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Bitcoin has seen near exponential growth in the twelve years since it was created. What started out as a niche interest of cypherpunks and computer programmers has turned into a global phenomenon with a wildly diverse group of users, from citizens in third-world countries like El Salvador to mainstay entities like massive banks and corporations. Due to the design of the technology on which Bitcoin is built (i.e., blockchain), the massive increase in its use has also led to a commensurate increase in the amount of energy used to power the Bitcoin network. In the simplest of terms, the relationship of Bitcoin’s energy growth to its useability can be visualized like this:
Use goes up → Price goes up → Mining goes up → Energy footprint goes up
The above relationship has played out in real time throughout Bitcoin’s life cycle. The network started out small, with only a handful of users. As more users joined the network, the demand to buy and use Bitcoin increased, which drove the price higher. As the price increased, more people were incentivized to mine Bitcoin, which is the only way to generate new Bitcoin. And as more people joined their computers to the network to mine Bitcoin, more energy was used to power their computers.
The Bitcoin network these days uses a huge amount of energy, so much so that it’s common to hear critics and media outlets compare Bitcoin’s energy footprint to that of small countries. This has recently clashed rather significantly with various ESG (i.e., Environmental, Social, and Governance) initiatives being put in place by companies and governments around the world:
Elon Musk indicated in May that Tesla would no longer accept Bitcoin as payment for its vehicles due to concerns about the environmental impact of Bitcoin mining.
China outright banned cryptocurrency mining within its borders in June. As a result, miners of all sizes have fled the country in search of more accommodative locales in which to re-establish their businesses.
While the above are examples of rather drastic actions taken against Bitcoin’s energy usage, they illustrate well the concern that many entities have regarding Bitcoin’s environmental impact. However, truly understanding the level of that impact and, perhaps, whether Bitcoin’s benefits are worth that impact, requires us to understand at a deeper level the part of Bitcoin’s technology driving its energy usage.
The Proof is in the Work
We’ve already covered blockchain rather extensively in another article. However, not all blockchains work the same way to confirm transactions and move data around the network. This means that not all blockchains use the same amount of energy.
Bitcoin’s blockchain relies on a mechanism called Proof of Work (PoW) to achieve consensus, or in other words, to help all network users identify and agree on which transactions are correct. Reaching consensus in this way means that the Bitcoin network is able to operate in a decentralized manner, meaning that a trusted intermediary like a bank or a government isn’t needed to enforce the network’s rules.
PoW in Bitcoin mining essentially comes down to each of the computers on the network making billions of guesses in order to correctly identify a random number generated by the blockchain software. Since the required number is randomly generated, each participant in the network has to follow the same process to try to identify it. Thus, the only way to increase your chances of finding the random number before anyone else is to use a more powerful computer or plug more computers into the network.
As more computers join the network, and as those computers become more powerful, the security of the entire network increases. This is because the main risk to a blockchain is that a bad actor will gain enough computing power to regularly identify the randomly generated number and then insert incorrect transactions into the blockchain. A pair of examples may help to illustrate how more computers on the network leads to more security:
If the Bitcoin network has five computers mining transactions, and then a bad actor joins five computers of their own, the bad actor now has a 50% chance to arrive at the random number before the rest of the network. In this scenario, the bad actor has a solid chance to manipulate the blockchain.
If the Bitcoin network has ninety-five computers mining transactions, and the same bad actor joins their five computers to the network, the bad actor has only a 5% chance of arriving at the random number before anyone else. In this scenario, it’s possible, but rather unlikely, that the bad actor will be able to harm the blockchain.
Given the commensurate increase in Bitcoin’s security as the nuber of powerful computers mining on the network goes up, it makes sense that the value of Bitcoin has risen into the tens of thousands and the value of transactions on its network has risen into the hundreds of billions. But as we discussed above, that increased computing power has led to increased energy usage. And governments, companies, and individuals have taken notice.
Going Green the Bitcoin Way
You won’t have to look too far in order to find a politician, media personality, or other critic suggesting that Bitcoin and other cryptocurrencies should just be banned outright so as to eliminate their environmental impact. However, at this stage of cryptocurrency’s development, it is a foregone conclusion that cryptocurrencies are here to stay. Tens of millions of individuals and companies have invested significant amounts of time and money because they understand and believe the value proposition offered by cryptocurrencies.
That said, there are a number of efforts underway around the world to ensure that Bitcoin’s environmental impact is less than the sum of its energy usage:
Bitcoin miners are actively switching to renewable energy sources like solar, wind, and hydro power that have minimal impact on the environment and are typically cheaper than more harmful energy sources like coal and oil. The miners are heavily incentivized to use the cheaper renewable energies since one of the primary drivers of mining profit is the cost of energy to power their mining machines.
Technological advancement is actively driving a reduction of environmental impact tied to energy consumption, including for Bitcoin and other cryptocurrencies. It’s true that more powerful computers typically use more energy, but as technology improves, we are able to get more power out of computer chips that use less energy on average.
As an example, the first digital computer used over 100 kW of electricity and was able to make a calculation every 30 seconds or so. By comparison, a specialized computer used for mining Bitcoin uses ~3 kW of electricity and is capable of making billions of guesses per second.
In May, a group of eight large Bitcoin miners formed a group called the Bitcoin Mining Council. The Council released a report in early July indicating that its participants were using sustainable power sources in 67% of their mining operations. The Council’s goal is the following:
To standardize energy reporting, pursue industry ESG goals, & educate + grow the marketplace.
Bitcoin’s Environmental Footprint is on the Decline
It’s true that Bitcoin’s blockchain uses a significant amount of energy. Many proponents of the network, including myself, will contend that Bitcoin’s benefits are worth the amount of energy expended. However, even discounting the cost-benefit analysis of Bitcoin’s energy usage, it is apparent throughout the industry that Bitcoin’s use of renewable energy is on the rise and its negative impact on the environment is on the decline. Anyone who argues otherwise is either accidentally or intentionally ignoring reality.
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