Bitcoin´s Energy Consumption: Demystifying Myths
Bitcoin’s energy consumption has become a hot topic of discussion recently. The terms energy consumption and carbon footprint are used interchangeably to criticize the energy-intensive Bitcoin POW mining process. However, they have different meanings.
According to estimates by the Cambridge Bitcoin Electricity Consumption Index, the Bitcoin network consumes 116 Terawatt Hours (TWh) of electricity per year. In comparison, the annual electricity consumption of the Netherlands is 110TWh and that of the UAE is 119TWh.
The digital currency relies on a network of miners to verify new transactions and mine new Bitcoin. It is an energy-intensive process that has resulted on a steady increase on Bitcoin’s energy consumption.
Bitcoin’s energy-intensive mining process is a feature and not a bug. Satoshi Nakamoto programmed the digital currency to follow the Proof of Work (PoW) consensus algorithm. In the PoW consensus algorithm, several miners compete to process new transactions and batch them in blocks.
Today, fossil fuels are burnt to power the manufacturing industry, produce electricity, run the public and passenger transport system and produce chemicals and other similar substances. Fossil fuels are used in electricity generation plants and the electricity obtained is used by every sector.
However, it is only Bitcoin’s energy consumption that makes headlines for all the wrong reasons. On this article, we will take a detailed look at Bitcoin’s energy consumption, understand how it makes the network more secure and compare it with other industries. We will also understand the Proof of Work (PoW) consensus mechanism and learn about merged mining.
Understanding Bitcoin’s Proof of Work Consensus Mechanism
Proof of Work also known as PoW consensus algorithm is the backbone of Bitcoin´s network. It is responsible for maintaining the trust and security among members. Bitcoin is decentralized and doesn’t depend on a single central authority to verify transactions. Instead, it relies on miners who compete amongst each other for verifying new transactions and adding them to the main chain.
Miners are incentivized to keep the network secure and they receive block rewards along with a share of transaction fees. Bitcoin is a deflationary currency with a limited supply where block rewards are reduced by half after a fixed number of blocks (usually on a period of 4 years).
The original block reward for solving the hashing problem was 50 Bitcoin. Since then, it has halved after every 210,000 blocks and it currently stands at 6.25 Bitcoin. In a Proof of Work consensus algorithm, miners solve numerical puzzles to add new blocks to the blockchain. The first miner to produce a unique solution is entitled to receive block rewards.
In the early years, Bitcoin could be mined on home computers but this isn’t the case anymore. Today, miners use dedicated ASIC chips for mining Bitcoin. As more blocks are added to the Bitcoin network and more miners compete to receive block rewards its hash rate increases. In simple terms, when new miners enter the network there is also an increase in mining difficulty.
Bitcoin’s Proof of Work consensus mechanism relies on the hashcash puzzle. The complexity of the puzzle changes depending upon the total computational power in the network. As the mining difficulty increases, miners need better hardware for improving efficiency else they would lose to other miners in the network.
As Bitcoin’s price increases, miners are incentivized to spend more and acquire expensive and dedicated mining chips. This in turn leads to an increase in the network’s hash rate and the cycle continues. The Proof of Work consensus mechanism is energy-intensive but it has several security advantages.
Proof of Work and Security
In the Proof of Work consensus mechanism, miners have to show the proof of work done to claim block rewards. Miners go through an intense trial and error process to find a unique solution to the puzzle. New blocks are added to the main chain as the longest chain is assumed to be the honest and valid chain.
Let’s assume that a few miners and nodes in the network went rogue and started adding blocks to a new side chain. In this case, other honest miners would reject this chain and continue adding blocks to the original main chain.
An objective behind using the Proof of Work consensus mechanism is to incentivize miners to keep adding blocks to the longest valid chain. The Bitcoin blockchain is a decentralized and peer to peer network. It does not have a central authority for arbitration. It relies on honest miners and nodes to maintain trust and security in the network.
For a transaction to be considered valid and irreversible, it needs to be added to the longest chain. If a set of rogue miners tried to add fake transactions to the network, then this shall be spotted and the block containing those transactions will not be added to the main chain. Miners would need to control over 51 percent of the network’s mining power to add malicious blocks to the network.
A 51 percent attack is a hypothetical scenario where a single miner or a group of miners control the majority of the network’s computational power. These miners could then create and approve malicious transactions. As they control the network, these malicious blocks would get added to the main chain.
The Proof of Work consensus mechanism discourages a 51 percent attack by making it extremely expensive for rogue miners to control the majority of the network’s resources. It can be clearly seen why Bitcoin relies on the PoW consensus mechanism to keep its network secure. It is energy-intensive but it keeps the network secure and reliable. Bitcoin is a decentralized, peer to peer payment system which relies on miners and FVNs rather than a central figure to keep the network running.
Mining Pools and Energy Consumption
As the Bitcoin network’s hash rate increased, it became inefficient for solo miners to continue operations. Bitcoin mining requires the use of highly sophisticated ASIC chips. They are highly efficient but expensive and have high energy requirements.
