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Talkin’ SaaSy

Why Bitcoin’s “Energy Mix” Doesn’t Matter

So a lot has been made of blockchain technologies energy usage over the last several months after Bitcoin hit an all-time high and brought massive amounts of attention to the crypto and blockchain space. I want to preface this entire article by saying that I am a long-term believer in blockchain and distributed ledger technology and its ability to help us build a more transparent future but in all honesty, this is still such infant technology that there is still a long way to go and many more innovation cycles to go before the best technology comes forward.

First, what is blockchain or distributed ledger technology? Simply put, it’s the idea that data and the status of that data is stored throughout a network versus on a central server. Think about your bank, your bank keeps a ledger of your financial transactions on a server that they control and give you access to as a customer. If a bank ran on a distributed ledger, that ledger of transactions would be encrypted using cryptography (hence the term cryptocurrency) and then distributed across the computers of a blockchain/DLT network. You, me, and everyone else would then have a private “key”, essentially a passcode, that when plugged into the system, unlocks your transactions data so you can view it. Despite being stored across the network, you and you alone have the keys to put the pieces together.

Cryptography is what powers these networks. Cryptography is the science of math and algorithms that the computers in the network are attempting to solve in order to “reach consensus”, or agree on the status of the ledger and verify a transaction that any of us wish to undertake. This is where the energy use comes from. All those computers using electricity to run, solve these complex math problems and contribute to verifying transactions and reaching consensus.

Bitcoin, arguably the world's most discussed blockchain network operates on what is called a “proof-of-work” protocol in which the computers on the bitcoin network compete using their processing power to try and solve these complex math problems faster than other computers on the network. When they do solve the equation first, they are rewarded with coins being mined (created) and assigned to them hence the term bitcoin mining.

The proof-of-work system is said to be fully decentralized in that anyone can participate by simply taking computing power and lending it to the network but that same fact is what also leads to its energy issues. As all those computers race to verify a transaction, only one can emerge as the winner and in an instant, all of the energy that the other computers on the network used are immediately wasted as the computers move on to the next transaction they are trying to solve for.

Now the majority of the argument against this is that Bitcoin mines are moving towards more renewable energy sources (the best estimates I found is 39%). While I commend the effort here, there is a fundamental issue. Sure moving towards renewable energy in any industry is a positive step forward and I have met several bitcoin miners who run their entire facility on renewable energy. I even met one who installed a wind turbine to power their mine. Here is my problem with that, great, we are offsetting the electricity of that mine, but if we found a more efficient blockchain protocol than Bitcoin couldn’t that energy be used to offset fossil fuels elsewhere like in our homes or places of work.

For me, again not knowing the exact energy mix of Bitcoin, the issue isn’t the energy mix at all, it's the overall energy load that it pulls in. The average Bitcoin transaction uses roughly 700 kWh of electricity, the same amount used by the average U.S. home over 24 days. Say we assume that 39% energy mix, that means instead of mining Bitcoin, for every transaction on the Bitcoin network we could be replacing 10 days of electricity in an American home with clean, renewable energy.

A single Bitcoin block (A block is just a bundle of transactions verified by the network and added to the end of the chain, hence the name Blockchain), takes about 10 minutes to process. If we use that as a benchmark, there are roughly 144 new blocks added to the Bitcoin network each day. If we look at the 30 day average on Blockchain Explorer, we can see that currently there are roughly 2k transactions on average for each new block added to the network. Times that by the 144 new blocks each day and that is 288,000 Bitcoin transactions on average each day. If each transaction is using that same 10 days of renewable energy that means each day the Bitcoin network is taking in enough renewable energy to offset the energy use of 2.8M homes. For perspective, there are 2.6M homes in LA and Chicago combined.

Look, I’m a believer in blockchain and distributed ledger technology. It will fundamentally change how we build the world around us. But is the innovation of Bitcoin worth redirecting the renewable energy that could offset 2.8M homes? Bitcoin believers will say that the electrical footprint of the U.S. Banking system is much larger than Bitcoins footprint, and it is in absolute terms. The 100 largest banks in the U.S. use a combined 263 TWh each year ( you can see the report on this here) and the Bitcoin network uses only 113 TWh per year which is less than the usage of the banks. Sure, on absolute terms the Bitcoin network consumes less electricity, but you need to look at the unit economics to get a fair comparison. The 100 largest banks in the U.S. hold a combined $21.3T, meaning that the U.S. banking system consumes 1.23 kWh of electricity per dollar each year. The Bitcoin network holds roughly $635B as of the writing of this article meaning that for each dollar of value help in the network, the network consumes 17.8 kWh of electricity, 14 times the electricity per dollar than the U.S. banking system.

Now I know that the argument here is the centralized nature of banks and blockchain proponents will refer to things such as the news last week that Wells Fargo is suddenly shut down all personal line of credit products for their customers leaving them in the lurch. Centralization vs decentralization is another argument that we can discuss in another post someday, my question here is is the energy demand that the Bitcoin network put on the system worth it? I’m not gonna pretend to be an expert in cryptography, but since the rise in popularity of bitcoin and the idea of digital currency has become more mainstream, many new blockchain and distributed ledger technologies have emerged that offer the same distributed ledger and consensus mechanism as Bitcoin, but with far less overall energy demand.

I’m not going to get into the specifics of any specific network or cryptocurrency as I don’t want this article to have the appearance of favoritism of one currency over the other or as financial advice because while some of these networks are technically superior to Bitcoin, I have no idea how things will ultimately play out. In full disclosure, I own Bitcoin, it is part of my portfolio and while for my sake I hope it continues to increase in value, my question here today to all of you is is the massive amount of energy that is directed to the Bitcoin network worth what it gives us as a society? If there are other networks that offer a decentralized ledger and consensus mechanism with several thousand times less energy demand should we be looking to those as a solution? Should we put the Bitcoin network on hold until they discover a way to make the network have an overall lower electrical demand (there are projects like this in the works, some very promising)? I don’t have the answer but it is worth asking the question, are you ok diverting renewable energy, which could be used elsewhere in society to reduce our footprint versus a rather energy inefficient system (as it currently stands)?

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Ross Andrews

SaaS Founder, Operator and Product Builder. Working on a exciting new project, stay tuned 😎