December 10, 2021

Bitcoin Energy Consumption and Sustainability of PoW

Bitcoin Energy Consumption and Sustainability of PoW

Whenever you get into a discussion about whether Bitcoin and other cryptocurrencies are a positive development or not, one of the first arguments against them will most likely be “They use a lot of energy.” The person you’re conversing with may be referring to what they’ve heard about in the media regarding Bitcoin or Ethereum. Both protocols rely on Proof-of-Work to maintain their network for the time being. Ethereum will be moving to a PoS algorithm next year, but until then it faces the same challenges as Bitcoin.

Addressing the energy consumption of such networks has undoubtedly made for some attention-grabbing headlines such as “Bitcoin can push global warming above 2 degrees C in a couple of decades” or NFTs Are Hot. So Is Their Effect on the Earth’s Climate.

In this post, we will provide more context to the ongoing energy debate and address the question of sustainability — building on our previous post on the topic.

When discussing energy, the first obvious question is:

How much energy does Bitcoin use?

Crypto critics are correct with their argument that Bitcoin uses a lot of energy. In June this year, estimates put Bitcoin energy consumption at 110 Terrawatt hours per year, similar to the energy consumption of the Netherlands (111TwH). While this sounds impressive as a comparison, it’s also worth noting that the Netherlands is one country, and Bitcoins’ network goes across the globe. Regardless, it’s tough to envision, so to put it into another context: washing machines.

The energy consumption of Bitcoin equals the energy consumption of the entire London workforce (roughly 5.2 million people) washing their laundry 220 cycles per year (estimated 190 kWh energy consumption). This seems like an awful lot of clean laundry, yet critics could argue they would probably find more use in clean laundry than Bitcoin.

Another way to put Bitcoin’s annual energy consumption in context is by comparing it to the phantom electricity consumption caused by devices left plugged in when in Standby which amounts to 124 TWh per year.

It’s safe to conclude that Bitcoin uses a significant amount of energy, which has led some countries to propose banning Bitcoin Mining altogether. However, in terms of policy and governance, the fact that Bitcoin uses a lot of energy alone may not be totally sufficient to inform decisions. What matters more is where the energy is from. Yet, before addressing that, it’s worth quickly covering why so much energy is consumed in the first place.

Why does Bitcoin need so much energy?

The reason Bitcoin consumes so much energy is because of its consensus mechanism: Proof-of-Work. Proof-of-Work (PoW) was invented decades ago as a means to prevent spam and distributed denial of service attacks. In Bitcoin, PoW enables a process called “Mining.” Mining is the driving force behind the energy consumption of the cryptocurrency, as during mining, so-called miners race to solve a cryptographic puzzle. The miner who wins validates the block and receives a block reward of currently 6.25 Bitcoin ($318,750). New Blocks on Bitcoin are mined every 10 minutes, so every 10 minutes, a miner receives 6.25 Bitcoin.

In the early days of Bitcoin, anyone with a bit of computing power could easily mine Bitcoin. However, the increasing value of the cryptocurrency has attracted commercial miners; whenever new miners join the network, the computing power and consequently the energy usage of the network increases.

To ensure that blocks are still mined at the same pace, Bitcoin will adjust the difficulty for miners (making it harder for them to find the right solution to the cryptographic puzzle). With the increasing commercialization of mining, we’ve seen the development of specialized mining hardware and individuals being driven out. The only feasible option nowadays for an individual to mine Bitcoin is to join a mining pool.

Competition and increased difficulty have increased the energy consumption of Bitcoin. One argument you might come across is that transactions increase energy consumption.

Energy consumption does not increase with the volume of transactions.

If energy consumption increased with transactional volume, that would mean the adoption of Bitcoin would result in an ever-increasing carbon footprint. Fortunately, this isn’t the case for Bitcoin or other Proof-of-Work blockchains. It’s understandable how one might conclude that if more is transferred, more energy is required, but that ignores an essential characteristic of Bitcoin: the block size is fixed. That means that the number of transactions that each block can include is limited. Currently, a block contains on average 1,600 transactions.

With the upper limit set, the energy consumption of Bitcoin doesn’t change regardless of whether there are 2500 transactions in the block or just 25. While not a perfect analogy, one can imagine these blocks like a bus.

A bus has a limit of how many passengers it can carry. It will still move between stations, with just one passenger or 90. And if it’s full, people will have to wait for the next bus. Some might be able to get in still if they offer to pay the bus driver more (because he’d then take on more risk). The same thing happens with transactions when the blocks are full.

They end up in the Mempool, a kind of waiting area for transactions in busy times. Once blocks fill up, transactions are prioritized based on the fees they pay. If they fall below the threshold, they must wait until the next block (or bus, to use our analogy).

