Is Bitcoin a waste of energy? Advantages and disadvantages of Bitcoin mining

Bitcoin is garnering passion, curiosity and has received more and more media attention, especially after climbing the ranks of the decade’s best financial asset. However, whenever its price rises, many doubts and questions arise, mainly about its origin and the energy expenditure by miners.

The Bitcoin protocol has created a unique digital asset

To understand how Bitcoin (BTC) is created and what mining is, the key is the double spending problem.

Before Bitcoin, there was no digital value to transfer or a digital asset to split into several parts. That is, if you scanned a $ 100 bill and wanted to pass this bill to someone, you could only send a copy of this bill.

We are all used to smartphones and computers already. We send emails, photos, but we don’t really realize that process: We send a copy of the email (and not the original email), a copy of our photos (and not the email original one). When we click on the send button on a smartphone or computer, a copy of the original will always remain on our device.

Similarly, when it comes to financial transactions, when we click the send button in our internet banking accounts or ATM machine, there is always an intermediary who transfers the money from one account to another. And that’s the problem that Bitcoin is trying to solve – the double spending problem.

When you click the send Bitcoin button on your mobile phone, for example, you’re not sending a copy, you’re actually sending a digital object. Once a transaction is made in Bitcoin, it becomes irreversible and cannot be tampered with.

For that reason, it is impossible to cancel or reverse Bitcoin transfer once it has been validated by the blockchain network because the Bitcoin protocol solved the problem of double spending. One asset, Bitcoin, made digital unique, enabling value transactions on the internet without intermediaries (independent of a central entity).

Who publishes Bitcoins?

While traditional currencies are issued (created) through (central) banks, Bitcoin is issued by algorithms, whose rules are pre-established in its protocol – the Bitcoin blockchain.

In turn, the Bitcoin blockchain is a transaction registration system, held in an open (distributed) network of “suspicious” participants, who do not know or trust each other.

So when Satoshi Nakamoto wrote the source code for Bitcoin protocol software and published it on the internet, he proposed the following: If you provide security to this network and help this financial network to operate, you will get reward you.

The logic of the pre-established rules in the Bitcoin protocol was very transparent and was written in a programming language. The groundbreaking development brought about by the first blockchain, after years of research on digital currencies, is not just about computer science solutions.

The secret is in motives

To create the Bitcoin blockchain architecture, Satoshi Nakamoto looked at existing research – bit-gold, b-currency, hashcash, time-stamped cryptography – and added game theory.

Using game theory, Satoshi implemented a motivational mechanism (consensus mechanism) called probation that enabled a new area of ​​economic coordination, now known as “cryptoeconomics” (economics and computing fields to study the decentralized markets and applications) which can be built by combining cryptography with economic incentives).

It is this economic incentive system that ensures that Bitcoin network participants act in favor of the security and perfect functioning of the system. This is the main reason why the Bitcoin blockchain has not yet been hacked.

Importance of mining

As more and more people realized the potential motivations in Bitcoin and began “plugging in” their computers to provide security to the network, the Bitcoin blockchain became more viable and secure. Now, huge computational power guarantees transactions: Bitcoin is computational strength.

Bitcoin is “pulled” from the blockchain protocol by miners (verifiers) who need to solve mathematical algorithms to gain the right to include and be rewarded with Bitcoin transactions in the blockchain network.

All Bitcoin transactions, before being added to the blockchain, are sent to the “mempool,” a storage area for upcoming transactions, where it waits for inclusion in a block. The miners then take the pending transactions, which are waiting to be recorded, and combine them to create a “block” of transactions.

Realize that the miners are competing with each other so that their computers are selected to record the most recent transactions in the next block that will be included in the network. And the best way to win this competition is by solving the algorithms as many times as possible (before someone else reaches the correct result, called a “nonce”).

Since it takes trillions of attempts to guess the right nonce, only those with more computational strength to win this competition will receive Bitcoin as a reward for their efforts.

We can draw two main results from what we have said so far.

The first result is that PoW prevents miners from bypassing the system and creating Bitcoin from scratch. Miners must burn real computing energy with every attempt and find the nonce to have a chance of winning Bitcoin. Since electricity to supply miners is not free, test work, therefore, generates a financial cost for Bitcoin mining.

The second result refers to the fact that PoW makes Bitcoin transaction history irreversible. If an attacker attempts to change a transaction, that attacker will have to redo all the work that has been done since then to restore and set up the longest network. This is theoretically impossible which is why miners are said to “protect” the Bitcoin network.

