Does Elon Musk and Tesla Plan to Use BCH? -- BCH Energy Consumption Per Transaction Calculated

As probably everybody in the cryptoverse knows by now, Elon Musk announced on Twitter that Tesla will no longer accept BTC payments for their cars. Here is a screenshot of the message:

As you can see, the official reason given are concerns about fossil fuel usage for BTC mining.

While several theories are circulating about the real reason -- maybe Elon wants to get back at Melvin Capital and Citadel who used to short Tesla stock -- maybe too many customers complained about the slow, expensive BTC transactions -- in this article we will take the statement literally. Therefore, we assume that the concerns are specific to BTC and that Tesla plans to accept other cryptocurrencies for payments in the future.

What could this other cryptocurrency possibly be?

Dogecoin maybe? Elon Musk has been pushing Dogecoin a lot on Twitter and there are certainly news that Elon Musk contacted Dogecoin developers with the goal of reducing its transaction costs from an average of $0.40 to below 1 Cent. In addition, the transaction speed is supposed to be improved.

However, there is a coin which already has achieved these exact goals and it goes by the ticker symbol BCH.

But what about the energy efficiency of BCH?

Could BCH be the coin which Tesla refers to in their statement?

Please pay close attention to the last sentence of the above screenshot which Elon Musk shared on Twitter. It states that Tesla is already looking into a cryptocurrency which can perform transactions with less than 1% of BTC's energy consumption per transaction.

The measure of interest for Tesla is therefore energy per transaction.

Is Tesla looking into BCH?

Let's calculate if that is possible! For that, we will calculate the energy expended per transaction for a BCH and for a BTC transaction -- and divide one by the other.

Here are some basic facts and some reasonable assumptions which we use for our calculations:

• BCH currently has a blocksize limit of 32 MiB. BTC has a blocksize limit of about 1.4 MiB -- taking SegWit into account.

• Both BCH and BTC use the SHA256 algorithm for mining blocks.

• Therefore, BCH and BTC miners are identical -- same hardware, same power consumption, same energy mix of fossil fuels in the generation of the electricity which powers the miners.

• At least a significant fraction of the available miners will mine the coin which is most profitable to mine at the time and switch back and forth between BCH and BTC (or other SHA256 coins).

• Miners will mine a certain coin if and only it is profitable for them to do so.

The last point is the most important for our calculations.

Miners will mine a certain coin if and only it is profitable for them to do so

That means that the block rewards determine how many miners will mine a coin at a given time.

Why is that?

If the block rewards are much higher than the electricity cost, then it is profitable to purchase new miners and to run them. Someone somewhere will probably do that. This process will be repeated until it is not profitable any more to invest into new miner hardware.

On the other hand, if you had to pay more for electricity than what you can reasonably expect to receive in block rewards, you're better off switching to another coin. And if there is no alternative coin which can be mined profitably, you will probably turn (a part of) your mining equipment off and wait until the block rewards are higher -- or until other miners also switch their equipment off and the difficulty is adjusted in order to maintain blocks every ten minutes. If that happens, you might be able to mine profitably again.

The key point of these statements is:

The block reward determines the electricity consumption.

How can we calculate the block reward?

That's easy:

blockReward = price*coinbase + txPerBlock*avgCostperTx

This equation means that the miner which finds a block first, gets a certain number of new coins (this is called the coinbase and it is currently 6.25 per block, both for BCH and for BTC). The market value of the coinbase is the number of coins multiplied by the current price per coin. In addition to the coinbase, the miner also gets the transaction fees -- which can be approximated by multiplying the number of transactions in the block with the average fee per transaction. In case of BCH, we assume $0.001 per transaction. For BTC, we mostly go with $5 per transaction, but we also study how the fees influence the results.

The important point is that we can calculate the block rewards for both BCH and BTC. With our reasonable assumptions from above, we can assume that the block rewards are directly proportional to the electricity costs -- the miners may literally sell their rewards in order to pay for the electricity they consumed and for other expenses.