The fixed block size ensures that energy usage doesn’t increase with increased transaction count, but it hinders scalability. How would the network process hundreds of millions of transactions? That would be similar to accommodating thousands of passengers with a bus fleet designed to cater to hundreds. It leads to a lot of frustrating waiting times.

After clarifying why Bitcoin requires energy and energy consumed doesn’t increase with transactions, the next question to address is the sources for that energy.

How much green energy do Bitcoin Miners use?

You might remember the hype when Elon Musk announced that Tesla would accept Bitcoin, only to revert by spreading ‘FUD’ (Fear Uncertainty Doubt)) by declaring that they’d stop accepting Bitcoin.

Since then, Bitcoin enthusiasts have argued that Mining could be fuelling a green revolution and started analyzing the energy sources for Mining. The latest estimates suggest that 38% of energy for mining currently stems from renewables. Ironically, China’s latest crackdown on miners might have helped them in that regard.

In China, Miners had access to cheap coal energy subsidized by the government; in other locations such as the US, there is a political agenda to increase renewables — if necessary by heavily subsidizing them. And renewable energy continues to become cheaper.

Yet, even if all Bitcoin mining was reliant on green energy sources, it wouldn’t address another downside of the biggest cryptocurrency: the fact that all the energy used for miners that did not win the block is wasted.

Miners Motivation

Miners’ motivation nowadays is purely based on profits — that’s why the energy spent on mining, without winning, can be considered wasted.

In the early days of Bitcoin, miners followed a different motivation. For them, it was a scientific experiment, and for a long time, Bitcoin was worth a fraction of a cent. Some might have also participated as an early node to help secure the network.

Every full node (a node that stores the entire history, whilst validating transactions and blocks) adds resilience to the network. The more full nodes in a network, the harder it is to attack.

Today, miners are not so interested in securing the network. If they were, they would arguably start distributing their machines across different pools and countries. After China cracked down on mining, mining pools are now concentrated in the US, with 35.4 % of the hashrate (computing power) in one country. This begs the question “If miners maintaining the network don’t have what’s best for the network in mind, is there a better way?”

The answer for most recent blockchain protocols is Proof-of-Stake.

Is Proof-of-Stake really the answer?

That depends entirely on the question. In Proof-of-Stake (PoS) networks, blocks are validated by participants in the network that hold the native currency. Often, the more of a native currency they hold, the more likely they are to be selected for validation and reap the rewards.

PoS, therefore, doesn’t require the same amount of energy as Mining or validation in PoW protocols. So one could assume it to be the answer to the question of energy efficiency. It is also one of the big drivers behind Ethereum moving from a Proof-of-Work consensus algorithm to Proof-of-Stake a change that is scheduled to take place next year.

However, PoS is not the answer to solving the blockchain trilemma.

The main purpose of using blockchain is decentralization. In Proof-of-Stake networks, decentralization is frequently abolished for scalability, and we see that play out in networks like Binance Smart Chain (with just 21 validators) and Solana (which was shut down by developers to restart it.)

In a truly decentralized network, no one should be capable of shutting down the network, nor accumulating a big enough stake to effectively take on control. The only consensus algorithm making decentralized networks possible is Proof-of-Work. But not as implemented in Bitcoin, in the form of miners competing against each other, with the incentive to accrue more power.

How can Proof-of-Work be sustainable?

While the major focus of addressing Bitcoin is on environmental sustainability, there is more to it. Sustainability is defined as “meeting the needs of the present without compromising the ability of future generations to meet their needs”. Based on that one could argue that Bitcoin itself might not be sustainable as a system, since it relies on economic incentives (for miners) to process transactions, and secure the network. Once these run out (In 2140), miners might be quick to find other avenues to use their computing power.

So how can a protocol use PoW and yet be sustainable not only in the environmental sense but as a protocol that will enable future generations to continue building on it?

At Minima, we believe that the answer is Tx-PoW. An implementation of Proof-of-Work that allows each network participant to do small proofs-of-work, which are then added up to an entire block worth of PoW. Minimum effort for the individual adds up to a maximally decentralized network for all.

Not only does this enable anyone to run an entire validating and constructing node on their phone, but it also facilitates environmental sustainability. Sourcing a small amount of energy in a climate-neutral way is much easier than doing so for the vast amount mining consumes. The innovations in alternative powering mechanisms for devices mean we will see even greater efficiencies in solar energy or even energy generated through motion.

Minima is also sustainable when it comes to adjusting to future demand. Blocksize isn’t fixed but adjusted based on the previous 24 hours of network traffic to provide a smooth experience and cater to all network users at any given time.

We believe that the evolution will not be centralized, and building a sustainable decentralized network is the best way to ensure that the demand of current and future generations is met.