Bitcoin Energy Consumption
In this blog post, you can read about the :
- in-detail history of Bitcoin’s consensus algorithm, Proof-of-Work
- Why it is necessary,
- And why it is not the ultimate solution.
Let’s get started!
One of the major criticisms that bitcoin faces is its energy consumption. To achieve and maintain a universal state, the Bitcoin network requires its users to create nodes, through which they contribute energy, software, and hardware. In exchange for their effort, the network rewards them by distributing new units of the network’s native digital currency. This process is referred to as mining.
To comprehend the energy requirements of the Bitcoin network, it is essential to first understand the consensus algorithm that it employs. In distributed networks, such as Bitcoin and other public ledgers, parties require a mechanism through which they can communicate and agree to validate transactions sent over the network. This apparatus is called a consensus mechanism.
Proof-of-work (POW) is the consensus algorithm leveraged in the Bitcoin network. It is also the most popular and widely used consensus mechanism across the digital currency landscape.
Many erroneously believe that Proof-of-Work is the invention of Bitcoin’s creator Satoshi Nakamoto. However, POW was first described by a duo of scientists in 1993. Cynthia Dwork and Moni Naor, in their article called “Pricing via Processing, Or, Combatting Junk Mail, Advances in Cryptology”, describe an apparatus through which users would be required to compute a hard problem, before gaining access to a certain resource. In their context, Dwork and Naor were aiming to combat the growing problem of spam mail in the early days of messages sent over the internet.
While it was not successful as a large scale spam mail deterrent, the apparatus described by the scientists gained steam within certain circles. It is important to note that this mechanism was not referred to as Proof-of-Work until Markus Jakobsson and Ari Juels in their 1999 paper ‘Proofs of Work and Bread Pudding Protocols’, brought the term into the public lexicon.
In the paper, Juels and Jakobsson postulated a standardized definition of the POW mechanism. They also noted that there were already a number of examples of the mechanism in use within the computer system.
The paper stated: “By contrast, in a proof of work, a prover demonstrates that she has performed a certain amount of computational work in a specified interval of time. Proofs of work have served as the basis of a number of security protocols in the literature, but have hitherto lacked careful characterization.”
POW works by requiring users to leverage the processing power of their machines to compute complex mathematical problems. The more effective a POW algorithm is, the more computationally hard its underlying algorithm must be. In cryptography and mathematics, computational hardness refers to a problem that is difficult to solve. The agreed-upon definition is a ‘problem which cannot be solved efficiently’, where efficiently is an allusion to polynomial time.
POW is the most widely employed consensus algorithm in the digital currency landscape. The cryptographic considerations which buoy the mechanism to ensure that it is an effective tool to manage the double needs of security and governance within a distributed system.
While we have established that Nakamoto was not the inventor of the POW mechanisms, he was the first to combine it with the distributed ledger to support a peer-to-peer payment network.
In the Bitcoin whitepaper, Nakamoto explained: “We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power.”
As alluded to by Nakamoto, within the Bitcoin network, POW serves a dual purpose. It secures the network as it disincentivizes those using the network from committing double spends or any other malicious actions while simultaneously providing the architectural framework which supports the creation of an immutable record of events.
For any distributed system, achieving a universal state is a significant challenge. Centralized systems, such as the global financial market, approach this challenge by deferring the responsibility of maintaining an up-to-date version of history to a single party. While this approach has its advantages, it comes with all the challenges that are inherent to any trust-based model.
Decentralized systems, like Bitcoin, approach the challenge by requiring its users to both create and preserve history. Decentralization is essential in the context of cryptocurrencies as it ensures that the network stays secure. If a network is dependent on a single party for an action, then it also has a single point of failure.
Nakamoto preemptively ensured that a scenario like this would not be possible for Bitcoin as he ensured that every user would have access to the entire transactional history of the network. When a user connects to the Bitcoin network and creates a node, they must first sync up with the entire blockchain, thereby downloading the entire ledger. Only after this point can the node amend the ledger by adding new transactions to the blocks. This is made possible by a combination of time-stamping and the POW algorithm.
Moreover, in conjunction with digital signatures, POW provides a mechanism through which the network can remain secure from malicious parties within the network. Managing the actions of independent parties is another challenge faced by distributed systems. Just as in regular society, each party has personal convictions and considerations which drive their actions. Thus in a distributed network, the challenge is to design a network that incentivizes the group to work in concert.
In crypto-economics, this is achieved through a delicate balance of incentives and punishments. POW curiously works as both. Hardcoded into its design, there will only ever be 21 million BTC in existence. New units of the digital currency come into circulation through the mining process. This is where nodes lend their computation power to validate the transactions sent over the network and in exchange they are entitled to a portion of the block rewards. Only by participating in the network as a miner can a party be entitled to the block rewards. Thus, in this way, those within the network are working together to secure the network albeit with their own selfish considerations in mind.
