Is Bitcoin’s energy consumption a problem for the world?
A Quora question asked: Is Bitcoin’s energy consumption a problem for the world? Bitcoin’s energy consumption recently exceeded Argentina’s as a consequence of its ‘proof of work’ model, and yet it still carries almost 0% of the world’s financial transactions of goods and services by transaction count. Iran recently suffered blackouts and smog — Bitcoin mining to blame?
Cause for concern for the environment? As I hope to convince you, possibly not. At least, not for the long term. Although … if my reasoning is right, and you’re emotionally invested in the success of Bitcoin, you might not like what you’re about to read.
Mining and Work
Bitcoin incentivizes ‘miners’ to perform the work of maintaining Bitcoin’s transaction ledger by issuing new Bitcoin to a portion of those who can solve the difficult cryptographic puzzles required by its algorithm for adding transactions to the ledger. The miners have ‘proved their work’, by sharing the new ledger data blocks, and their results can be cheaply verified. But solving these cryptographic puzzles is by design expensive in terms of compute time (for this affords some security benefits), and it is therefore also energy-intensive.
Defenders of Mining
Reading what a lot of Bitcoin advocates say about the energy issue can be boiled down to this: Bitcoin miners are rational actors and seek cheaper energy sources, such as surplus green energy, and we should embrace the innovations in energy production that follow. I wouldn’t dispute some of that.
However, energy is not free, and surplus energy is not free and may become more expensive as energy storage costs are lowered with innovation in the future.
Here’s an article that is typical in arguing the green benefits of bitcoin mining: https://www.danheld.com/blog/2019/1/5/pow-is-efficent
Let’s visit some of the arguments made there and elsewhere.
“The cost of Bitcoin mining becomes the lowest (excess) value of electricity”
Perhaps this is currently true, but it doesn’t seem to be fully thought through. Surely this would depend on the price of energy, the availability of surplus energy, and the popularity of the Bitcoin network. Given that Bitcoin currently carries around 0% of all transactions, and yet already demands country-sized energy use means that the energy prices are not going to stay low if Bitcoin captures a significant portion of the world’s market share of financial transactions. Perhaps it's more accurate to say, if the price of Bitcoin increases 10x, so then does the incentive for the mining and the expected energy use.
“Miners flock to areas generating surplus electricity for the lowest marginal costs”
Yes. People work to maximize efficiency. And Bitcoin miners co-locate their mines and farms next to solar arrays, wind farms, and hydro-power plants. That is wonderful. But suggesting that mining only uses surplus energy and so don’t worry about it is disingenuous reasoning lacking a search for counterfactuals. Simply, it does not just use surplus green energy but uses energy that could otherwise have been stored. And it so destroys motives to innovate solutions to store such energy. And in the recent case of smog-filled Iran, it is not using green energy at all. Let’s be clear — the world has ZERO surplus energy and would absolutely use more of it if innovation made it more readily available at a lower cost.
“As aluminum manufacturing matured over the decades, the kWh per Kg of aluminum produced became more efficient.”
I’ve seen similar arguments, and “proof by analogy” with metal production. It is variously argued that, like metal production, Bitcoin’s massive demand for energy will surely drive down energy costs through fabulous new innovations in energy production. Again, this is also disingenuous reasoning that lacks an effort to point to obvious counterfactuals. The most efficient processes for metal refinement, as far as we know, require a lot of energy. Alternatives to proof of work such as the proof of stake model and the incumbent financial system require almost no energy at all, in comparison per transaction. Who would seriously argue that the world should be grateful for efficiency improvements in smelting if there existed an alternative that used almost no energy at all?
This line of reasoning also overlooks the fact that… well…, people are already motivated to seek sources of lower-cost energy, because there is a huge unmet demand for energy at lower prices. And aluminum supply is still held back by its high energy costs — we’re not constructing buildings from the stuff, as cool as that would be. A market for innovation does not guarantee innovation will take place.
