Energy Consumption Is Bitcoin’s Best Feature
Why Bitcoin’s Energy Consumption Is An Optimised Design By Nature That Should Never Be Changed
Bitcoin’s energy consumption has been widely criticised. People claim that it is an outdated feature and newer, more modern blockchains have overcome that problem.
This is a common misconception of Bitcoin. The article argues that Bitcoin’s energy usage is the optimal design choice based on natural laws. It is the most critical component to make Bitcoin the most advanced and secure store of value.
Table of Content:
1. How Bitcoin Uses Energy
Let’s first start why the Bitcoin network uses energy in the first place.
The purpose of Bitcoin is to store and transmit value. Therefore, the network stores transactions in blocks and attaches them to a continuously growing chain.
The information, hence transaction data, stored within blocks is publicly available for all network participants. The Bitcoin network is permissionless, thus open for anyone with an equal opportunity to participate in the network. Participation is possible by connecting a computer called node to the network.
Full nodes store the entire Bitcoin blockchain including all individual transactions. They not only execute their own transactions, but also validate all other individual transactions and calculate balances. If Person A wants to pay another Person B, every full node in the system would be able to validate whether Person A has the required funds.
To execute new transactions, new blocks need to be attached to the chain. Thereby, the network needs to establish rules that let nodes agree on the correct new information that will be added to the chain. These set of rules are defined by a blockchain’s consensus mechanisms.
Bitcoin uses the ‘Proof-of-work’ (PoW) consensus mechanism to let nodes compete against each other: to attach a new block to the chain, nodes need to solve a mathematical puzzle. The likelihood of finding a solution increases proportionally with the computational energy expended. For each attached new block, nodes receive a Bitcoin reward and transaction fees. The process is called mining.
It shows that the consensus mechanism of a blockchain selects the participant who attaches new information to the chain. The consensus mechanism of Bitcoin is PoW which is based on the energy expenditure.
2. Consequences Of Controlling The Consensus Mechanism
So, whoever controls the consensus mechanism controls the creation of new blocks. Whoever controls the creation of new blocks:
- Captures Bitcoin mining rewards and transactions fees
- Controls voting rights: small changes to the Bitcoin protocol can be implemented after letting miners vote with their respective mining power
- Controls new transactions broadcasted the network: technically, that party could revert an own transaction, hence after sending Bitcoin from the own to another address, the Bitcoin could be reverted back. Also, a node could submit an empty block without transactions and delay their execution.
Therefore, a decentralised network needs to protect itself against malicious parties gaining control over the consensus mechanism and thereby controlling the network as a whole. This would be achieved with a 51% control over the competitive selection procedure that defines the consensus mechanism.
Hence we need a selection procedure which is highly competitive and gives every participant the fairest and most equal opportunities. Only then, can we minimise the risk of a minority ever gaining controlling power.
3. Learning From Nature
In the search of a perfect competitive selection process, one can simply learn from nature to derive similar principles.
In 1859, Charles Darwin published On The Origin Of Species and developed his theory of biological evolution. It states that organisms need to go through natural selection to compete, survive, and reproduce. The more advantageous the traits of an individual, the higher are the chances to pass those on to the next generation. If enough of those features accumulate over generations, entirely new species can emerge.
Nature has ‘developed’ the perfect mechanism for a fair and objective competition. As environmental factors are ever changing, it requires continuous adaptation and fight for survival. Even the most superior species can never develop a position of uncontested control and have to continuously change to stay relevant.
“It is not the strongest of the species that survives, nor the most intelligent. It is the one most adaptable to change”. — Charles Darwin
Boltzmann, an Austrian physicist and promoter of Darwin, then connected his theory to fundamental physics. He argued that to survive, organisms essentially need to capture energy, which they get from resources such as food and light, from their environment. However, to find and capture resources, organisms also need to expend energy e.g. during the search for plants or hunt of other animals.
On a fundamental basis, it means that organisms need to maximise their energy efficiency: they have to capture as much energy as possible from their surroundings while minimising their own energy spent.
4. Natural Laws In Bitcoin
So, how does this tie back to Bitcoin and PoW?
First, PoW requires miners to expend energy: they capture any form of energy such as solar, wind, water energy and convert it into computational energy to mine Bitcoin. The cost for energy and mining infrastructure penalises participants that try to attach a block with malicious information.
For every successful block attachment miners also receive Bitcoin rewards and transaction fees. The value stored within each Bitcoin essentially is associated energy. It might sound confusing at first. However, any Bitcoin is worth a value defined and driven by the network. A miner could trade such value directly for resources or indirectly for services that help increase the capture of resources. As earlier discussed, such resources are stored energy that any organism needs to compete and reproduce.
The more efficiently miners capture and convert energy, the more can they contribute to the network, the higher are their chances to solve the mathematical puzzle, win the race to attach a new block, and receive Bitcoin rewards and transaction fees which ultimately are a digital representations of expended energy. Let’s define this representation of energy expenditure digital energy.
The most efficient miners will capture more digital energy from rewards than they expend. The resulting delta between reward and cost can then be used to invest in e.g. new infrastructure, R&D, etc. and help miners to expand and better adapt with changing environmental conditions.
PoW essentially copies the same natural laws of competition: to maximise energy capture and efficiency, miners will have to constantly adapt and evolve. The chances that a minority of stakeholders gains control are minimised because developed advantages are only temporary until the environment changes. With no minority being able to gain a 51% control, the security of the entire network is maximised.
The Bitcoin network requires energy as an input to give a representation of energy as an output. Anything else but energy to mine coins would break the relationship between effort and reward, and ultimately make the network vulnerable for attacks. For this reason, using energy to mine Bitcoin is inevitable.
5. Summary
To summarise, yes, Bitcoin requires energy expenditures. However, it is a perfect mechanism copied from nature to promote equal opportunities, avoid central power control, and ultimately, maximise the security of the network.
As a consequence, Bitcoin has become the most superior store of value in human history. No entity is able to manipulate its state or limited supply, or corrupt it in any other imaginable form. Therefore, Bitcoin has the potential to disrupt the global financial system and establish sound economic fundamentals.
It is up to the reader to decide whether the benefits of Bitcoin are worth to spend around 0.55% of the global electricity production (as of 2021).
6. Final Note On Proof Of Stake
Other blockchain projects aimed to capitalise on the misconception of Bitcoin by the public and suggested an alternative consensus mechanism called ‘Proof-of-stake’ (PoS).
In PoS, nodes also compete to attach the next block. However, instead of needing to expend energy to increase the chances of winning over the competition, their likelihood to attach the next block increases proportionally with the amount of coins someone owns.
The idea: the more coins an individual has at stake, the less likely they are to attack the network, the more power can be safely granted to them.
Inevitably PoS is based on a fundamental dilemma: the richer a participant is, the more authority is being granted to that individual. As the chances to create the next block increase, PoS makes wealthy individuals wealthier and gives them more power without any effort.
Moreover, once wealth is attained, there is no need for continuous adaptation. Ultimately, minority groups with a majority stake that would abuse their rights could much more easily emerge with great implicated risk for the system.
In fact, all major PoS blockchains such as Ethereum, Polkadot, Near, Cardona, etc. are today controlled by a small group of influencers and founders. Such a network is simply unsuitable for protecting high amounts of stored digital value.
