Why Does Bitcoin Mining Use Energy?
Table of Contents
- Bitcoin mining uses energy to secure the entire history of transactions.
- The energy cost makes it immensely expensive for bad actors to do anything meaningful.
- Bitcoin is powered by a higher % of renewable energy than any highly developed country.
How Is Energy Spent to Mine Bitcoin?
Energy is spent in the form of electricity, which powers the computers of Bitcoin miners. These miners try to add new blocks of transactions to the blockchain, by essentially creating as many tickets to a “lottery” as possible. The winner of this “lottery” is the first one to get the majority of the nodes in the network to verify their block. They are rewarded with newly minted bitcoin and transaction fees to compensate them for their service. Miners then need to use this new block to try to be the first to create the next block in the chain.
On the surface, this mining process looks wasteful to many. If you take a moment to understand why it works this way, you realize why mining is a crucial component to make decentralized money work at a global scale.
Why Does Bitcoin Mining Need to Use Energy?
Anyone can become a Bitcoin miner without having to ask for access or permission. This permissionless setup is a great way to keep mining and thus part of Bitcoin’s security decentralized. However, it also means Bitcoin needs a clever mechanism to ensure that bad actors can’t flood and overload the network with many new blocks, without (m)any costs for the attacker. There need to be consequences for bad behavior. In Bitcoin, its consensus algorithm takes care of this, called Proof-of-Work.
A miner must first create a valid block to get a chance at being compensated. By design, creating a block requires energy. When a miner presents a block to the network, they are proving that they put in the work. They can’t fake the creation of a valid block, as the nodes in the network would detect it. As a result, none of the network participants have to trust each other, they only need to verify that no rules were broken and all the blocks are valid.
What if Miners Try to Cheat?
If a block contains any transaction that cannot exist due to the rules in the Bitcoin software, then the nodes in the network would detect this and reject the block. The miner would lose their reward and thus waste the money they invested before ever being compensated.
How Much Energy Does Bitcoin Use per Transaction?
This question doesn’t make much sense in practice, as it is not how Bitcoin is designed. It originates from two common misconceptions around Bitcoin’s energy usage:
1. Bitcoin Does Not Use Much Energy to Process Transactions
The energy used by miners secures the entire historical record of transactions so that nobody can alter it. During this process, miners do add new transactions to the blockchain, which leads to the misconception that this energy is only used to process transactions. In reality this is just an elegant technical implementation to combine the two activities.
Similarly, processing a card transaction at a store doesn’t take much energy either, but protecting a bank and its payment networks from physical or digital attacks at all times takes tremendous amounts of effort.
2. The Energy Used To Secure Bitcoin Doesn’t Necessarily Always Increase
There are two main factors that determine Bitcoin’s energy usage:
1. The costs for a miner to earn bitcoin determine the profit margin for a miner.
As long as miners can profitably add computer power to the network, they’ll do it. If a lot more miners are on the network than recently, the Bitcoin software rebalances the difficulty to create new blocks. This difficulty adjustment ensures that on average it still takes roughly 10 minutes to create a new block. As a result of increased difficulty, mining will cost too much for the miners who are paying the highest operating costs, such as their energy prices. They may have to halt their activities until it becomes profitable to mine again. If miners drop off, the software will take note and when it rebalances again, it might become a bit easier again to create new blocks, which means less energy usage as well.
1. The bitcoin price determines the revenue for a miner.
If the bitcoin price keeps rising, then many miners can keep adding computer power, even if the difficulty increases. They just need to have enough energy and mining machines to do it.
If the bitcoin price keeps dropping, not all miners need to scale down their activities. Some miners have access to much cheaper energy than others and continue operating at lower margins.
One Bitcoin Transaction Can Settle Many Payments
Bitcoin is gradually turning into a settlement layer, where one transaction on the blockchain can represent multiple, thousands, or even millions of transactions that were made on additional layers of the network. This makes estimates on “energy per transaction” less accurate over time.
