Is the energy consumption of bitcoin a good thing or bad thing and why?
The quick answer to the question is; yes, the energy bitcoin consumes is a good thing. It makes it impossible to rewrite the past. This quality is essential to ensuring one of bitcoin’s most important properties: censorship resistance. Secondly, the problem is not in fact energy consumption, but the emission of greenhouse gases. Energy and “green” energy are so abundant in the universe that we could never consume all of it. Bitcoin mining is already cleaner than many other industries and can reduce the emission of greenhouse gases in other areas that have nothing to do with bitcoin. Let’s develop these two ideas.
Let’s take a step back. What is the Bitcoin blockchain in fact? The Bitcoin blockchain (spelled here with a Capital B) is in fact just a database. It tracks who owns which bitcoin, (bitcoin the asset, spelled with a lowercase b). Unfortunately coders are terrible at naming things, so they gave the asset and the database the same name, bitcoin. However a good comparison is the land registry. The land registry is a database that tracks who owns which piece of land. The Bitcoin blockchain is a database that tracks who owns which bitcoin. It is really nothing more than that. However it is organized in a completely novel way. It is organized in a way where there is no central point of control. It is like saying there is no office of the land registry to check the transactions. We have replaced this central point of control with another system. We ask everybody participating to check every single transaction, not just their own transactions. Concretely that means every node, running the bitcoin software, checks every single transaction. It is like saying every person in the city will check every single real estate transaction that happens in that city to make sure it is legitimate. Several potential problems could arise from this system and they were solved by the invention of bitcoin. One problem is, we need to make sure that everybody has been made aware of these transactions. That is one reason why we want a block time of 10 minutes. Another problem is that we want to make sure that all the participants, or bitcoin nodes in this case, have that same state of the database. In other words everyone must agree which transactions occurred and who are the new owners of bitcoin. Remember, every node is keeping their own complete copy of the database. Every node must have the same entries in their database. This is what is called the Byzantine general’s problem, i.e all parties have the same copy of the database even if there is no coordinating central party, like the office of the land registry. Furthermore, once everyone agrees which transaction has taken place, it becomes impossible for the entity to spend those bitcoin again. (The double spend problem)
This is where miners come in, and this is where the energy is spent. The miners perform something called proof of work. Proof of work cements all the transactions together. The only way to reverse the transactions would be to “re-mine” the transactions and spend the energy again. Explaining how proof of work occurs could be the subject of another piece. However the rule that all bitcoin nodes follow is; they recognize the blockchain with the most cumulative proof of work.
There are currently so many miners, mining bitcoin with extremely powerful machines, that after about 3 blocks it becomes almost impossible to reverse a transaction captured in a previous block. To thank the miner for performing this task, we give them the block reward. This is the only way to create new bitcoin. This is very different to credit card payments and bank transfers that can be cancelled after they have been made. This meant that when Wikileaks received bitcoin to support Julian Assange, the transactions could not be reversed, even by pressure from the government. For more on this subject see this https://www.forbes.com/sites/rogerhuang/2019/04/26/how-bitcoin-and-wikileaks-saved-each-other/ . Furthermore, this is different from fiat money creation. Fiat money creation comes simply by making new loans, in other words by issuing debt, by banks or governments. The US government handed out almost 5 trillion dollars to support the economy during the Corona virus crisis. This required absolutely no energy.
There are two properties that make bitcoin censorship resistant. One of them is the work of the miners. The other component is asymmetric cryptography and the famous sentence, “not your keys, not your coins”. But that could also be the subject of another piece. Finally, as mining is permission-less, anyone can propose a block. This is another component of censorship resistance. Censorship resistance is completely undervalued in the west.
I hope you see why spending the energy is necessary. It is a “good thing” because it makes it impossible to rewrite the past. To make it difficult to rewrite the past, it has to be very expensive to write the present. The price you pay is energy.
When people worry about energy, they are in fact worried about greenhouse gas emissions. Let us remind ourselves, energy is not scarce. Energy in the universe is so abundant, we could never even burn a tiny portion of it. It exists in many forms that do not emit greenhouse gases.
Why do we use hydrocarbons? Two main reasons are: they can be easily transported and they conserve their energy until needed.
Bitcoin mining does not need either of these two properties. Mining rigs can be located anywhere. They are in fact placed next to the source of energy. One does not transport the energy, one transports the mining rig to the source of energy.
Secondly mining rigs can be turned on and off in the flick of a switch, just like a computer. They are often independent from any energy consumption happening on the grid. Mining simply continues elsewhere, in another part of the world.
According to The Cambridge Bitcoin Electricity Consumption Index bitcoin’s energy consumption was 107.65 Twh in 2022. In 2017 it was 14.4 Twh. How much of it comes from hydrocarbons and how does that compare to other industries. According to CBECI in 2022, 62.41% came from hydrocarbons, the rest from renewables and nuclear. How does that compare to other industries? This is difficult to ascertain. Citing again this index “ It is surprisingly difficult to find reliable GHG emission estimates for many industrial and residential activities. Datasets are often non-standardised, produced or maintained by various stakeholders who pursue personal interests. They are based on distinct theoretical models that use significantly different methodologies and assumptions, and/or are limited to specific geographical areas or periods, leading to vastly contradictory estimates about the same activity.” However, some comparaisons by industry in total Mtco2e (metric ton carbon dioxide equivalent) are: bitcoin emits 72.53 Mtco2e, goal mining 100.4, air conditioning 1950, tabacco industry 84, fashion 2106. (see the full list here https://ccaf.io/cbeci/ghg/index). Compared to nations, bitcoin produces the same amount of Mtco2e (72.52) as New Zealand, 72.6 or Kenya 73.4.
Blockstream Mining's main source of energy is Hydro Quebec. The CEO Adam Back , has said that Hydro Quebec could produce double the amount of energy they currently produce. They do not do so for various political considerations. The extra production would be more than sufficient to satisfy the entire bitcoin network.
If you would like to learn about how bitcoin mining actually helps reduce the amount of methane emitted by landfills, you can listen to this podcast of “The Swiss Road To Crypto” podcast.
Or if you would like to learn about how mining helps improve the energy mix, listen to this episode of “The Swiss Road To Crypto”
Many major oil companies like Exxon have publicly stated that they mine bitcoin to capture economic value from methane that would otherwise escape into the air. They burn methane, create electricity and mine bitcoin. Therefore even though Warren Buffet thinks bitcoin is rat poison squared, he owns shares of companies that have it on their balance sheet.
Discover more here https://www.cnbc.com/2022/03/26/exxon-mining-bitcoin-with-crusoe-energy-in-north-dakota-bakken-region.html or here
So the next time someone says bitcoin is not backed by anything, you will now know that it is backed by all the energy that was used to produce it and that was a good thing.