This week’s letter is inspired by my darling sister, who asked me to try and tackle environmental concerns in crypto. So with COP26 (the UN Climate Change Conference) in full swing and crypto having a bad rep when it comes to energy use contributing to climate change, I’ve loaded up some bullets for her:
1. “I thought you read my newsletter”
My first response to my sister is “you need to read The Bullet No.4”, where I palmed off the topic to a great article written by Lyn Alden about Bitcoin. It’s an in depth read and addresses all the points in detail with independent supporting evidence, so I think everyone should ditch this letter now and read that instead.
Bitcoin’s Energy Use Isn’t a Problem. Here’s Why
If you’re still here, I get it, we’re all time poor so I’ll try my best to distil it for you. I’m going to focus on Bitcoin rather than other cryptos, but we’ll touch on other ones at the end.
2. Why does Bitcoin use energy?
Every 10 minutes, the latest transactions between all the Bitcoin addresses are put together in a block. That block of transactions then gets made into a mathematical puzzle, which is where the cryptography part comes in. Computers enter a race to try and solve that puzzle. The winning computer gets to validate the transactions and add them to the previous block, hence the term “blockchain” and they are rewarded for solving the puzzle with some Bitcoin, currently 6.25 Bitcoin for each block. This process is what we refer to as mining and it takes a lot of energy for the competing computers to complete.
3. Energy is necessary for Bitcoin to work
The use of energy is integral to the process of mining and enables something called proof of work. By expending energy, which has a cost, the computers/miners show that they have undertaken work to solve the puzzle, which is what we call “proof of work”. As long as the reward for the miners exceeds the cost of energy for the miner, then they are profitable and there is incentive for them to keep participating. The energy used also secures the network as the most powerful computing network in the world, which gets stronger every day. Some worry about the Bitcoin network being hacked, but it never has been in over 13 years now, and the security provided by massive computing power is one of the key reasons why.
4. Bitcoin’s total energy use is low
Running the Bitcoin network uses more energy than Argentina, which sounds massive but it’s very important to put this into perspective because Argentina is a small country when it comes to annual energy consumption. China is by far the largest user of energy in the world, followed by the USA, and they both dwarf every other country. Bitcoin’s energy use is less than 1% of all the energy the world produces. You don’t have to take my word for it, the University of Cambridge keeps track of it for us Cambridge Bitcoin Electricity Consumption Index (CBECI) (ccaf.io).
5. Other things use more energy
An article from the BBC earlier this year says “the amount of electricity consumed every year by always-on but inactive home devices in the US alone could power the entire Bitcoin network for a year”. Think about that the next time you put your TV on standby.
Why are you still here? Read the Lyn Alden article.
6. More transactions don’t mean more energy
If people make more transactions using Bitcoin, this doesn’t mean it uses more energy. The process I described above is related to the amount of computing power, which doesn’t increase with volume of transactions. Computing power fluctuates, but it doesn’t matter if there is 1 transaction in the block or many. Therefore, as Bitcoin grows in terms of transaction volume, it’s energy consumption won’t necessarily grow in the same proportion alongside it. Quick fact, yesterday $74Bn was transacted on the Bitcoin network, which is 18 times more than Visa and Mastercard combined daily in the UK, so it’s already pretty big and how much energy do those 2 companies use?
7. Bitcoin decreases wasted energy
A large proportion of the energy produced in the world is actually wasted, as it is transferred from where it is produced to where it is used, and because energy needs to be ready and available when we switch something on in our homes. Much of Bitcoin mining is set up close to where energy is produced, therefore tapping into energy that would be otherwise wasted when it’s not needed.
8. Bitcoin encourages renewable energy solutions
Because Bitcoin puts a monetary value on energy, it incentivises miners to seek out ways to access the most abundant and cheapest sources of energy, and invest in the development of renewables. I’ve mentioned before about El Salvador tapping into volcanoes to use geothermal power for Bitcoin mining, which is just one example. I’d reference others but this letter is getting long already.
9. Proof of stake
Some other currencies use proof of work in a similar way to Bitcoin. Others are experimenting with something called “proof of stake”, which is where the people who own the most tokens validate the transactions. While proof of stake is less energy intensive, it is similar to what we have today, where a few organisations in power (banks) decide what happens and what doesn’t. That’s not open and free.
Final thoughts this week. All human activity uses energy, the question we should be asking is whether Bitcoin and others are a good use of energy or not. Free and fair money, I believe, is far more important than a lot of other activities we undertake as a society. Our money in the UK is currently mandated to inflate each year by 2%, and in most countries right now it’s over 5% per year. That means for every £100 you save today, next year it will buy only £95 worth of equivalent goods and services. Bitcoin is a deflationary currency that aims to solve that problem of people constantly being unable to get ahead because of inflation.
Oh, and read that Lyn Alden article.
Peace, love and Bitcoin.
Rob