The excessive energy usage of bitcoin has been one of the major topics and drivers of volatility in the blockchain space over the last couple of months. Traditional media has been reporting about bitcoin and comparing the energy usage to whole countries, for example Venezuela. China, the former hometown for most bitcoin miners, cut the energy supply of some of the most impactful bitcoin miners, apparently due to environmental policies that influence energy supplies. Tesla CEO Elon Musk stopped the possibility of buying Tesla automobiles with bitcoin, as they did not want to be associated with bitcoins intensive usage of fuel energy, at least until bitcoins energy usage becomes greener. But how and why is bitcoin using so much energy? And is there anything that can be done to make it better? This blog article will give insights on the reason for bitcoins high energy usage, possibilities of reducing it, give perspectives on a green bitcoin, and more.
How does the bitcoin network waste energy?
The energy consumption of bitcoin has something to do with the way blocks of a blockchain are mined. Mining a block basically is creating and hashing a block that cannot be changed anymore. This newly mined block is added to the previous block, resulting in a blockchain. When mining blocks, you are looking for a solution to a complex hashing puzzle. This solution can be imagined as a random number that all miners are looking for. This number cannot be precalculated, there is no shortcut, no algorithm to calculate this number faster. You can simply try different numbers, and then a specific formula will produce the result the bitcoin network asks you for. Therefore it all is about purely trying out. Trying out means that the faster you are, the better your chances are to mine a block. So what miners actually do is to accumulate as much mining power as possible, to be the first ones to mine a block. All miners try to mine a block at the same time and whoever is the first to find the correct number, gets rewarded with bitcoin. This way, miners are doing the work of verifying the legitimacy of bitcoin transactions, as these transactions are being kept on each block. Therefore, miners are getting paid for their work as auditors.
In the beginning, people were just mining with their notebooks or computers, because there were not so many people mining at the same time. Then bitcoin mining became more and more popular. In the race for the block rewards, the competition was therefore increasing. Due to the larger number of participants, more computing power was made available and thus the mining difficulty (aka “hash power”) of the entire network was increased. Mining difficulty varies depending on the number of miners in the network. Later on, people started using graphic cards to mine bitcoins, which was much quicker but more energy-intensive. Some years ago, people came to the conclusion that this one specific calculation could be done on specific hardware, nowadays known as ASICs (application-specific integrated circuit chips). These are chips that are specialized in mining bitcoin. These specialized chips are now used basically everywhere so you don’t have a chance nowadays with your personal computer. Nowadays, it is common to mine bitcoin in so-called mining pools. In this process, a large group of miners join together and combine their hash rates. This way they increase their chances of block rewards.
So with increasing miners and therefore the increase of computing power, the energy usage has become very high. Nevertheless, it is important for miners how much money has to be invested to receive a bitcoin. Therefore it is strongly in their interest to reduce their energy usage due to electricity costs. So if we manage to build renewable energy plants cheaper than fuel plants, they will use renewable energy. So eventually, bitcoin would turn green, because there is an incentive to do so.
Bitcoin mining with green energy
There will be an increasing amount of green energy that needs to be produced in the future for example for electric cars. Is it okay to use so much of this energy for the bitcoin network? In fact, it is a philosophical debate about what value we put into something and what we get out of it. The value is energy in this case. So we as a society have to ask ourselves what is valuable to us. If society decides that bitcoin is some kind of digital gold, we should compare the energy consumption of bitcoin to the energy consumption of winning, managing and storing gold. Then bitcoin would not look as bad when it comes to needed energy resources.