A more important question to address, which is behind this “energy per transaction” narrative, is how much energy Bitcoin uses in total.
How Much Energy Does Bitcoin Use in Total?
According to Bitcoin Mining Council’s Q1 2022 data, Bitcoin mining consumes 0.16% of the world’s total energy production.
There are many industries and activities that “waste” enormous amounts of energy in the eyes of some people, while in the eyes of other people they are important. Think of things like Christmas lights, fireworks, terrace heaters, flying and driving all over the world for big sports events held in stadiums that get little use afterwards. The list goes on.
A better question to ask is, how much renewable energy does Bitcoin use relative to other things?
Bitcoin’s Renewable Energy Mix
According to Bitcoin Mining Council’s Q1 2022 data, Bitcoin mining is powered by roughly 58.4% renewable energy. This statistic is not surprising, given that in many remote places around the world, renewable energy is cheaper than fossil fuels due to a lack of demand. Think of a hydroelectric dam with only some small towns in the vicinity to consume a limited amount of energy.
58.4% green energy may not sound like a lot, but compared to the European Union average of 43.5%, the US with 31.4% and China with 16.4%, it’s actually a high number. Bitcoin miners have far more flexibility to relocate than countries have to get renewable energy generation up and running.
Can Bitcoin Use a Different Consensus Mechanism That Uses Less Energy?
In theory it’s possible to change Bitcoin’s consensus algorithm to an algorithm that doesn’t use much energy, such as the most widely researched alternative, Proof-of-Stake. However, the vast majority of the participants in the Bitcoin network don’t believe this is a good idea, as it carries several serious risks.
The most dangerous risk is that in a Proof-of-Stake system there are huge centralizing forces at play due to its design. Centralization can lead to major consequences in the long term.
In a Proof-of-Stake system, instead of spending energy to create blocks, stakers vote with their coins on the correct version of the blockchain. If they try to cheat, they lose their stake. If they are honest, they are rewarded with newly minted coins.
In practice this means that the more coins a staker has, the more power they have over which transactions get processed and the more they earn. From an outside perspective this not only looks like a ponzi scheme, but it effectively recreates the financial system we already have, just managed by different people using different technology.
Could Bitcoin Miners Solve Useful Problems?
Bitcoin miners use energy for a process that doesn’t have other applications. This isn’t a design flaw or a lack of imagination to solve problems that are “useful” to society, but a necessary design decision to ensure Bitcoin mining isn’t controlled by one or a few organizations or individuals.
Newcomers to Bitcoin sometimes come up with ideas to “fix” this “wasted energy” by proposing that miners should solve problems that are energy intensive, but “useful” to society. An example of this is protein folding, a process that aims to study diseases by simulating countless ways that proteins can be folded in your body. Certain protein structures could lead to diseases, but simulating all of the possibilities is energy intensive.
Bitcoin miners cannot solve “useful” computational problems, because when they create a block of transactions, they need to present a verifiable solution to the network. The only way a node would be able to know if for example the proteins were folded correctly and in a way that nobody else did before, would be if it already knew this solution beforehand. If the solution was already known, then the energy would be wasted all the same.
An additional problem is who provides these “useful” problems to the network. It would allow this person to get a massive advantage in adding blocks to the blockchain, as they would already know ahead of time which problems will need to be solved in the near future.
Could Countries Ban Bitcoin Mining Because of Its Energy Use?
Some countries are trying to ban, regulate and restrict bitcoin mining in various ways. The reasons vary from wanting to maintain total financial control, to concerns over energy usage.
Countries that have implemented such rules, like China, are struggling to enforce this ban in practice.
Instead of trying to ban Bitcoin mining, or constantly judging its energy use, perhaps the most productive approach is to ensure renewable energy becomes the most attractive energy source globally. Taking it a step further, bitcoin mining can and is being used to reduce global emissions.
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