Bitcoin & Energy, Part 1: Energy mix and the role of power consumption for Bitcoin
This is the first part of the Bitcoin & Energy series, four articles dedicated to Bitcoin and its electricity consumption. The goal: that you can make up your own mind on its environmental impact, and on Bitcoin’s potential for society’s future.
Good reading 👇
Introduction
This first part focuses on:
- The concept of energy mix, and why it is so relevant in Bitcoin’s case
- The role of electricity consumption in Bitcoin
Energy mix: difference between consumption and pollution
Bitcoin consumes an important quantity of energy. In general, this is quickly translated to “Bitcoin is polluting” or Bitcoin is bad for the planet”. However, energy consumption is not a synonym of pollution. Every energy consumption’s emissions depend on their source. It is what we call energy mix.
Take the example of an electric car. If it belongs to a german city’s family who’s electricity comes from a coal mine, using this car would emit a lot of CO2. However, if this car is in south of Spain and consumes electricity from solar panels, the same electricity consumption would be clearly less polluting.
This example is simplified (origin and renewing of solar panels), but is coherent and illustrate well the idea of energy mix.
This confusion between consumption and pollution has another side: thinking that an increase in energy consumption is polluting in itself. It is true today at the planet’s scale as we still rely mostly on hydrocarbons (oil and gas), emitting a lot of CO2. However, the environmental impact of “carbon-free” energy sources mainly comes from building their infrastructure, and not by the consumption of their production (ex: hydro or nuclear power).
A change in the quantity of energy produced and consumed from a “carbon-free” source has a marginal impact compared to that from hydrocarbons.
All these notions are very important when looking at Bitcoin mining. Its consumptions is solely electric. It can come from any energy source around the globe that can be turned into electricity, and its demand is potentially unlimited. Making the shortcut “Bitcoin consumes a lot of electricity so it’s bad for our environment” is a nonsense. We need to look at where this electricity comes from, its source. It will be next week’s topic.
The role of power consumption for Bitcoin
Before looking into Bitcoin’s electricity consumption, we need to think about its role. Is it really necessary?
Bitcoin mining is the mechanism securing the network. It finalizes transactions and helps register them in an historic on which everyone agrees: the network’s consensus. Thanks to mining, consensus can be reached in an autonomous and decentralized way.
Mining is based on a Proof-of-Work (PoW) system. As its name suggests, it consists in proving that a certain work has been performed. This work needs to be irreversible, as it acts the state of the network’s ledger, its consensus. This is the reason why the proof requires an energy expenditure. That way, history can be reversed only by reproducing this expenditure, requiring an additional cost.
This cost, coupled with a reward system through transaction fees and newly issued bitcoins, encourage all potential participants to join the network rather than attack it. Without this energy expenditure, it would likely be impossible to have such a robust decentralized network.
Other less energy-intensive mechanisms exist, like Proof-of-Stake (PoS). However, PoS doesn’t require any additional energy expenditure to reach consensus. It relies on purely economic incentives. The notion of physical irreversibility is therefore much less present there.
In addition to securing the network, this system directly transforms energy into money. It brings back money to its fundamental representation: past or future energy.
This first article focused on why Bitcoin consumes energy, and why this consumption is essential to how it works. It also recalled the notion of energy mix, and how the amount of energy consumed isn’t directly linked to the impact on our environment.
Next week’s will focus on the nomadic aspect of Bitcoin mining, and the implications on its energy consumption.
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