“Ledger transactions are real work and lead to a more efficient financial system.”
I certainly hope cryptocurrencies lead to a more efficient financial system. But, ledger transactions are significant work? From a value of labor perspective, Bitcoin’s method of performing this “work” seems to be simply just wasting energy, as it’s not clear that any significant desired labor is produced or reduced through Bitcoin mining.
“Innovations that lower energy costs are wonderful for the world.”
Yes! But what has that got to do with Bitcoin energy consumption? It is estimated that 60% of Bitcoin mining uses non-renewable energy.
Furthermore, isn’t Bitcoin demanding proof of work in the first place exactly because it is not almost free/cheap? For example:
“The security of the Bitcoin network is dependant on the financial incentives built into mining. This means that the amount of energy used to secure the network is not really important, it is the cost of that energy that is important!”
Is it possible to have a modified Proof of Work that does not require as much energy to secure the blockchain?
The whole point of Proof of Work is to have skin in the game to demonstrate your position as a stakeholder. If the cost of this work became cheaper, more miners would come online, hash puzzles would be solved at a faster rate, and the Bitcoin algorithm would simply respond by making the hash puzzles a bit or two harder to maintain the designed one-block every few minutes that it has at its core.
Proof of Work isn’t a bad idea … if that work is actually … necessary.
“The incumbent financial system has grossly inefficient energy use.”
(!) Usually, this kind of argument comes with a comparison of total energy expenditures of existing financial system transactions. I hear this a lot and it makes my blood boil. Very obviously, it neglects to note that the incumbent system supports the livelihoods of billions of people, and Bitcoin… well, … it does not.
Bitcoin is tens of thousands of times more expensive per transaction than, say, Visa transactions.
Absurd. Go soak your head.
“The incumbent financial system has produced a grossly inefficient market and can’t be trusted.”
OK. You hate Visa. You hate central banks. I believe you. Go, go distributed cryptocurrencies!
“Proof of work is necessary”
A counter-argument to my complaints is that we need secure, distributed, and trustless transactions, and Proof of Work is necessary here because that’s how we can perform secure, distributed, and trusted transactions. OK. I hear you.
We certainly do want secure, distributed, and trustless transactions. But is “proof of work” necessary? I think, perhaps, this is the most important point to understand, and sadly, the easiest argument to overturn with two independent arguments.
Firstly, we should note that Bitcoin *is* inefficient. Broadly, you should expect mining activity to increase 1:1 with Bitcoin’s USD trade value. Bulls note this brings extra security, and so is not waste. Let’s dig into that. Note that as a consequence of the Bitcoin algorithm’s goal of achieving a steady block rate, any energy efficiency or cost improvements achieved by miners directly results in faster hash solutions, and therefore an increase in the hash difficultly to maintain the block rate. In effect, Bitcoin immediately spends any efficiency or cost improvements, or equally, gains on the USD value of mining (!), on increasing security. Because, as Bitcoin bulls are keen to point out, Bitcoin is already the most secure transaction system in the world, we should treat these marginal improvements in security as a total waste. The marginal work simply isn’t necessary to achieve a rational level of security. Absurdly high security is not necessary. It is waste.
Secondly, an alternative model to Bitcoin’s high energy use does, in fact, exist: Proof of Stake, which consumes tiny quantities of energy in comparison. In fact, the second most popular cryptocurrency by market cap, Etherum, is making the switch to Proof of Stake and is already eating Bitcoin’s lunch, if measured by the rate of transactions:
(* As of this writing, I’m told Ethereum hasn’t fully shed its Proof of Work beginnings). Ethereum is rapidly gaining in market cap, as are other Proof of Stake currencies, Cardano and Polkadot, included.
