Cryptocurrency Is Turning Electricity Into Digital Cash

Chris Malmo
Jul 21, 2017 · 6 min read

Cryptocurrency miners around the world are turning electricity into digital cash. I’ve previously covered the country-sized electricity consumption of both bitcoin and ethereum mining. Here, I’ll explain how it’s possible to turn electricity into magic internet money, and what the future might hold for the industry. I’ll also ask a question: with catastrophic climate change breathing down our necks, does it make sense to expand use of a suite of currencies backed by redundant energy use?

As coin values have grown, so too have miners’ appetites for electricity. This has led to a scramble to get the most efficient mining equipment and then set up shop in places like China, Iceland, Canada, and Eastern Europe, where power is cheap, naturally cold air cools hot datacenters, or governments provide incentives. In ethereum’s case, it’s also sparked a temporary worldwide shortage of graphics cards as home miners build rigs to earn their share.

In brief, the mining process requires computers, running on electricity, to generate coins. Since most miners are in it for the money, they’ll mine as efficiently and profitably as possible, selling coins for traditional money, or holding coins if they expect prices to rise.

Cryptocurrencies like bitcoin and ethereum are currently mined by performing challenging computations, over and over, to solve cryptographic puzzles. Solve the puzzle for the next block of the blockchain (the decentralized public ledger), and you get a reward of brand new coins. This process is called Proof of Work, and it’s baked into bitcoin’s code. Ethereum runs the same way, but is planning on switching to a much more energy efficient protocol in future.

Hard at work with a graphics card in the dogecoin mines

Both the bitcoin and ethereum networks reward miners with new coins for every new block added to the blockchain. To claim the reward, miners compete to be the first to solve the math problem that results in a cryptographic ‘hash’ for the block, which is a unique string of letters and numbers that represents that block. Meanwhile, transactions that occur on the bitcoin or ethereum networks are recorded securely on each block of the ledger, which is propagated to the network.

Importantly, the more miners spend on electricity, the more secure the network becomes: anyone looking to double-spend coins or block transactions will have to spend a greater and greater amount on computers and power to mount their attack.

As more miners join in with faster equipment, both bitcoin and ethereum increase the difficulty of the puzzles to compensate and keep rewards set to a constant schedule. This has the effect of pushing out old mining equipment as miners seek greater efficiency: electricity costs will eventually outweigh performance hashing crypto-puzzles in time to snag a reward. Already, home bitcoin miners have long been forced out of the picture. Depending on ethereum’s price movement, the same could soon happen for amateur ETH miners as well.

The upshot of the Proof of Work “arms race” is that there are three big factors affecting miners’ profitability: 1) the dollar price of a coin, 2) the price of electricity wherever they happen to be, and 3) how many hashes their equipment can get per watt of electricity, relative to other miners. As a very simple business plan, it looks like this: The higher the price of a coin, the more electricity you can burn through while still making a profit. This affects people’s willingness to enter the mining game.

When you’re mining at scale, electricity costs very quickly become your biggest expense. To squeeze out extra margin, industrial miners are now setting up in places with low electricity rates, like near underutilized dams and coal plants in China. In Canada, one mining operator claims to be paying as little as 2 US cents per KWh (six times lower than the average US residential rate). In Washington State, bitcoin mining firms have tussled with local utilities over increasing power prices.

As in any gold rush, some people are selling shovels. Mining equipment company BitFury sells very efficient bitcoin mining chips, and also runs data centers in Georgia where they liquid-cool their chips to increase efficiency. Graphics makers like Nvidia have announced plans to build special graphics cards cards for ethereum miners. .

In the medium to long term, a few things could happen for miners. If and when cryptocurrency prices stabilize, economists speculate that competition should bring their overall electricity consumption costs close to the total dollar value of all newly created coins (while allowing for equipment purchases). This is because crypto mining should in theory be close to a competitive market. Although entry costs are high, the product, in this case tokens, is fungible and indistinguishable no matter who you’re buying from. As such, the price should eventually approach the marginal cost of creating a new coin, which is the number of kilowatt-hours multiplied by the price per KWh.

Bitcoin, still the reserve currency of crypto, is coded to slowly reduce the block rewards for miners. This means that steadily growing transaction fees, which users must pay each time they transfer coins, will have to make up more and more of miners’ income. If users decide they’ve had enough fees and abandon ship, bitcoin miners may have to scale back their electricity budgets to match any reduction in incomes from lost block mining rewards.

On the other hand, if bitcoin prices shoot to the moon, miners may yet increase their electricity consumption profitably for years to come, despite declining block rewards.

Barring any hiccups, ethereum plans to begin changing its algorithm in stages, beginning this year, to one called Proof of Stake, which would greatly reduce its energy consumption by requiring far less “work” to build consensus. So instead of electricity being a major input cost and security guarantee, miners would “stake” their ethereum holdings in locked-up contracts earning interest to establish consensus on the blockchain. Essentially, existing ethereum holders would earn interest in lieu of miners creating new ether.

For the moment, there are profits to be made using computers to turn electricity into various forms of decentralized, stateless, digital cash. Looking beyond technical explanations of how this happens, perhaps it’s better to ask why it happens: because the rest of us attach value to cryptocurrencies — whether it’s anonymity, network security, or simply the collective, useful delusion to believe an internet token (or a dollar, or a yuan) has some inherent worth.

As many smart people have pointed out, blockchains are always less efficient and often harder to use than their centralized counterparts. In light of their immense energy demands, we ought to be thoughtful about use cases. Do most consumers need decentralized payments, or feel shackled by credit card processors? Do most developers need decentralized applications running on the ethereum network, as opposed to running on AWS?

In the context of climate change, these kinds of questions are worth asking because even if all crypto mining happened with 100% sustainable power, that mining is still displacing other uses.

For example, would you rather that a 40MW solar farm powered a Visa datacenter processing thousands of transactions a second, or a bitcoin mining operation securing only three transactions per second? Do bitcoin’s primary advantages (pseudonymity, un-censorable transactions, decentralization, and so on) make it thousands of times more valuable? It’s a simple example, but that’s essentially the tradeoff.

Personally, I’m not sure the benefits outweigh the electricity consumption for the large majority of day-to-day use cases. In the short term, there’s money to be made both by investing and mining. But in the long term, I think this dynamic could weigh on the value of cryptocurrencies unless they can improve their efficiency significantly.

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