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The truth about the Bitcoin energy consumption problem

Bitcoin energy consumption

The world’s first cryptocurrency Bitcoin is facing a wave of criticism from environmentalists who have accused the digital currency of having a ravenous appetite for energy. The massive carbon footprint it’s allegedly leaving behind has led many to the conclusion that Bitcoin as a global peer-to-peer payment protocol is just not feasible. In this article, we’ll explore if there is any truth to the Bitcoin energy consumption problem.

Bitcoin Energy consumption levels

In 2017, several dozen reports by some of the most leading media outlets including Forbes, The Economist, Vox, CNBC and numerous others, suggests that Bitcoin’s extreme price fluctuations are driving bitcoin energy usage,. At the time, Bitcoin was trading only at ~$16000, not even its peak price point, but the more than 16 fold increase in price since the beginning of the year was enough incentive for more miners to join the network. 

As of December 2017, the maximum energy consumed by Bitcoin was ~32 TWh which is more than the energy consumption of over 159 countries, according to the Bitcoin Energy Consumption Index which is a measure of the energy consumed to mine Bitcoin. Since then, the energy consumed by Bitcoin has only increased according to the index and is currently as ~73 TWh per year.

Why does Bitcoin consume so much energy?

Bitcoin’s ravenous appetite for energy is not a design flaw as some might but instead a strength. It’s simple, Bitcoin is peer-to-peer payments protocol that’s not being run by a central authority like Banks are but instead, it’s decentralized through its Blockchain. 

For verifying transactions and recording it on the Blockchain, network participants known as miners are incentivized to provide computational power in return for a reward. This process of network participants providing computation power to verify transactions is called mining. 

So why do miners consume more power over time?

This is because the mining difficulty of Bitcoin has only increased over the years. Here’s a graph that shows the mining difficulty of Bitcoin from December 2018 to July 2019. Mining difficulty has consistently gone up during that period.

Bitcoin energy consumption


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Mining is also a very competitive field because only one miner is awarded for every block that is verified, the mining difficulty is the degree that determines how hard it is for miners to validate a block in terms of hashing power. It is updated every time 2016 blocks are added to the Blockchain, the mining difficulty gets updated. It is also correlated with the number of miners on the network or the overall available hashing power.

The proof-of-work algorithm used in Bitcoin’s network was meant as a way to filter email spam by Satoshi adapted to fit the purposes of payments. The bitcoin ledger is often referred to as being immutable but it can only be immutable if it is costly to produce Bitcoin via Block reward.

Bitcoin network power consumption and its astounding Carbon Footprint

Several months ago,several news media outlets quoted an article from Digiconomist , which stated that Bitcoin’s main problem isn’t its ravenous energy consumption but instead how this energy is being produced. The article pointed out that a majority of the Bitcoin mining pools are from China, a country that satisfies a majority of its energy needs by burning coal.

Bitcoin energy consumption

The writer of the Digiconomist article assumed that since a majority of China’s energy comes from coal, the Bitcoin mining pools must also be running on the same energy. Thus concluding that the bitcoin power consumption is running on dirty fuels.

But there’s a critical flaw to this assumption. That miner’s aren’t incentivized to cut costs. A recent research report by Coinshares cocnluding that a majority of electricity being consumed by the Bitcoin Network, as much as ~75%, came from renewable resources. This means that the Bitcoin network is more renewables driven than any other large-scale industry sector in the world. 

There’s a big reason for this, miners make money by getting rewards for validating transactions and as we mentioned earlier this takes power. So profits are the difference between the cost of one Bitcoin and the cost of electricity, operational and maintenance costs. This means that miners are incentivized to set up mining rigs in locations where cheap electricity is available. 

Let’s take the example of one of the major Bitcoin mining locations in the world. Sichuan district in China is home to some of the largest Bitcoin mining pools in the world. Why? There’s a lot of stranded and excess Hydroelectricity available. Christopher Bendiksen, head of research at CoinShares was quoted saying “The reason why they’re doing this is that stranded renewables, and particularly underutilized and stranded hydro, is the cheapest large-scale energy that you can find. This is why you see miners flock to regions where high-powered renewables are abundant.”. This incentive to find cheaper energy sources has even prompted miners to go to remote areas in Iceland to harvest Geothermal energy.

But this isn’t to say that the total Bitcoin electricity consumption doesn’t have an environmental impact. Notably, the Application Specific Integrated Circuit (ASIC) chips can be a huge contributor to electronic waste. As these chips can’t be repurposed to do anything other than mining but it doesn’t mean can’t be recycled. Then there's the environmental impact of creating hydroelectric dams which has a large carbon footprint, on top of the complete restructuring of the environment near it.

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