Bitcoin Mining-Related Energy Consumption
In our new series for the Future Citizen Institute we lay the focus on social implications of emerging practices from the fintech industry. The weekly published articles aim to inform an international audience with an interest in the evolution of financial technology and the economic, political, or philosophical meaning thereof. In particular, applications of the blockchain technology, such as self-enforcing contracts or bitcoin mining, will be presented and cautiously discussed, to enable the reader the development of a holistic perspective. The first article introduces and explains key-terminology and is concerned with the comparatively high energy consumption of Bitcoin mining.
“In short, block chains may improve any process where people need to access, verify, send or store information securely. This information could be a person’s identity, a product’s shipment history or a digital asset like money” (Meiklejohn, Cary, 2018).
Blockchain technology puts a different complexion on the world of accountancy and data transmission. By decentralising the task of verifying the correctness of transactions, as well as solely working with encrypted data, the creation of block chains can be tomorrow’s global digital ledger.
As may be surmised from the above quote from a white paper published by the founders of ‘Blockchain’, applications of block chains are manifold and seemingly unproblematic. Due to its various advantages, latent potential and mystified image as the future’s prevalent mediator for digital transactions, existing flaws and concerns are discarded or remain concealed. A crucial downside is the energy intensity of the procedure behind the creation of the block chain.
The Bitcoin Energy Consumption Index shows the estimated annual electricity consumption arising from a practise called ‘Bitcoin mining’. The term Bitcoin mining refers to one step of the still young blockchain technology. Here, all participating computers are interconnected and configured to produce a unique numerical fingerprint. This fingerprint serves as verification of whichever bitcoin transaction is being carried out and needs to be created for each such transaction.
The verification process is complete if and only if the one hash function corresponding to another encrypted data set – for instance, a person’s account balance – has been randomly created by a member of the interconnected miners. This encrypted data set is an altered version of that person’s initial transaction. Thus, this process is designed to act as the means of decentralised verification of the transaction - a hashed block is precisely what gives ‘block chain’ its name and qualities.
As it is the case for all fingerprints, this numerical one is also unique and can only be generated by state-of-the-art computers. This is because of two linked reasons:
First, in order to create – or rather find – the random numerical key, encrypted mathematical hash functions need to be written and run which already is highly energy consuming.
Secondly, the incentive for participants to provide the computational power necessary to verify and organise global bitcoin transactions is a remuneration in bitcoins – a currency per se. Consequently, fierce competition emerged with the goal to provide as many hashed blocks with the correct numerical value and time stamp validating the correctness of a large package of transactions as possible in order to get rewarded 12.5 Bitcoins. At the time of publication of this article in mid-March 2019 those are worth £36,341.30 – £2,907.30 per Bitcoin.
As a result, a single high-performance computer, i.e. those with powerful central processing units or CPUs, creates over five million cryptographic hash functions – per second. Since the number of Bitcoins is limited to 21 million and roughly 17.6 million have been mined so far, competition increased inversely proportionally to available Bitcoins. The amount of electricity spent globally on the mining process is measured in terawatt hours, since the customary indication in kilowatt hours is no longer adequate.
Consequently, according to the above-mentioned Bitcoin Energy Consumption Index, Bitcoin mining – put into a country perspective – ranks 51st, ahead of countries such as Singapore, Nigeria or Denmark. In fact, it consumes virtually fifty billion kilowatt-hours per year, roughly the same as the combined energy consumption of thirty-seven million Chinese households in the same period. This is exacerbated by the scarcity of the good; with only 3.4 million bitcoins left and approximately 1900 Bitcoins mined per day, the last Bitcoin will be mined in less than five years and subsequently prices will skyrocket.
The website BitcoinEnergyConsumption.com ascertains that a single Bitcoin transaction consumes more than three times as much energy as 100,000 Visa transactions. However, the statistics portal Statista presents significantly differing numbers; here we find a ratio closer to 6:1, indicating that almost 600 thousand Visa transactions could be conducted with the amount needed for one Bitcoin transaction. Considering these numbers, certain questions arise: Which are the ecological consequences of this praxis, in what way is crypto-mining affecting energy prices, How do we design the transactions to be more efficient.
As part of the Future Citizen Institute’s research into financial technology, a series of articles with the intend to answer these and further questions will be published weekly.
Author: Patrick Lehner