Rising costs, expensive hardware and the increase in mining difficulty led to the rise of mining pools. Solo miners switched over to mining pools in hopes of better earnings. A mining pool is a group of miners who combine their computational resources to increase their probability of winning block rewards.
A significant number of mining pools are located in China and North America. The energy consumption of these mining pools has always been a hot topic of discussion. In 2020, a report by the University of Cambridge found that 76 percent of miners used varied percentages of electricity from renewable sources to power operations. However, there was still room for improvement as some mining pools relied on electricity from coal-based power plants.
In April 2020, a city in China’s Sichuan province invited blockchain companies to harness the excess hydroelectric power it produced. China’s Sichuan province is home to almost half of the world’s mining operations. The region has an abundance of hydroelectric projects and miners harness it. During the monsoon season, the province receives abundant rain and these hydroelectric plants produce more electricity than there is demand. Without mining operations, this excess electricity would be wasted.
Understanding the Difference Between Energy Consumption and Carbon Emission
There is a lot of confusion around the terms energy consumption and carbon emission when talking about Bitcoin mining. The terms are incorrectly used interchangeably and have different meanings.
Energy consumption refers to the units of energy consumed while carbon emission refers to the amount of carbon emitted while obtaining one unit of energy. For example, hydroelectric projects have less carbon emission than coal-based power plants and both are used to power mining operations.
In such a case, mining operations powered by the hydroelectric project will have fewer carbon emissions as compared to mining operations being run by coal power plants. Both will have the same energy consumption but strikingly different carbon emissions.
As pointed earlier, a report by the University of Cambridge estimated 76 percent of miners rely on renewable energy to some extent for mining operations. Miners in Sichuan harness the excess energy produced by local hydro energy projects. In some countries, miners do rely on coal and other fossil fuel-based power plants to power their mining operations. However, this is more due to the lack of other energy alternatives than a miner’s preference necessarily.
To date, there is no clarity on the exact figure about Bitcoin’s carbon emission. Different reports have their own calculations and end up with striking numbers. Over the years, there has been a significant rise in media reports trying to paint Bitcoin as an electricity guzzling payment system that is harming the environment. Most of these reports are baseless.
Bitcoin vs Fiat: Energy Consumption
According to estimates, the size of the global financial services sector is expected to grow to $26.5 trillion by 2022. In the USA alone, there are more than 80,000 bank branches and 470,000 ATMs. The sector constitutes almost 9 percent of America’s GDP and provides livelihood to hundreds of thousands directly and indirectly.
When we talk about Bitcoin’s energy consumption, we take into account the network’s hash rate, number of transactions processed, the average hash rate of mining hardware used by miners and its electricity consumption. The carbon footprint calculation of the Bitcoin network could include miners, users and nodes. But, how do we calculate the energy consumption and carbon footprint of fiduciary money?
Bitcoin mining faces criticism for being energy-intensive but at close scrutiny, fiat money and its financial system could have much larger energy requirements. Calculating fiat money’s energy requirements isn’t as simple as multiplying the total number of new currency printed with the cost to operate those printers. If we are calculating its total energy usage we need to consider electricity consumed by the banking and financial sector, reserve and central banks, wall street and other allied industries.
In a scathing attack on fiat money’s energy consumption, Peter St. Onge wrote: “It would take between 500 and 1,000 years for Bitcoin’s energy use to even approach (match) the 2008 crisis alone.”
Most fiat money enthusiasts love to compare Bitcoin’s energy usage against that of card payment processors. They ignore the reality that there is a complex backend that keeps this system running. The complex backend generally comprises operations spread across international borders and operates round the clock.
It is powered by electricity produced from the same plants that power Bitcoin mining operations. The only difference is that Bitcoin’s energy consumption is far less than that of the international financial industry which is powered by fiat money.
Energy Consumption of Countries vs Bitcoin
The Cambridge Bitcoin Electricity Consumption index compares the energy consumed by Bitcoin mining operations to electricity consumed by countries. It estimates the Bitcoin network to account for 0.53 percent of the world’s total electricity consumption.
China and America consume 6453 TWh and 3989 TWh of electricity annually. In comparison, the Bitcoin network only consumes an estimated 116 TWh of electricity annually. The tool estimates that the total electricity wasted by appliances left in idle but plugged state across the USA could power the Bitcoin network for 1.9 years.
Statistics by the US EPA estimates a typical passenger vehicle emits 4.6 metric tons of carbon dioxide per year. It is assumed that the average gasoline car drives 11,500 miles per year and has an average fuel economy of 22 miles per gallon. Every gallon of gasoline burnt releases 8,887 grams of carbon dioxide into the environment.
EPA estimates that transportation accounts for the largest portion of US greenhouse gas emissions. It accounted for 28 percent of the total emissions in 2018. Private cars, taxis, trucks, commercial vehicles, railroads and other modes of transportations were all taken into consideration.
China and the USA continue to be the world’s largest emitters of carbon dioxide. The two nations together account for 45 percent of the world’s global carbon dioxide emissions from fossil fuel combustion. Six countries namely the USA, China, India, Russia and Japan account for over 60 percent of the world’s greenhouse gas emissions.