The market cap of Bitcoin (the value of all the Bitcoins in USD) gets a lot of attention. Bitcoin is undoubtedly number one. However, if what you want from your currency is to be able to transact goods and services, transaction count (or its rate) may be the better measure of success (at least when it comes to gauging growth). By this measure, Bitcoin has seen no growth since late 2017. Bitcoin bulls note that we should value Bitcoin more as a value store (for example, as a gold alternative), than as a transactional currency. Perhaps. But gold investments, like stock investments and housing, achieved their high values as value stores precisely because they have intrinsic utilities and values beyond their tradeable values. Housing, companies, and gold are useful and we should, in some sense, view them as safer stores of value than fiat currencies for that reason. I’m not arguing that currencies that are not backed by, say, gold, should not exist — I’m arguing that value stores that also have widespread utility, even as transactional systems, are safer stores of value while they retain that utility. Bitcoin’s only major utility other than a value store is as a transactional currency, and this utility is extremely low, especially when its technical limitations are viewed in the light of its competitors - systems that have quantitative transactional technical utilities that include improvements in speed, volume, energy use and cost by orders of magnitude. Additionally, Ethereum, Cardano, and Polkadot, for example, have a multitude of qualitative practical utilities beyond uses as value stores and currencies, such as smart contracts, programmable currencies, NFTs... As long as any of these qualities of utility remain in demand, we should expect these competitors to retain utility, and as a consequence over time, for people to view them as safer stores of value.
Couple the relatively low utility of Bitcoin (outside of being a value store) with the energy scalability problem of Proof of Work, and shouldn’t we conclude that Bitcoin is already obsolete and that people just haven’t noticed yet?
Are there tradeoffs between Proof of Stake vs Proof of Work? I’ve looked, but have not found concerns with Proof of Stake that people don’t already have with Proof of Work. In some ways, it seems even more secure.
Is Bitcoin a Bulb-le?
Why do we Bitcoin? In fact, why do we money? We use the money to trade for goods and services — abstractly, any things that hold a utility that we can trade money for. We hold onto money in case that, at some time in the future, we’d like to trade it for such things … beans, cars, vacations, …, homes, Netflix subscriptions, retirement expenses. We’d like to be able to trade one unit of money with at least as much stuff next year, as we can today. If we can’t, we should prefer to convert our money into stuff that retains its trade value. Since leaving the gold standard, people have reasonably lost faith in governments to responsibly regulate money supplies. It is estimated that 22% of all US dollars were printed in 2020. While the whole economy is currently experiencing deflation, that money is causing house price and stock price inflation as people take advantage of cheap lending and seek inflation-resistant alternatives to money. For the majority of people, perhaps, this is not the economic stimulus they imagined. And inevitably it will cause inflation of the costs of other goods and services over time.
We already depend on fiat currencies, and I have no quarrel with the fact that nothing backs the value of cryptocurrencies, other than people’s self-interest and belief that it will hold value. Belief in future trade utility is, after all, all that backs the dollar. But a belief of there being more dollars undermines the belief that it will hold its trade value over time.
During a time of madness, tulip flower bulbs in Holland became prized beyond their intrinsic value. People were trading tulips bulbs for their debts instead of the incumbent money system. Tulip prices skyrocketed and eventually crashed as people lost faith in tulip futures. You might say the Dutch Tulip Bulb Market bubble also demonstrated ‘proof of work’ through the literal digging (mining) of the tulip bulb currency out the ground. You might (wrongly) argue that this led to some great innovations in tulip production. Someone might also argue (rightly) that surplus tulip bulb currencies are stupid because they don’t contribute any benefits to the economy over alternatives, and unlike the work of extending the secure and trusted Bitcoin ledger, the production of that many tulips is not performing work that anyone really wants or needs. However, no-one really wants or needs the maintenance of a transaction ledger to cost significant amounts of energy either — people want a secure and trusted ledger, and there’s no clear reason to believe that the expense of a lot of energy is necessary to achieve that. That fact that Bitcoin’s model asks for it to consume significant energy in the form of Proof of Work, as its own method of achieving security and trust, and that alternate low-energy methods exist that do not, means we should simply view these energy costs as almost all waste.
