With digital currencies gaining popularity, discussions about Bitcoin’s future attract more and more attention with concerns being raised over the ways it’s being mined and the energy-costs of the mining process. This article deals with different mechanisms of cryptocurrencies’ emission and outlines the main advantages and disadvantages on the example of Bitcoin and MILE, a fully decentralized, transparent and environmentally-conscious ecosystem that uses a completely different approach to money-minting.
Bitcoin is rather expensive for the economy. Even if miners use the most inexpensive electricity in the world that costs three US cents per kWh, Bitcoin’s annual electricity bills exceeded two billion USD in summer 2018. According to the most realistic estimates, it was amounted to 3.5 billion USD, if 1 kWh cost miners five US cents. Rapid growth of energy consumption was caused by exponential growth of hashing operations that are used for adding new blocks into the blockchain. Such operations were performed 26 quintillion times per second in March 2018, and now the figures are already equal to 52 quintillion.
In the last year and a half, starting from 2017, Bitcoin’s energy consumption grew approximately from 7-8 to 73 TWh. Bitcoin consumes more energy now then countries like Austria and Chile (72 TWh). According to the estimates of Arvind Narayanan, a computer scientist, who delivered his speech at the US Congress, approximately 1 percent of global power capacity is being used by Bitcoin’s miners – 5 GW.
Digital money is extremely convenient. It does not take space in your wallet, and large transactions can be completed almost instantly. But how environmentally-conscious is cryptocurrency? According to the estimates of Alex de Vries, PwC cryptanalyst, Bitcoin’s production capacity last year was equivalent to 2.55 GW. It consumed approximately 22 TWh/h what is almost equal to the levels of energy consumption in Ireland. To compare, Google consumed 5.7 TWh/h with its giant servers what is four times less.
Blockchain’s energy consumption is rapidly increasing. It was increased by five times in 2017. Why does Bitcoin that exists only in the digital space require so much energy? The problem is in the mechanism called Proof-of-Work. Distributed systems that store information about money and its movement are secured from malpractices with blockchain receiving information after the completion of complicated algorithmic problems. Miners are competing in solving these problems (blocks), and once the block is being solved successfully, they are being rewarded with 12.5 Bitcoins and 1000 USD. This reward is being decreased by half every four years.
The Proof-of-Work mechanism allows the network node to verify that another node responsible for adding a new block into blockchain has completed necessary calculations. In the process of verification, the string of the new block’s header is being discovered. It contains the link on the former block. In March 2018, such hashing operations, according to de Vries, were performed 26 quintillions times per second in the world.
This mechanism created the mining industry and made it a giant consumer of electricity. In 2012, Bitcon’s total capacity exceeded the most powerful supercomputer in the world. Computers require a lot of energy to solve algorithmic problems, but they become more and more powerful. Consequently, Bitcoin’s protocol gets more complicated upon the completion of the next 2016 blocks once every two weeks as otherwise miners would have been generating too many Bitcoins. It is a perpetual cycle: the faster the computers get, the more complicated problems miners are solving become. People engaged in mining have to upgrade their devices that consume more and more energy.
It is impossible to win this race. The cheaper and the more effective the mining equipment gets, the more complicated the problems become, and the more energy is required to solve them. Fortunately, the original number of Bitcoins is not infinite. Therefore, the energy consumption of Bitcoin’s blockchain will gradually decrease, but the final outcome will depend on its price. According to Bitcoin Energy Consumption Index, energy consumed by miners will soon reach the level of Austria, or 20 percent of the UK’s energy intensity.
De Vries is concerned with the fact that Bitcoin’s overall electricity consumption will grow from current 0.5 percent of the global figures to 5 percent. This year’s profit of the mining industry will exceed 5 billion USD, and its costs (electricity and equipment) will amount to 3.7 billion USD. However, de Vries’ estimates are just one of the models assessing Bitcoin’s energy consumption. His opponents argue that in reality Bitcoin’s energy consumption is approximately three times lower.
