In June this year, a large Bitcoin transaction totalling 48,500 BTC was sent across the network for just three Satoshis per byte. This equates to a Bitcoin transaction worth just under $300 million being processed for around $0.04.
This transaction is an example of how cheaply large sums of value can be transferred globally. One use case for Bitcoin certainly is its ability to seamlessly send value quickly and cheaply in large amounts. This convenience, however, does come at an often overlooked environmental cost.
The Bitcoin network expends a massive amount of energy. Although the exact amount of energy consumed is difficult to accurately calculate, it can conservatively be estimated that Bitcoin mining consumes around 20 – 30 terrawatt hours (TWh) annually. This amount of energy is comparable to the annual energy consumption of a mid-sized country like Ireland or Denmark.
The size of Bitcoin’s energy requirement is sometimes used by economists and environmentalists to question the scalability and practicality of Bitcoin. Although hundreds of millions of dollars can be transferred for pennies using Bitcoin, it can be argued that these extremely cheap fees are outweighed by the environmental costs.
However, as outlined in previous articles, Bitcoin transactions contain unique properties which are not offered by the legacy financial system. Bitcoin transactions are immutable and censorship resistant. These characteristics are extremely important in certain circumstances, and therefore must bear additional costs.
Waste of energy?
One critic of Bitcoin commented about the seemingly waste of energy on Twitter:
If Bitcoin was a country, it would have the 65th highest global energy consumption. One single transaction consumes as much energy as 9.6 US households for an entire day.
To which well known Bitcoin advocate Andreas Antonopolous replied:
Um no, immutability is not a waste of energy. Christmas lights are a waste of energy.
Actions vital to society require energy consumption. National defence requires a massive use of energy. So does food production. All the different components which comprise the internet, such as the operation and cooling of Youtube and Ebay servers so that we can share cat videos and buy bags of Justin Bieber’s hair, all require a huge consumption of energy. In a similar way, the securing and maintaining of the world’s largest decentralised public ledger requires energy consumption.
Bitcoin vs Banks
As an interesting side note, unofficial calculations comparing the consumption of energy by the Bitcoin network compared to the legacy banking system found that banks actually use far more energy that Bitcoin. There are approximately 30,000 banks in the world, each with computer servers to run, branch offices to heat and cool, and ATMs to maintain. Adding together all these components, broad estimates totalling 100 terrawatt hours were approximated to be burned by banks, compared to Bitcoin’s 20 – 30 TWh. On top of this, it’s estimated that banks mail 50 billion pieces of paper annually, further contributing to environmental pollution.
In any event, why does the Bitcoin network need to consume so much energy to simply send ones and zeros across the internet? Well simply, Bitcoin transactions are secured by a process called mining. Bitcoin miners use computational power to verify transactions and to secure the network. This is done by adding transaction records to Bitcoin’s public ledger of past transactions, known as the Blockchain. A massive amount of computer processing power is needed to secure the network and keep the Blockchain consistent, complete, and unalterable. The more processing power that is used, the more secure the network is from digital attacks.
The rate at which the Bitcoin network is growing is however, a serious concern. If the current growth rate of the Bitcoin network continues, then by the end of this year, it’s estimated that Bitcoin energy consumption will be responsible for 0.3 percent of all energy consumed in the world. What’s scary is this current growth rates implies that the network will consume as much electricity as the entire world does today by 2020.
This unsustainable statistic is a worry, but it fails to factor in the mining difficulty equation. The difficulty in mining Bitcoin rises and falls depending on how many miners are actively mining on the network. In other words the software that mines Bitcoin is designed so that the difficulty in mining new Bitcoin varies depending on how many people are on the network mining for Bitcoin. As more miners attempt to mine Bitcoin, it becomes less profitable for everyone involved, until it eventually becomes unprofitable altogether. At this point, miners stop mining, reducing the overall energy consumption. So in a theoretical world where the majority of the world’s energy is being burned to mine Bitcoin, energy costs will increase to such a level, combined with the mining difficulty also increasing, to make mining unprofitable.
Furthermore, miners trying to reduce their energy costs are continuing to seek out cheaper and more efficient sources of energy. Many Bitcoin miners are now powered by geothermal and hydroelectricity. This creates an interesting side effect in the growth of Bitcoin – the adoption of cheap, sustainable clean energy. So it’s possible, and even probable, that in the future a new form of clean, renewable energy, perhaps even free energy, will be created and adopted by the world as a byproduct of Bitcoin mining.