As mining has become a legitimate industry over the years, it is being supported by dedicated professionals with specialized hardware, requiring big data centers and lots of electricity.

It is worth noting that while there are other consensus mechanisms, PoW is the most widely used in blockchain because it is the most effective in terms of cyber security.

How much electricity does Bitcoin mining consume?

Cambridge University has been operating a live Bitcoin network energy estimator since 2015. In fact, Bitcoin transparency allows anyone to see how much hash power is applied to the network, which is usually measured at the number of hashes per second that the network performs as part of the mining process.

You can estimate how much power the network uses to achieve these hashes based on the energy efficiency for accelerating mining hardware deployment.

According to Bitcoin energy usage tracker Digiconomist, mining currently consumes 77.78 terawatt hours per year. That can be compared with the total energy consumption of countries such as the Netherlands and the Czech Republic.

Based on the estimates above, many argue against Bitcoin and the use of proof work.

However, can we take these “estimates” as absolute truth? Do these estimates take into account that miners do not always operate with the same efficiency? Is it considered that the electricity used could be from clean sources?

Let’s look at these arguments individually.

Anti-PoW arguments

The arguments against proof-of-work and the incentive mechanism created by Satoshi Nakamoto are:

  • A1 – Bitcoin mining consumes a lot of energy.
  • A2 – The vast majority of Bitcoin miners are based in China.
  • A3 – Bitcoin miners in China mainly use dirty energy based on coal.
  • A4 – Bitcoin mining has a relatively extreme carbon footprint.
  • A5 – Bitcoin is bad.

Debate A1 indeed, as we have shown in the previous subject. It’s one of the fundamental reasons why the Bitcoin network is so incredibly secure.

Debate A2 used to be the case, but the situation is changing, as more regions globally are joining the BTC mining industry. Since this does not matter for energy use by the Bitcoin network, I would consider it true.

Regions with high relevance are highlighted in teal, Sichuan province in China is in yellow, and regions of lesser relevance are in red.

Finally, the argument A3 false, as we will see in the next topic, which shatters controversy A4 a A5.

Bitcoin is an energy piggy, but … renewable

Recent research published by CoinShares Research found that most of the electricity used to mine Bitcoin, in fact, comes from clean sources, such as wind, solar and hydroelectricity.

To be more specific, 60% of global mining takes place in China, where Sichuan alone produces 50% of the global hash rate, with the remaining 10% divided more or less equally among the Yunnan, Xinjiang and Mongolian provinces.

It is important to note that Sichuan supremacy in China and the world has a direct relationship with the hydro-rich provinces of Yunnan, Guizhou and Sichuan in southwest China. During the rainy season, its electricity prices are among the lowest in the world, making Sichuan one of the most attractive global mining regions available.

On the other hand, of the remaining 40% of mining companies, 35% of global hash rate production is split equally between Washington, New York, British Columbia, Alberta, Quebec, Newfoundland and Labrador, Iceland, Norway, Sweden, Georgia and Iran.

Still, the report highlights a broader problem with how renewable energy is currently used worldwide: Many renewable energy producers are in a poor location and are underused, and therefore , Bitcoin mining is the only viable use for this electricity.

In this context, the research concludes that the Bitcoin network derives 74% of its electricity from renewable sources, making it more focused on clean energy sources than almost all other large-scale industries in the world. world.

Takeaway Shop

Everything needs energy, and the extra use of energy has always improved our standard of living. Are the benefits provided by Bitcoin worth the extra energy consumption? Aren’t miners now looking for ways to reuse wasted energy, for example, the CO2 released during oil drilling?

Since the physical location of mining centers does not affect the Bitcoin network, do miners no longer migrate to surplus electricity generating areas at lower marginal costs? And in this case, this could not solve the problem of renewable energy that has predictable capacity and would otherwise be wasted, like hydroelectric and methane burning.

Everything is energy – the waste does not use it intelligently to improve economic and social standards of living.

The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Tatiana Revoredo a founding member of the Oxford Blockchain Foundation and a blockchain strategist at Saïd Business School at Oxford University. In addition, she is an expert in blockchain business applications at the Massachusetts Institute of Technology and is the chief strategy officer of Global Strategy. Tatiana has been invited by the European Parliament to the Intercontinental Blockchain Conference and has been invited by the Brazilian parliament to the public hearing on Bill 2303/2015. She is the author of two books: Blockchain: Tudo O Que Você Precisa Saber a Cryptocurrencies in the International Scenario: What is the Position of Central Banks, Governments, and Authorities About Cryptocurrencies?