|pic credit: Financial Times|
In today’s article, we’re going to see if Bitcoin energy consumption has the potential to ruin our environment and adversely affect the energy sector.
Disclaimer: First of all, please note that this content does neither represent financial, legal, or tax advice, nor is it supposed to be understood or interpreted as a solicitation to buy or sell any securities, coins, or tokens.
Energy Consumption of the Bitcoin network.
We all know that bitcoin is becoming an increasingly popular topic in the mainstream media and that spike in interest brings various points of view and angles from which the currency is being analyzed.
And one of those angles that simply cannot be ignored, especially in this day and age, is the energy consumption of the Bitcoin network. This issue, alongside the ever-present accusations of potential criminal applications of the currency, has become one of the fundamental criticism against bitcoin.
Before we go any further, let me emphasize one thing, high energy consumption is a Bitcoin-specific issue, as not all blockchains rely on the energetically demanding Proof-of-Work mechanism. Bitcoin has an energy problem.
Although the precise energy consumption of the network is difficult to measure due to its inherent decentralization, even conservative estimates suggest that it consumes significant amounts of energy: right now a single Bitcoin transaction requires about 1,173 kWh.
This amount is enough to provide energy to an average European household for about 4 days! Without a doubt, a key contributing factor to the overall growing energy demand of bitcoin is the humongous success of the network.
With its price increase from $0 to almost $50,000, the incentive for the miners to participate in the ecosystem has also increased greatly. With more miners, the difficulty of mining is increased which, in turn, means that mining requires more energy.
As you know, miners in decentralized networks help ensure the correctness of the data and the security of the network; a task that–in traditional monetary systems–is ceded to the intermediaries. These miners collect and validate transactions and generate data consensus based on a blockchain-specific mechanism.
In the case of Bitcoin, this is done by the computation-intensive solving of mathematical puzzles, better known as Proof-of-Work (PoW). Solving the puzzle is rewarded with a new Bitcoin, so–with the higher Bitcoin price–more miners compete for the premium by contributing computing power. This, of course, brings the question of long-term sustainability.
At the World Economic Forum in Davos in January of 2018, Christine Lagarde–the director of the International Monetary Fund–expressed her critical opinion on the energy consumption of Bitcoin. It was suggested that if the price of Bitcoin continues to develop as it was in 2020, the network could soon consume more electricity than Argentina.
Some argue that Visa or Mastercard can have a similar global energy demand and their consumption is rarely put into question. The key difference is, however, that–with around 300,000 transactions a day–Bitcoin is far from achieving a similar scale of operations.
Visa, for example, processes that number of transactions in about two minutes! Other analysts, on the other hand, downplay the significance of bitcoin’s energy consumption quoting the sheer impossibility of precisely determining the network’s electricity usage and accusing outlets of giving inaccurate figures in order to create attention-grabbing headlines.
One such analyst is Marc Bevand, who claims that the estimate that miners have to spend up to 60% of their revenue to cover energy cost fails to “accurately track the rate at which technological innovation in the mining industry increases the efficiency of the network as a whole.”
He also claims that the push towards energy efficiency is a self-driving phenomenon, as lowered demand for electricity immediately increases returns.
One thing is certain, however, if it is difficult to precisely measure the energy consumption of the decentralized network, it is even harder to assess the impact that it has on the environment as different countries have significantly different power grids and energy sources.
For that reason, the energy demand of bitcoin remains–in my opinion–more of a PR issue than a major obstacle in the widespread adoption of bitcoin. An issue that, nevertheless, should be addressed if Bitcoin itself is to be considered a serious currency.
For that reason, bitcoin is actively searching for new, environmentally-friendly solutions. The current trend is to utilize renewable, otherwise unused, energy to mine for new coins. Geothermal energy in Iceland or hydroelectric power in Austria for example are popular sources of energy for bitcoin mining.
Another important blockchain-related topic that needs to be more publicized is the fact that most public blockchains are based on other, much more energy-efficient, proofs-of-concept than Bitcoin.
One such concept is the Proof-of-Stake Consensus Mechanism (PoS), which enables nodes to validate transactions by staking some of their capital rather than using up computing power.
Additionally, private blockchains, meaning those that are limited to specific groups of people or companies, display an even more economical approach, as–due to the nature of network participants–lower requirements can be placed on the consensus mechanism.
Of course, the issue of regulation is an ever-present subject when discussing cryptocurrencies and without a doubt–in the near future we’ll see a legislative move to clarify how blockchains consume resources and affect the environment.