Batching shows true health of Bitcoin Network
Issue: 037
More complaints about Bitcoin energy usage
A study revealed that Bitcoin’s energy use consumes as much electricity as the Netherlands now, or 0.5% of the world’s energy use. The study goes on to suggest that at today’s growth rates, Bitcoin will consume all of the world’s energy by 2021.
The study seems to lack an understanding of the way Bitcoin mining farms operate. The key to profitability for mining farms is the price of energy. Mining farms will only set up shop if they can find excess energy at a cost that makes it profitable to mine for the long term — typically less than $0.07 / $0.08 per kwh. There are a limited number of opportunities to find long-term contracts at these prices and those contracts are very competitive. If Bitcoin is adding to the competition for the cheapest (often times renewable) energy on the planet, then Bitcoin is providing an incredible incentive to accelerate the fast pace of renewable energy innovation already taking place.
Bitcoin Batching
Nic Carter and hasufly wrote a great piece on the evolution of batching and its impact on the Bitcoin network. Typically, analysts, investors, researchers and journalists cite transactions per day as the metric to quantify the economic health of the Bitcoin network. This article highlights that transactions per day is a bad metric and outputs per day or “payments per day” is the better metric because of batching.
Bitcoin uses a UTXO (“unspent transaction output”) model instead of an account/balances model, meaning users don’t accumulate bitcoins in one account address. A Bitcoin transaction includes a set of inputs and outputs. The inputs find and verify the set of previous outputs containing the necessary bitcoins for this transaction’s outputs. The output allocates ALL of the bitcoin from the inputs to the specified addresses for the transaction outputs. These outputs associated with a specific address are the UTXOs, which require the specific private key to spend that UTXO in a future transaction. An example would be helpful. Let’s say I have been using bitcoin for a while and in my wallet I have 3 UTXOs. One UTXO is worth $3, the second one is worth $12, and the final one is worth $7. I want to buy something worth $21. Well, I am in luck because I have a total of $22! However, I don’t hand over exactly $21 to the counterparty and leave $1 in my wallet. Instead, the bitcoin transaction would include 3 inputs for each of my UTXOs described above and two outputs (or two new UTXOs). The first one is the output of $21 to the counterparty, and the second one is the change output of $1 either back to an address I currently own or to a new address that I create with this transaction. There is no bitcoin account that I add and subtract from, instead a wallet just aggregates all of the UTXOs of the addresses for that wallet.
Back to batching. The example above is one transaction consisting of 3 inputs and 2 outputs, batching is when you combine multiple transactions into one transaction so that there are more than 3 outputs. Batching is encouraged because adding outputs to a transaction is non-linear in terms of data size. Therefore, a transaction that has four outputs is not twice as big as a transaction that has two outputs, but instead much less than twice as big. This means we can fit more outputs (economic activity) in a Bitcoin block if we use batching. Batching is used by exchanges and some transactions can have 100s of outputs in one transaction, hence why citing bitcoin transactions as the health of the network is a bad idea. A better idea is using the outputs to account for batching.
This article shows that batching accounts for roughly 12% of all transactions, 40% of all outputs, and 30–60% of all raw BTC output value.
Project Spotlights
- During Blockchain Week, Lightning Labs officially launched their beta version, which anyone can download today and begin using.
- Blockstack introduced their “App Store” including applications from Blockstack, Ethereum, EOS, IPFS and more.
- Coinbase wants to be a legitimate bank, engaging with regulators to acquire a federal banking license.
