How do we solve bitcoin’s energy problem?

Cryptocurrencies continue to fascinate, but one part of bitcoin mining is increasingly being pointed out as a problem. This is because bitcoin mining and transactions in bitcoin consume a huge amount of energy, which is not sustainable in the long run. But how come?

Since its invention in 2008, bitcoin has been slowly rising through the ranks of to become something even mainstream investors on the stock exchange are interested in. More investors and more transactions that all have to be encrypted over the Internet, which means you also need more energy to run the currency. So much energy, in fact, that between the high cost of mining (unless you’re operating a server farm there’s no point in trying) and an increasing number of transactions, you could run entire countries off the energy it takes to manage what remains a speculative digital asset.

If you understand the principles of blockchain, then you also know that it is a decentralised principle that locks transactions. So since we need different computers for each set of data, each of which possesses an identical copy of the previous transactions, it becomes increasingly difficult in terms of difficulty. Mining bitcoin, both to secure transactions and to mine additional bitcoin, also requires more and more from computers or nodes.

Why does bitcoin consume so much energy?

Crypto coins have two key properties: 1) they are encrypted and 2) they are verified. To do that, you need two elements: 1nodes that complete the encryption and 2) a ‘nonce’ (number once used) – a, unique, number given to a blockchain.

Once the nonce is found, it is combined with the previous block and that becomes a hash function. That’s another unique code that ensures your block is absolutely secure.

However, because the nonce must be searched for in a random manner (there is not really a calculation method) and it takes an average of about 10 minutes per block to find the nonce, a lot of computer power is required to secure bitcoin.

As a reward for all that work you get something in return: some bitcoin of your own.

Why mining is so competitive

The idea is that because of the incentive of bitcoins to be earned, there will also always be enough computers online to make transactions relatively smooth. That in itself has consequences: a sort of race between miners is created to convert the highest-value transactions anyway (because the higher the amount, the higher the transaction cost). The more hardware and the faster your computer(s) you can deploy, the more money you make. Since there will also be a certain number of bitcoins in circulation, the race to mine new bitcoins becomes increasingly competitive.

On top of that, the yield for new bitcoin, gets smaller and smaller. Every so often, the amount you get per bitcoin mined is halved. So the message is to get there fast. The more miners there are, the harder it becomes to be the first to find the right code, and so having a stronger computer also becomes increasingly important.

So that explains why it takes so many strong processors to make bitcoin mining a lucrative business. That is, it also takes a lot of power to power all those processors. Depending on where you live and where your energy comes from, the price of your energy is higher than the profit you can make on bitcoin.

This is no exaggeration. ING put an economist on the issue and he calculated that one monthly energy bill (i.e., literally, powering his entire house) was enough to get one bitcoin transaction done. To make one transaction, miners charge an average of 200 kilowatt hours. At 0.25 euros per kilowatt hour (according to VREG), you shouldn’t process too many small transactions on your home laptop before you end up running at a loss. By comparison, VISA uses about 0.01 kilowatt hours per transaction.

Alternatives

Of course, Ethereum, another popular crypto currency, is also blockchain-based. This one consumes about 37 kilowatt hours per transaction. Not bad, but still very high if you want to use it to pay for your coffee, for example.

Now imagine if we all had to do about five transactions every day. That’s an average that may not sound entirely unrealistic. Then, according to Computerworld, we would each download about 672GB of block information to keep everything safe according to the proof of work system that bitcoin adheres to. That’s 240TB of information per year per user.

One solution offered for the energy problem is that bitcoin would go from a proof of work to a proof of stake system. In a proof of work, the money from mining bitcoin goes to the person who put the most work into it (and is the first to find the solution). In proof of stake, there is no reward for mining an such, but the person with the most number of bitcoins gets to create the next block.

Since bitcoin is currently the crypto currency with the greatest value, there is also more money in blockchain development for bitcoin than, say, Ethereum. However, once other crypto currencies also manage to develop a secure and solid system, that could change quickly.

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