Lastly, POW is a powerful disincentive for malicious actions. In the Bitcoin network, there are two classes of parties, the miner and user. However, as we have shown above, it is in the interest of miners that they work in accordance with the rules of the network if they are to win the block reward. Because each action requires significant computational resources before it can be added to the blockchain, users are not likely to engage in activities like double spends.
As referenced earlier, POW is the most widely used consensus mechanism because it is considered one of the most robust, durable and reliable algorithms. Due to its use within the world’s most valuable digital currency, it has proven itself and holds a respected spot as far as consensus algorithms go. Other notable cryptocurrencies that employ POW include Litecoin, Dash, and Bitcoin Cash.
While POW is very effective in securing networks, it is not without its challenges. Arguably, the biggest concern is the enormous energy consumption associated with the mechanism. In the initial days, the energy required by the Bitcoin network was small. However, as the user base grew so did energy requirements. This is a by-product of the design. As both the network and the size of the ledger grows, more energy must be expended to download and sync the ledger as well as to validate the transactions.
POW has been criticized because a number of smaller networks that employ the algorithm have fallen victim to a 51 percent attack.
What is 51% attack?
A 51 percent attack refers to a malicious event where a majority group of miners colludes to take over the network. By pooling their computational resources, the group can then amend the ledger and commit double spends, steal units of the cryptocurrency or otherwise render the ledger untrustworthy.
In the early days of the cryptocurrency sector, many postulated that 51 percent attacks were only theoretical and would be financially infeasible. However a number of digital currencies, each having the distinction of not being sufficiently decentralized, have fallen victim to the attack vector.
Additionally, the threat of this attack vector is growing increasingly larger as ASICs continue to be deployed. ASICs promote centralization in a number of ways. First, the knowledge required to design and manufacture these machines is not readily available. As is stands, the majority of ASICs in circulation are manufactured in China. Some critics believe this already constitutes a centralization. However, the more dangerous centralization is the fact that ASICs are expensive and are only available to those able to pay the high premium.
As a result, only large scale miners or high-net-worth individuals can access ASICs. In the meantime, the regular user, armed with only a Central Processing Unit (CPU) or Graphics Processing Unit (GPU), can no longer effectively participate within the network.
How Much Energy Does the Bitcoin Network Consume?
According to the Digiconomist, the Bitcoin network consumes 73.12 TWh of electricity per year. For reference, this is the same amount sponsored by European country Austria annually.
Additionally, validation of the transactions sent over the Bitcoin network results in the emission of 34.73 Mt of Carbon dioxide (CO2). CO2 is one of the most common greenhouse gases and is an important metric for assessing the carbon footprint of a particular undertaking. For reference, the Bitcoin network’s average annual carbon footprint is comparable to that of Denmark. Lastly, the electronic waste created by bitcoin and its users comes to 9.96 kt, a value akin to the e-waste generation of Luxembourg.
To better understand the immense pressure the Bitcoin network puts on global energy resources, it may work better to consider the metrics for a single transaction sent over the Bitcoin network.
The carbon footprint of one transaction is 292.92 kg of CO2. On its own the value does not seem significant but when the comparison is made, revealing that this CO2 emission is equivalent to the carbon footprint of 732,291 VISA transactions. Watching 48,819 hours of Youtube will result in the generation of a similar amount of CO2.
A single transaction sent over the Bitcoin network consumes 616.67 kWh of electrical energy. The electrical energy expended to broadcast and validate only one bitcoin transaction can power the average U.S. household for a period longer than twenty days.
Lastly, the electronic waste that results from one transaction is 84.00 grams, which is similar in weight to 1.29 ‘C’-size batteries or 1.83 golf balls.
What is important to note for the Bitcoin network, is that energy consumption is linked to the number of user transactions over the network as well as the value of the digital currency. That means that if the bitcoin price sees a rally, we are more likely to witness larger amounts of energy expended by the network.
This feature is by design, controlled in part by the difficulty adjusting algorithm embedded in the Bitcoin protocol. The Bitcoin network is designed to adjust to changing user dynamics to maintain a relative equilibrium in terms of mining difficulty. However, this also has a spillover effect on the amount of energy required to successfully validate a transaction. The larger the number of people connected to the network, the higher the hash rate. The higher the hash rate, the more energy is needed.
Christopher Bendiksen, head of research at CoinShares, a blockchain and digital currency analytics firm explained the correlation stating:
“We fundamentally don’t know how high the price of bitcoin will go. If the bitcoin price goes up by 10x, you would expect the energy consumption of the network to also go up by 10x.”
In other words, the energy consumption of bitcoin, and other POW-based blockchains, increases as the price grows, in direct proportion.
‘Bitcoin energy consumption’ is the first part of our series in which we put the energy consumption of blockchains under a microscope.
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