As we assume that both BCH and BTC miners use a similar energy mix for their electricity generation and have similar additional costs, we can estimate the energy expenditure and the fossil fuel consumption of the miners.

As we only need to look at the ratios, most factors -- such as percentage of reward spent on electricity and percentage of fossil fuel used to generate the electricity -- cancel out. And therefore, we can just divide the block reward that BCH offers miners to the block reward that BTC offers them.

Therefore, we calculate the following two ratios:

ratioBCHBTC = blockRewardBCH/blockRewardBTC

ratioBCHBTCPerTx = rewardPerTxBCH/rewardPerTxBTC

and we get to the reward per transaction by dividing the block reward by the number of transactions in the block.

rewardPerTx = blockReward/txPerBlock

These equations are just given here for people who would like to double-check my calculations. If you are lost by the Math, don't worry. We will discuss every important conclusion in an easy way, so that you will get the take-away message -- even if the equations confuse you.

Let's have a look at the results

In the following I have created several plots to figure out whether BCH can achieve an energy consumption of less than 1% of BTC's energy per transaction -- which is exactly the statement from the above tweet.

I have made several calculations in which we explore different scenarios. For the next two plots, we make the following assumptions:

1. We assume both BCH and BTC blocks are always full. For BTC we assume an average of 2,000 transactions per block. For BCH we use the maximum blocksize of 32 MiB to calculate the maximum number of transactions per block with the following equation:

   txPerBlockBCH = txPerBlockBTC*blocksizeLimitBCH/blocksizeLimitBTC = 2,000*32/1.4 = 45,714

2. We study the effect that the BCH price has on by looking at a range from $200 to $50,000 per coin.

3. We keep the BTC price constant at $50,000.

4. In addition, we repeat the calculations for BTC average fees of $1, $5, $10, $20, $50 and $100 per transaction and we look at all these results in the same plot.

First, let's compare the block rewards for BCH and BTC. We look at the ratios:

As you can see, when the BCH price approaches the BTC price of $50,000, the block rewards are almost identical for BTC average transaction fees below $10.

Is this bad news for BCH?

No, because what helps BCH is the higher number of transactions per block -- if the BCH blocks are full.

Let's now look at the relevant ratio of rewards per transaction -- rather than per block:

This plot is pretty good news. The BCH energy expenditure per transaction is below 1% of BTC if we are below the red dashed line. This is the case if the BCH price is below $10,000 -- even if the BTC average fees were as low as $1. For higher BTC fees of $100, BCH transactions are below the 1% line until BCH reaches a price of almost $20,000. Remember that we assumed full BCH blocks for this -- and we assumed a BTC price of $50,000.

What happens if the BTC price changes?

For the following plots, we vary the BTC price between $10,000 and $60,000 and keep the average fees for a BTC transaction fixed at $5. Again, we assume full blocks for BCH and for BTC. And we study the effect that an increase in BCH price has on its mining energy efficiency.

Again we can see that the BCH block reward is slightly below the corresponding BTC block reward. For instance, the blue line represents BTC at $10,000 per coin. If we look at the BCH = $10,000 mark, we see that the ratio is slightly below 100%.

Another observation is that the BCH block rewards become larger than the BTC block rewards if the BCH price significantly overtakes the BTC price.

The good news is again that the electricity expended per transaction is significantly lower for BCH than for BTC. The BTC fees are not thee main reason for this. The main reason is actually the higher block size limit -- and that we assumed full BCH blocks.

So far we have assumed that the BCH blocks are always full.

What if the BCH blocks are not full?

In the following study, we calculate the energy efficiency of BCH compared to BTC when the BCH blocks are not full. For the following two plots, we vary the transactions per block from 400 to a full block with 45,714 (see above for the explanation and calculation of this number).

And we vary the BCH price from $200 to $50,000. We assume the BTC price is fixed at $50,000 again.

