure and allowing it to function. They are paid for this via something called "proof of work" - in order to claim their reward for the mining process, they need to "prove" that they performed some “work”.

This work consists of finding the solution to a cryptographic puzzle, which in simple terms can be thought of as guessing a random number. The only way of finding the random number — called a nonce in technical jargon — is to go through all possible options. This way, the work cannot be faked but is trivial to verify by other network participants once the winning nonce has been revealed.

Whoever finds the solution to the puzzle first, obtains the right to add his block to the global ledger. In return, the successful miner gets rewarded for his efforts with newly minted bitcoin. 

Solving the puzzle (PoW) requires substantial computing power depending on the difficulty level: the more miners join the race, the more difficult the puzzle becomes. Rather than guessing numbers manually, miners operate specialised mining equipment (ASICs) that are specifically designed to be very good at only one single task — solving the PoW. 

The result is that 60-80% of mining revenues go straight back into electricity. The quest for the cheapest Kilowatt is a real thing. Setting up server farms in Mongolia or Iceland can give an operational edge.

Sounds unnecessary? Maybe. But the more computational power the network uses, the more secure it becomes.

So how much energy does it actually use?

Bitcoin currently accounts for 0.26% of global electricity production and 0.30% of total electricity consumption....

Here's a chart of electricity consumption by country. The Bitcoin network does use more electricity than many small countries, though another reaction would be the excess consumption of the two outliers at the far left of the table, China and the US.

It's interesting that China is considering a ban on Bitcoin mining, citing a waste of electricity. Given its only a small fraction of their overall usage (far left of the above chart), you could be forgiven for thinking the ban is more likely due to other reasons, such as a potential loss of control for the government over a part of their economy.

Cup of tea or left the lights on? Some context...

A couple of "fun facts" from the study to give some context to Bitcoin's electricity bill...

How about other payment networks?

Current payment systems are not entirly green. Here's a pro bitcoin view from crypto influencer, Andreas Antonopoulos...

For every time you pull out [a VISA card] and use it to [make] a transaction, you’re not aware of the 100,000 square-foot data center that is churning 100,000 servers to do fraud detection, or clearing […] You’re not aware of the tower offices that are lit 24-hours a day, trading floors, the bank vaults,  armored cars, and the diesel trucks […] All of those costs are mostly hidden and they’re enormous.

I've researched this and different sources cite very different energy figures for such systems. It's impossible to quantify with any accuracy. Visa is certainly WAY more efficient than Bitcoin, perhaps 1000x or more so. However the banking system that it relies on as a whole arguably uses 3x more energy than Bitcoin. I don't think you can really compare the two though.

The alternative, Proof of Stake...

The "Proof of Work" mining process described above clearly has its advantages (network security) and disadvantages (energy consumption) but there is another way. It's called "Proof of Stake".

To keep the explanation simple, Proof of Stake systems have the same purpose of validating transactions and securing the blockchain, however there is no mathematical puzzle. Instead, the creator of a new block is chosen based on their stake, i.e. how many coins they put down. For example if one person were to stake 10 coins and another person staked 50 coins, the person staking 50 coins would be 5 times more likely to be chosen as the next block validator.

By cutting out the energy-intensive mining process, this may prove to be a much greener option. However there are other potential technical issues and the system has yet to be proven in any rigorous way. Ethereum is in the process of transitioning to this mechanism so it will be interesting to watch how that plays out.

To wrap up...

Bitcoin is clearly an energy guzzler vs more centralized systems but that energy is currently a necessity to keep the network secure. Alternative "engines", e.g. proof of stake, may remedy that problem in future, though this is yet to be proven. Either way, there is still a lot more energy usage in the world that we could be equally worried about.

We haven't touched on how "green" the energy consumption is. A recent report reckons 75% of Bitcoin is powered by renewables. I don't know how accurate that is, you can argue both sides of the issue and pick the data that suits. However, the question at the centre is whether a global, secure, decentralized payment system is worth this cost? Something to ponder next time you brew the kettle or notice that you left the lights on.

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