Bitcoin is often reported as wasting vast amounts energy. But how much energy does Bitcoin actually consume? And is it justifiable?
The Electricity Cost per Payment
Let’s start by taking a look at Bitcoin’s power consumption.
On the 29th of September, 2018, Bitcoin mining ran at a hashrate of 55 EH/s, 55 Exa-Hashes per second1. The SHA256 hash function underlying Bitcoin’s proof of work mining algorithms is computed roughly 55,000,000,000,000,000,000 times a second across the globe (mostly in China). All this trying to capture the coveted 12.5 BTC reward paid out once on average every 10 minutes.
This hash-power can be achieved by roughly 6.4 million special Bitcoin mining computers called Antminer R42 outputting 8.6 GH/s per unit.
Each Antminer consumes 840 Watts around the clock in an ideal setting. In total that’s 5.4 Gigawatts of continuous power consumption. 5 Gigawatts is more than peak load of a city like Portland, OR, or equivalent to roughly 10% of the energy consumption of all of Germany3.
Bitcoin processes up to 3.5 transactions a second or up to 300,000 transactions a day. Per transaction, 1.5 Gigajoules of energy are used, or 0.4MWh. Assuming a cheap electricity cost of $0.10 / kWh, that’s $40 per transaction.*
Enough with the numbers. We’ve seen them before, and they’re clear.
BITCOIN IS A MASSIVE WASTE OF ENERGY.
Case closed. Bitcoin is a bubble, everyone is stupid, humanity is doomed. At least that’s what some people say.
Is there merit in this madness?
Bitcoin advocates strongly defend their proof of work mechanism that incentivizes this massive energy expenditure. Let’s explore 4 of their arguments.
- Same Old Story: Other systems waste just as much energy
- Technical: As with any new technology, we expect growing pains.
- Libertarian: A libertarian moral code commands no judgement on how others use their resources, i.e. there is no “waste”.
- Generated Value: Mining is worth the energy.
Argument 1: Same Old Story
The Same Old Story argument says traditional payment networks need vast amounts of energy too. Banks are run by employees, employees drive cars, those cars needed manufacturing, and so on… The energy costs behind banking are immense. These costs are hidden from view, so we don’t immediately appreciate the energy waste in question.
The Same Old Story argument suggests that Bitcoin’s energy waste isn’t unique, it’s just clearly visible.**
Quantitatively, this argument is difficult to carry forward. It seems likely that a company like VISA uses less energy per transaction than Bitcoin. And VISA payments carry a substantial fee, meaning most of the transactions are economically significant; the same can’t be said for almost fee free Bitcoin transactions.
With that in mind, I believe the Same Old Story defense of Bitcoin’s energy waste is a weak one.
Argument 2: Technical
Technical rebuttals to Bitcoin’s waste of energy argue that the waste is temporary.
The first cars wasted petrol and polluted the air to an enormous extent. Modern cars, by comparison, are significantly more efficient. The first computers were also slow and used tons of electricity. Modern smartphones now run incredibly complex software, and a small battery powers them all day long. Subsequently, it could be argued that during Bitcoin’s first years we expect to see a vast amount of energy consumption. But later versions ought to be orders of magnitude more efficient.
How can Bitcoin achieve energy efficiency? Here we run into the fundamental human dilemma: we can’t predict the future. But we do know the Bitcoin mining reward is halving every 4 years. Assuming constant Bitcoin price and transaction fees the energy consumption should half every 4 years as well. But the price of Bitcoin or the transaction fees might compensate for these halvings. Without change, there is no clear path towards greater energy efficiency.
Maybe the Lightning Network combined with side chains will solve the problem. Not by reducing the energy requirement, but by making Bitcoin more useful. For example, these technologies enable more transactions, reducing the cost per transaction to perhaps less than $0.01. None of these technologies are production ready.
Consequently, I believe the Technical defense of Bitcoin’s energy waste is plausible but has yet to be verified.
Argument 3: Libertarian
The Libertarian perspective is a simple free market argument: Is watching “Keeping Up with the Kardashians” a waste of energy? Is digging up rocks, and looking for tiny pieces of diamond in them, to then sell to a young hopeful to-be-wed at a massive price, a waste of energy? Is Bitcoin a waste of energy? It’s not for anyone to judge how others spend their time and money.
Free markets, with free actors, are arguably the best organizational structure humanity has come across. Every person works to satisfy their own desires. One person’s trash is another man’s treasure – trading. Likewise, energy can’t be wasted. As long as it’s bought and sold on the open market and used by whoever bought it, that’s the most efficient use one could hope for.
There is no waste; the energy is put to its best possible use.
I believe the Libertarian defense of Bitcoin’s energy waste is logical. But, the free market can err in spectacular ways. The fact that a lot of energy is consumed without a clear benefit remains, even if one accepts this perspective.
Argument 4: Generated Value
The Generated Value argument on energy waste proclaims we are looking at the situation from the wrong angle. The energy isn’t used to confirm a certain number of transactions per second. The energy gives us something else:
An open, permissionless, censorship resistant, 100% uptime, instant, online settlement system.
Let’s unpack what this means by comparing how a traditional payment system works: PayPal.
|PayPal – transfer of $10||Bitcoin – transfer of 10 mBTC|
verified account to send or receive
no accounts, no identity, to send or receive
Sender or recipient can be blocked.
No one can stop a transaction.
PayPal owes $10 less to sender
PayPal owes $10 more to receiver
Sender owns 10 mBTC less.
Recipient owns 10 mBTC more.
PayPal transactions are debt-swaps secured by contracts between legal entities. The contracts are secured by the legal system of lawyers and courts of a country. The rulings of courts are ultimately secured by men with guns.***
In Bitcoin, there are no contracts, courts, or men with guns. A Bitcoin transfer changes real ownership of the asset, like a piece of gold changing hands. Bitcoin transactions are secured by hard mathematical rules. These rules are secured by the network of nodes. The status of the nodes is secured by miners. And the miners are secured by energy expenditure. Because you can’t cheat the universe out of energy, you can’t cheat in Bitcoin.
In essence, PayPal offers debt transfers through traditional governance institutions, while Bitcoin offers real ownership exchange through a new type of governance model.
Bitcoin is a new governance system, secured ultimately by energy expenditure.
The argument justifying the massive waste of energy is then simply: It secures a worldwide governance system.
I believe the Generated Value defense of Bitcoin’s energy waste is the one that packs the mightiest punch. The value Bitcoin offers – the functionality it provides – is unprecedented. We can’t put a fair price on a network with these properties. Perhaps the currency energy expenditure is actually cheap for this kind of service!
Is the Bitcoin power consumption wasteful?
We have seen that Bitcoin consumes a massive amount of energy per transaction, which is incredibly wasteful. We explored how this waste could be defended: Maybe it’s not that much more costly than other means. Maybe it’s just a technological quirk that can be worked out. Maybe it’s not fruitful to paternally evaluate when energy is spent wastefully. Or maybe energy per transaction is the wrong metric, energy for governance is more appropriate.
Bitcoin does consume a huge amount of energy – only the future will tell if it was worth it.
* A shortcut to calculate the cost per transaction: Assume miners are operating at marginal profitability close to zero, as they necessarily tend towards. The value of Bitcoin mined each block must be just a tad more than the energy costs of creating it. At currently 12.5 Bitcoin block reward valued at $6,000 each, we get $75,000 of energy costs. For a block containing around 2,000 transactions, that’s $37.50 per transaction.
Smart ideas are likely copied from someone else.
Mistakes are all my own.