Bitcoin turned eleven years old last year. In that time, it has proved revolutionary because it ignores the need for modern money’s institutions to authenticate payments. Instead, Bitcoin depends on cryptographic techniques to prove identity and authenticity, which consumes high levels of energy.
However, the price to pay for all of this innovation is a high carbon footprint, created by Bitcoin mining.
Fundamental to that mining process is a peer-to-peer network of computers, referred to as validators, who perform Proof of Work. In essence, this involves computers solving computationally-intensive cryptographic puzzles that prove blocks of transactions, which are recorded in a public asset ledger, known as a blockchain. This ledger is publicly viewable by all computers, which helps the system achieve consensus in an unreliable network of participants.
Validators are called miners because the computer, or node, that successfully verifies one of those blocks is rewarded with “mined” Bitcoin. Thus, mining is also the process by which Bitcoin adds new coins to the network.
But these processes consume a vast amount of power.
The energy costs of mining Bitcoin, it has been estimated, now exceed the costs of mining actual metals.
However, both the study in Nature and the team in Hawaii make assumptions about the means of energy generation. In the light of the recent disturbing UN 1.5°C Report, humanity would be wise to act on the recommendation for an “unprecedented shift in energy systems”. The hope is that such a shift towards large-scale renewable energy does occur, thus invalidating the assumptions made in those papers.
Nevertheless, concerns over Bitcoin’s energy consumption remain, so Ethereum, another cryptocurrency, is investigating a more energy efficient consensus algorithm known as Proof of Stake. This method differs from Proof of Work because miners on this network use their economic stake to prove transactions and therefore, they are not performing energy intensive calculations.
That introduces some complications – not least, how to make sure that people in this network act honestly, as they would have nothing to lose by behaving dishonestly? Ethereum’s proposed solution is to introduce penalties through measures such as penalizing miners for simultaneously producing blocks on two versions of the blockchain. After all, only one of those blockchains is valid.
Bitcoin’s Proof of Work overcomes such problems implicitly because it includes natural penalties since miners have to expend energy to prove transactions.
In economic game theory, a Nash Equilibrium is said to be reached when a system stabilizes because no one gains by changing strategy from that which produces the stable state. Since Bitcoin rewards are given to miners only if their blocks help forms the valid Bitcoin blockchain, the most profitable outcome, or the Nash Equilibrium, is for each miner to act in consensus with the majority.
As a result, Bitcoin’s Proof of Work algorithm has proven effective, despite the excessive energy consumption.
Bitcoin’s inbuilt energy demand makes it a superior cryptocurrency, for now.
A price worth paying?
In essence, my work looks at whether blockchains are a rebuttal to the hierarchies of capitalism. If Bitcoin promotes a way of organizing that does not depend on capitalist consumption, might that indirectly drive down society’s energy use and help lessen its environmental impact? After all, consider the recent alarming WWF report, which all but blamed capitalism for the dramatic decline in wildlife populations. We need alternatives.
Perhaps, then, Bitcoin’s revolutionary offer, as an alternative to capitalism, means its energy use is a price worth paying? That argument holds some weight if it drives down consumption in other areas of society because Bitcoin mining is not the primary driver behind climate change. However, even then, given the urgency of environmental degradation, if we continue to produce energy in a manner that creates so much warming CO₂, that argument may provide scant consolation.
Perhaps alternative consensus schemes, such as Ethereum’s Proof of Stake, provide part of the solution. However, Bitcoin or not, if humankind is to avoid climate catastrophe, we need to take urgent action and find solutions that produce clean, sustainable energy. If we do that, humanity will benefit, and as a by-product, so will Bitcoin.
In if energy consumtion is something you care about, you should read this