Rationalized Waste
The great danger with the tulip bulb story is thinking that energy is anything as whimsical as tulip bulbs. Modern society depends on energy about as much as it depends on water. Indulge me for a moment and imagine that we replaced energy with drinking water. In Bitcoin, we’d see a system whose design motivates rational people to pump both surplus and non-surplus drinking water alike, into the ocean as the system would pay them tradeable ‘wasted water tokens’ to do it. We’d have a band of profiteers extolling this as a virtue, pointing us to the great strides in their rate of efficiency at disposing of surplus drinking water made by moving taps closer to the ocean, and pleading with us for gratitude as yet more fabulous advances in drinking water pumping and production technology are sure to be the result of this new market for surplus drinking water. And in such a world, why would you build a water tower, or a reservoir if someone would just pay you to pump surplus water into the ocean?
Sure, pumping is a little work, and you’re paid for it, but is it really … necessary?
Can you think of a more clear example of a broken and inefficient market than Bitcoin, which not only disincentivizes the storage of a resource but explicitly incentivizes its direct destruction, and with no obvious thing of value produced in exchange but for a few bits in a ledger, and personal beliefs that future people will pay handsomely for them? … Outputs that we could achieve by other means having almost no resource expenditure.
We seem to have flown past Bitcoin being harmless speculation with only the participant’s stake at risk. We seem to now be watching an unstoppable trillion-dollar machine drive across the world that has energy resource destruction as both the means and ends of its engine.
Bitcoin miners are efficient and rational. Bitcoin’s energy costs are not rational.
Bitcoin miners certainly are behaving in a rational and efficient manner within a closed Bitcoin model. However, Bitcoin is NOT a closed system and suffers competition from other, more efficient systems.
I think an argument can be made that a system that is dependent on simply wasting energy to “prove work” as a necessary part of its functioning, may necessarily fail as a condition of its increasing success if its total energy costs continue increasing with respect to competing systems that require almost no energy to function.
IF energy consumption continues to increase, AND energy costs are significant with respect to competing systems (such as incumbent financial systems, or proof of stake systems) AND there is a competing system that provides the same benefits with hugely lower energy costs,
THEN you should expect demand for Bitcoin to fall as people prefer the competing, cheaper, lower cost (cost=value-of-labor) systems that consume almost no energy at all by comparison.
And on balance — why prefer Bitcoin at all?
Can Bitcoin innovate itself into a lower-energy consuming system by removing the proof of work component? Maybe. Maybe not. Changing the system requires achieving the consensus of more than 50% of the Bitcoin nodes [fact check needed!]. There have already been several attempts to fork Bitcoin into a technically better system, each of which has failed.
Either way, I think the answer to “Is Bitcoin’s energy consumption a problem for the world?” will be, eventually, no. I’m arguing one of two outcomes:
A) if energy costs remain significant, the problem will solve itself by Bitcoin’s failure (as it will be replaced by competing, lower energy systems), OR
B) Bitcoin will do the sensible thing and remove proof of work from its algorithm, and not require large amounts of energy.
If you have thoughts, let me know — I would love to understand what I’m missing here. Possibly Bitcoin is the VHS and proof-of-stake is the Betamax, and its branding will win out? Or possibly the phenomenal expense of Bitcoin mining will turn out to be a marginal operating cost, and the value of Bitcoin’s benefits will hold more value than switching to efficient alternatives.
Maybe I’m all wrong about the Bitcoin network and this post will age about as well as this:
Sayonara, suckers. Good luck with your ‘network’. And we know exactly what the network was. It was the internet. — David Rakoff
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Additional reading:
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The above article is a reprint of my answer to a Quora post, here:
https://qr.ae/pN3gmr
With thanks to Ian Wright for directing me to Proof of Stake systems, and Oskar Fridell for pointing me to pro-mining arguments.