Let's look at the block rewards first:

As you can see, when the BCH and BTC prices are identical at $50,000, the difference in fees of $0.001 for BCH and $5 for BTC make only a small difference.

What we can also see is that the BCH block reward is pretty much constant. The $0.001 fees per transaction are negligible in comparison to the value of the coinbase. This is true even for low BCH prices of $200 per coin.

Let's now take a look at the energy expended per transaction for BCH:

Have a look at the y-axis. It goes up to 500% -- meaning that in this particular case where BCH is worth as much as BTC and the blocks are pretty much empty, the BCH energy efficiency is far worse than BTC's. This may look and sound shocking at first. Especially when you try to spot the red dashed line. This line is not actually at 0. It is our 1% line once again.

What can we learn from this plot?

If the BCH blocks are far from being full and if the BCH price is high, then BCH is less energy efficient than BTC with full blocks!

Is this bad news?
-- Yes. And no.

Let's investigate further and zoom in. In the following plot, we start now from 100 transactions per BCH block. The upper end of the x-axis represents full BCH blocks:

This plot looks much better already -- even though it is the exact same as the one before. Now, we just focus on the part which is relevant.

We see that BCH reaches an energy per transaction of less than 1% of BTC if the BCH price stays below $10,000 and if all blocks are pretty much full.

For a BCH price of $5,000, the 100-fold energy efficiency is reached at around 20,000 transactions per block. And for BCH prices around $2,000, this efficiency is reached with less than 10,000 transactions per block.

You may ask:

What if we changed the BTC fees from $5 to $100?

The higher BTC fees make it easier for BCH to fall below the 1% line. That means that less transactions per block are required in order to beat BTC's energy efficiency by a factor of 100.

Note however, that at price parity -- when both BCH and BTC are worth $50,000 per coin -- even full BCH blocks don't fall below the 1% line. A block size limit increase would be necessary and the blocks would have to be filled to a high degree with real transactions -- unless we find further solutions to improve the energy efficiency.

Spoiler alert: I have an idea on how to improve the energy efficiency and on how to offset any carbon emissions. More on that after the summary.

Summary

In this article, we have studied the energy efficiency of BCH in comparison to BTC. We found that BCH transactions are a factor of 100 or even more energy efficient as long as the blocks are well-filled and as long as the BCH price is lower than the BTC price. High BTC fees are also working to the advantage of BCH.

BCH achieves an energy expenditure per transaction of less than 1% in the scenarios that we studied despite being a proof of work coin with a SHA256 mining algorithm. Note that this is the exact same algorithm that BTC uses.

We saw that full big blocks lead to great energy efficiency improvements over BTC. However, if the BCH blocks are mostly empty and the BCH price is high, then the energy efficiency suffers significantly.

To answer the question from the beginning:

Is Tesla looking into accepting BCH?

-- Yes, that is certainly possible.

How can the energy efficiency of BCH be further improved? How can the carbon emissions be further reduced?

In the recent days after Elon Musk's tweet, I have heard several suggestions:

1. Switch BCH from proof-of-work to proof-of-stake.

2. Encourage or require the miners to use renewable energy sources.

3. Donate BCH in order to plant trees. The trees will offset the carbon emissions.

While these are certainly valid ideas which can be discussed, I believe that I have found a straightforward way to make BCH -- or any other proof-of-work coin -- a lot more green without switching to proof-of-stake. The solution could be implemented very easily and it could be effective immediately.

However, I believe that the idea has to be introduced with proper explanation of the possible criticism it may be faced with. And therefore, I will dedicate an entire new article to introducing it along with some explanations. I will publish this article as soon as possible. Stay tuned!

PS

In case you found a mistake, please don't hesitate to tell me about it in the comments or send me a message on Telegram. My username is MorgenTee. You can also find me here: https://noise.cash/u/MoreGainStrategies. I will happily send you the Octave/Matlab code I used to produce the plots.