If miners’ profit no longer exceeds the electricity and equipment costs, mining firms will be dismantled. There are cases, however, when miners do not pay their electricity bills or buy mining equipment. According to the report prepared by the University of Illinois, National Science Foundation’s supercomputer was used to mine Bitcoins worth of 8.000-10.000 USD what caused the university 150.000 USD in charges. In Orenburg, Russia, the authorities ceased the operations of the biggest mining firm in Russia and Europe stationed in the building of an abandoned factory that did not pay the bills for 8 million kWt/h it used. Miners’ profit exceeded almost half of the costs in August, 2018. It means that we will not be able to witness the growth in Bitcoin’s energy consumption, if its price remains the same. One can only imagine what the mining costs will be if it reaches 50.000 USD.
Entrepreneurs are finding different locations for mining where they would either have cheaper electricity bills or they would not have to pay for it at all. This is the reason why the main mining equipment producer is the Chinese company Bitmain and the center of mining industry is Inner Mongolia in China, where 1 kWt per hour costs 4 US cents, what is five times lower than in the UK.
21 thousand computers work at the biggest mining firm located in Ordos, Inner Mongolia, what is amounted to four percent of the global energy consumption to mine Bitcoin. Each of these computers generates 14 trillion hashes per second and consumes the same amount of electricity as a microwave. Approximately 30-40 percent of energy consumption in a lot of data-centers is being used for cooling: Bitmain computers cannot function when the temperature reaches 38 degrees Celsius. Electricity supplied to the firm in Ordos is being produced from coal (the fifth in China, coal production-wise), that’s why it is argued that mining is not an environmentally conscious activity. Bitmain consumes 40 MWt/h, the number equivalent to the energy consumption of 12 thousand apartment buildings. Bitmain pays its bills with industrial tariffs, approximately four cents for kWt/h: if the electricity cost the same as for households, this type of business would not be considered attractive. The amount of electricity used in order to serve Bitcoin’s entire industry is equal to the amount consumed by 7 million households in the US.
Bitcoin is extremely unecological. A single Bitcoin’s transaction in summer 2018 consumed 934 kWt. In comparison, 100.000 transaction in the Visa system require 5.5 times lower energy. Bitcoin’s “carbon footprint” is equal to 17.7 million tons of CO2. Mining capacities will reach its economic limits with Bitcoin’s current price as profit will no longer cover the electricity costs. However, if its price hits the 20.000 USD target, a steady increase in its energy consumption will be observed. It is not surprising as Bitcoin’s protocol offers a 200.000 USD reward every ten minutes to those who will be able to find inexpensive electricity and fire their laptops.
It can cause problems for Ireland with cold climate where it is not necessary to spend money on cooling of computers and where almost 80 percent of electricity is being generated on hydro stations. It makes it so attractive that this year local crypto firms would need more electricity than households.
It is possible that crypto industry will find the way to decrease its energy consumption. One of them is the substitution of the Proof-of-Work mechanism with Proof-of-Stake (PoS). In this case, those blocks will have higher chances to generate the next block that already have a large number of tokens and keep them longer. It is not necessary to build mining firms that are competing in solving algorithmic problems. If the entire crypto industry has transferred to the Proof-of-Stake simultaneously, its energy consumption would have decreased significantly. Keeping one coin in the wallet in the system of delegated Proof-of-Stake is equivalent to having the right to add the next block into the blockchain. MILE’s emission is built in the similar manner. Each participant of MILE’s ecosystem can become both the owner and the emitter of the money and get small percentage from issuing it.
The difference lies in the fact that MILE uses developed half a year ago mining protocol (environmentally conscious mining) sdBFT that only slightly resembles PoS. Any PoS protocol has limitations in the form of several dozens of active masternodes what increases the probability of decentralization. It can be observed in case of Ethereum or stablecoins like Bitshares. As opposed to conventional strategies, in MILE’s ecosystem, the first ecosystem that was able to implement sdBFT on practice, decentralization is programmed in the way that only hundred nodes are selected from thousands in order for the block to be solved. Selection happens according to the algorithm that guarantees high level entropy combined with energy consumption.
Bitcoins’ emission requires a lot of energy, and with the Proof-of-Stake mechanism it is necessary to have cryptocurrencies in order to emit it. If in the process of Bitcoin’s emission miners compete with one another, money is being emitted by the community itself in Proof-of-Stake. The drawback of such mechanism is in the fact that cryptocurrency is being concentrated in the hands of a limited group of people. There are hybrid versions as well, and one of them is described above, that combine both mechanisms and help to save the energy. Insignificant time constraints and financial costs of finding the consensus make it possible to assume that the future is ahead of energy efficient minting, and not mining.
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