Bitcoin’s energy consumption and carbon emissions are a drop in the bucket when compared to these statistics. The Proof of Work consensus mechanism is energy-intensive but it is nowhere close to being the energy guzzler portrayed by the media.
Bitcoin’s Push for Renewable Energy
The Bitcoin Mining Council was formed to encourage Bitcoin miners to switch completely to renewable sources of energy. Bitcoin mining company Argo launched the Crypto Climate Accord (CCA) to promote industry decarbonization. Similar to the Paris Agreement, the main objective of the CCA is to reach net-zero emissions from electricity consumed by the end of 2030.
It also aims to achieve net-zero greenhouse gas emissions by 2040. The accord already has more than 45 signatories including some of the most prominent Bitcoin miners. It also plans to hold the inaugural Crypto Climate Congress Accord.
Bitcoin mining operations aren’t exclusive or restricted to a geographical zone. They can be set up freely anywhere across the world where electricity is available cheaply. Electricity and maintenance costs are the biggest chunk of any miner’s expenses. Electricity from fossil fuel-based plants is expensive. It includes the cost to buy fossil fuels, to move them to a site and then they are burnt and converted to electrical energy.
Fossil fuels are not energy efficient and also lead to harmful carbon dioxide gases being released into the environment. On the other hand, Bitcoin miners are conservative in keeping their costs down. Most new mining pools are being set up in locations that have an abundance of energy from renewable sources. In such places, electricity is cheaper and miners have an opportunity to reduce their costs.
There are several large Bitcoin mining pools that have already moved their operations. They have shifted to places like China’s Sichuan province which produces excess energy from its hydroelectric plants during the wet season. Bitcoin mining isn’t centralized or exclusive to one geography. Miners are moving operations to regions that help them save electricity costs and also keep the planet greener while at the same time being compliant with local regulations.
There is a debate around the long term energy sustainability of the Proof of Work consensus mechanism. Some believe a switch to Proof of Stake (PoS) consensus algorithm is better for the environment as it consumes less energy. Ethereum 2.0 is switching to the Proof of Stake consensus mechanism. However, there is an exciting concept called merged mining which helps save energy while also keeping the network secure.
Merged Mining
Merged mining refers to the idea of two cryptocurrencies being mined together at the same time. The Auxiliary Proof of Work (AuxPoW) consensus mechanism allows users to mine two different digital currencies by mining blocks on multiple chains.
The AuxPoW consensus mechanism allows work done on one chain to be proved as valid work done on another chain. The concepts of parent and auxiliary blockchain are used. The parent blockchain is the one where the miner actually completes work while the auxiliary chain refers to the chain that accepts work done on the parent chain.
The biggest advantage of merged mining is energy savings. As miners can mine more than one coin with the same resources, they help secure multiple blockchain networks from the same mining hardware. The parent blockchain remains unaffected by merged mining. It is the auxiliary blockchain that needs to incorporate certain changes in order to accept work done on the parent chain as valid.
Merged mining incentivizes miners to join networks with smaller hash rates. It improves security in the network and also provides additional income to miners. RSK is the number one Bitcoin merged mining platform. RSK uses the same SHA-256 hash function as Bitcoin. Miners do not need any additional hardware for merged mining RSK on the Bitcoin (BTC) blockchain.
The RSK network rewards miners for valid uncle block submissions too. At its core, RSK is a platform that brings smart contract functionality to the Bitcoin blockchain. Due to merged mining, RSK is one of the world’s most secure smart contract platforms.
Closing Thoughts on Bitcoin’s Mining and Network’s Energy Consumption
We´ve covered various statistics and research that clearly depict that Bitcoin’s energy consumption is a drop in the bucket. Bitcoin’s energy-intensive Proof of Work consensus mechanism is a feature of the network and not a bug. It helps keep the network secure.
The hullabaloo around fossil fuels being burnt to power Bitcoin mining rigs is factually incorrect. Statistics and reports use various methods of calculating Bitcoin’s energy consumption but they do not differentiate between energy spent to validate transactions and energy spent to mine Bitcoin.
The mainstream media portrays Bitcoin as an energy-guzzling and dirty payment system with clickbait headlines. The total energy consumption of the Bitcoin network may be more than that of some small countries but it is powering a true peer to peer payment system. It is easier to calculate Bitcoin’s energy consumption but difficult to estimate fiat money’s energy consumption.
Fiat payment system’s energy consumption isn’t restricted to merely banks. It includes the entire financial and banking industry along with its allied sectors. If we take all this into account then fiat money’s energy consumption and carbon emission exceed that of Bitcoin by multiples.
Bitcoin miners are solely motivated by profits. It is more economical for miners to power their operations through renewable energy than fossil fuel-based energy sources. Bitcoin miners are using excess energy generated from hydroelectric projects and natural gas to power mining rigs.
The Crypto Climate Accord is a step in the right direction. It will make mining operations more sustainable. Innovative ideas such as merged mining are also a great solution to reduce energy consumed in mining operations. Miners can secure two networks with the same hardware and resources.