Bocconi Students for Sustainable Finance

Bitcoins consume more energy than Argentina!

In mid-February, the Cambridge Center for Alternative Finance published the Bitcoin Electricity Consumption index, an online tool assessing Bitcoin’s consumption of electric energy to that of countries.

 The evaluation was conducted calculating the total USD mining revenues, then estimating the part spent on electricity and average cost per KiloWatt (0.05$) and finally converting the approximated total cost of electric energy to consumption.

The research’s result is alarming, in fact with an estimated consumption of 121.36 TeraWatt per hour, global Bitcoin mining utilizes more electric energy than countries such as Argentina (121 TWh) and the Netherlands (108.8TWh)

But to understand the reasons behind this massive consumption, it is critical to understand what the process of “mining” involves.

The word, used to draw a connection with gold mining, is related to “the proof-of-work” system through which transactions involving Bitcoins are verified. Every eight minutes, a batch of transactions is released and attached as a new block to the Blockchain, i.e. the unique and immutable record of all the transactions performed. The miners are the computers constantly tasked with preparing the next batch.

Proof-of-work is the system regulating new blocks’ addition of the among the millions created by the miners worldwide. The chosen one comes from the first miner producing a valid block,  solving the highly complicated mathematical problems required by the protocol.

The computer is then rewarded for the operation with payment in Bitcoins.

The process of producing a valid block is largely based on a trials and error approach, with miners making numerous computational attempts every second to find the correct value for the mathematical problem posed by the Protocol.

So mining can be compared to a lottery where the probability of success is positively correlated to the number of computers owned and their speed. In the last years, the growing number of transactions and the surging value of the currency led to entrepreneurs storing thousands of powerful computers in warehouses placed in cold regions like Island, Russia or China.

This phenomenon explains where the sensational energy consumption comes from: the more transactions performed the more blocks to add, which implies more problems to solve, and consequently the need for more powerful and faster computers, which then require a massive amount of energy to be kept operating and cooled. 

To even worsen the landscape, Digiconomist released its own Bitcoin Consumption Index Chart. In the attached article, they stressed that not only the electric energy consumption is problematic, but also that the source of  energy used  is of the worst type.

The analysts found out that the weighted average of the global Bitcoin Network, which also considers those countries where electric energy is “greener”, amounts to 475 gCO2eq per KWh consumed.

Fortunately, a less impactful alternative to proof-of-work has been found: proof-of-stake.

As its creator, the 27 years old prodigy Vitalik Buterin puts it in his site, proof-of-stake does not consume large quantities of electricity to secure a Blockchain. In fact, coin owners create blocks rather than miners, thus not requiring power-hungry machines to produce as many ashes as possible to gain the reward. The cryptocurrency created by Buterin, Ethereum, is currently moving from the proof-of-work to the proof-of-Stake system, and Bitcoin could do the same. The downside is that there are many different versions of the proof-of-stake protocol and none has fully proven to be secure yet.

It is clear that cryptocurrencies are more than just a speculative asset heated by a fad: major central banks, the Fed, the ECB and the Chinese and Russian governments are all working toward the creation of digital currencies based on the Blockchain; nevertheless, it is of paramount importance that the sustainable problem is solved before the system becomes prevalent, as the widespread adoption of the system could have a major environmental impact.

Author: Andrea Pavese

RELATED

Bitcoins consume more energy than Argentina!

In mid-February, the Cambridge Center for Alternative Finance published the Bitcoin Electricity Consumption index, an online tool assessing Bitcoin’s consumption of electric energy to that of countries.

 The evaluation was conducted calculating the total USD mining revenues, then estimating the part spent on electricity and average cost per KiloWatt (0.05$) and finally converting the approximated total cost of electric energy to consumption.

The research’s result is alarming, in fact with an estimated consumption of 121.36 TeraWatt per hour, global Bitcoin mining utilizes more electric energy than countries such as Argentina (121 TWh) and the Netherlands (108.8TWh)

But to understand the reasons behind this massive consumption, it is critical to understand what the process of “mining” involves.

The word, used to draw a connection with gold mining, is related to “the proof-of-work” system through which transactions involving Bitcoins are verified. Every eight minutes, a batch of transactions is released and attached as a new block to the Blockchain, i.e. the unique and immutable record of all the transactions performed. The miners are the computers constantly tasked with preparing the next batch.

Proof-of-work is the system regulating new blocks’ addition of the among the millions created by the miners worldwide. The chosen one comes from the first miner producing a valid block,  solving the highly complicated mathematical problems required by the protocol.

The computer is then rewarded for the operation with payment in Bitcoins.

The process of producing a valid block is largely based on a trials and error approach, with miners making numerous computational attempts every second to find the correct value for the mathematical problem posed by the Protocol.

So mining can be compared to a lottery where the probability of success is positively correlated to the number of computers owned and their speed. In the last years, the growing number of transactions and the surging value of the currency led to entrepreneurs storing thousands of powerful computers in warehouses placed in cold regions like Island, Russia or China.

This phenomenon explains where the sensational energy consumption comes from: the more transactions performed the more blocks to add, which implies more problems to solve, and consequently the need for more powerful and faster computers, which then require a massive amount of energy to be kept operating and cooled. 

To even worsen the landscape, Digiconomist released its own Bitcoin Consumption Index Chart. In the attached article, they stressed that not only the electric energy consumption is problematic, but also that the source of  energy used  is of the worst type.

The analysts found out that the weighted average of the global Bitcoin Network, which also considers those countries where electric energy is “greener”, amounts to 475 gCO2eq per KWh consumed.

Fortunately, a less impactful alternative to proof-of-work has been found: proof-of-stake.

As its creator, the 27 years old prodigy Vitalik Buterin puts it in his site, proof-of-stake does not consume large quantities of electricity to secure a Blockchain. In fact, coin owners create blocks rather than miners, thus not requiring power-hungry machines to produce as many ashes as possible to gain the reward. The cryptocurrency created by Buterin, Ethereum, is currently moving from the proof-of-work to the proof-of-Stake system, and Bitcoin could do the same. The downside is that there are many different versions of the proof-of-stake protocol and none has fully proven to be secure yet.

It is clear that cryptocurrencies are more than just a speculative asset heated by a fad: major central banks, the Fed, the ECB and the Chinese and Russian governments are all working toward the creation of digital currencies based on the Blockchain; nevertheless, it is of paramount importance that the sustainable problem is solved before the system becomes prevalent, as the widespread adoption of the system could have a major environmental impact.

Author: Andrea Pavese