Bitcoin and proof of stake
There could be more sustainable ways to mine bitcoin. As mentioned, one way is through only using renewable energy. Another idea could be a different approach to finding consensus on the blockchain that does not need as much energy. One example is the proof of stake approach. Here users can assign tokens from the blockchain to their node which they want to validate. Depending on the share of the total supply attributed to the validator node, the probability of being selected by the network as validator increases. If the node builds a valid block as defined by the network rules, it receives the block subsidy as a reward. Fraudulent nodes are punished by the network for example, by freezing the stake. Instead of computing power, the probability of building a valid hash using the proof-of-stake method depends on the number of coins deposited. Nevertheless, in comparison to the almost eleven years old proof of work mechanism bitcoin currently has, we hardly have any experience with the proof of stake approach. But if it works, there is no reason for bitcoin not to upgrade and switch to proof of stake from a technical point of view. That is one beautiful thing about blockchain, it is programmable money. That means we can improve and update the system and therefore we can adjust to new requirements in the future.
Comparing bitcoins energy consumption to countries
There have been a lot of comparisons between bitcoin and the energy usage of countries in traditional media lately, pointing out bitcoins equivalent carbon footprint to Argentina or energy usage of Venezuela. Comparing bitcoin to a country would assume that bitcoin has similar functions as a country which is not the case. You could use bitcoin or especially the popular ethereum network for decentralized identities, to pay taxes or transfer money in general. So there might be country-like properties that you could attach to ethereum. But why are people comparing it to countries? It is rather simple to imagine the energy consumption of a country and compare it to bitcoin. Some months ago bitcoin reached its all-time high. Whenever something reaches the all-time high in the bitcoin and ethereum universe, it gets the attention of the mainstream media, as they then have something to report about. Nevertheless, the comparison is not reasonable, because it is not helpful. What does it help if bitcoins energy usage is compared to the one of Venezuela? On the other hand, some people might argue that bitcoin is bringing more value to the world than Venezuela. Definitely, the energy usage of bitcoin is high and should be reduced. Nevertheless, instead of comparing apples and oranges, digital assets like bitcoin should rather be compared to things in our system that have similar or the same functions. As mentioned, one example could be the whole management of gold. Furthermore, if Bitcoin becomes an international currency, it could be compared to the energy usage of all online banking transactions. In both cases, bitcoin suddenly would not appear as wasteful anymore.
Can Bitcoin be a payment solution?
Currently, it is way too expensive and slow to actually be a payment solution that could handle the whole world. But there are already some uprising developments like the lightning network as a second layer solution, that might eventually allow you to pay for cheap things like a coffee with either no or low fees. The main idea of it is that you can open something that is called a channel on bitcoin, place a bitcoin in there and then use that bitcoin on another network. You can send three-quarters of that bitcoin to diverse family members for example. In the end, in order to exit into the main net again, you just write the final answer. In this case, you have one-quarter of that bitcoin left. So we only do one transaction with this final amount on the main net. Therefore, we reduce the number of transactions on the main layer and instead put everything else on the second layer. This allows us to do more transactions, keeping the security of the main network.
Will bitcoin become green?
Electricity consumption has always been a critical topic in the blockchain community. Miners that use proof of work will always try and reduce their energy consumption because they have an economic incentive to do so. Already in 2020, the IEA (International Energy Agency) outlined that it is cheaper to build solar plants than fuel plants in most countries. In the long run, bitcoin will probably use renewable energy because it is cheaper. Not because they necessarily want to contribute to a sustainable future. Bitcoin miners have always functioned that way: follow incentives that are economical. And that is all we need for bitcoin to become green.
Green Bitcoin: A Critical Reflection of Bitcoin’s Energy Consumption
Learn more about the possibilities there are for bitcoin to become green and gain deeper insights into the topics mentioned in this article. Watch the full BLOCKCHANCE Online LIVE show here, where Marc Bevand, an independent bitcoin researcher and analyst and blockchain solutions architect Albert Peci will critically reflect the chances for a “Green Bitcoin”. BLOCKCHANCE Online LIVE is a regularly hosted live show on YouTube and LinkedIn, where you can ask renowned experts in their field your questions and gain glimpses of our future. Many more insights will be shared at the upcoming BLOCKCHANCE EUROPE 2021 conference! Get your ticket here and take a deep dive into the universe of future technologies. Join our community on Telegram, Twitter and LinkedIn to stay up to date.