Bitcoin Mining Wastes Energy? What If That’s a Good Thing?

I am frustrated by the debate over whether or not bitcoin is an environmental disaster waiting to happen.

No one seems to know what assumptions to use. Depending on what efficiency ratios we assume for currently operating ASIC mining rigs, they’re either consuming 35 terawatt-hours per year, the equivalent of Denmark, or something far less, closer perhaps to Bolivia. The stinginess of mining pools to provide information about their operations can be partly blamed for this.

We also don’t know how much of mining runs on low-carbon energy, such as the mining farms that use geothermal energy in Iceland or hydropower in Washington State. Surely that matters.

And then there’s the “compared to what?” question.

Gas-guzzling banks

If bitcoin is to be assessed as an alternative to fiat currencies, banks and traditional payment systems, then we must consider the costs of securing those systems – the physical bank branches, the armored cars, the staff employed in fraud detection, and so forth.

While only a portion of those legacy costs goes to energy consumption, savings from foregoing those costs could be put toward constructive uses for humankind, such as building more renewable energy sources.

But then, what metric do we use to compare bitcoin to banks? Bitcoin is still a pipsqueak compared with the total value of fiat transactions, which still means its energy consumption is proportionately very high. Motherboard recently claimed that one bitcoin transaction uses as much electricity as theaverage house does in a week.

Still, we all know that transaction growth on the network has slowed due to congestion and a fixed block size. So, as rising bitcoin prices keep enticing miners to add more hashing power, the numerator is increasing while the denominator stays steady, resulting in a massive surge in per-transaction electricity.

And while that’s hardly a shining endorsement for bitcoin, it’s less of a critique of its energy efficiency than of its scaling challenges.

Things change

Which brings me to an even bigger gripe I have with the ill-defined bitcoin energy debate, which is that too many people assume that technology remains static, perhaps without thinking.

That’s a crazy assumption for an industry in which intense competition for block rewards and an open-source developer pool come together in a dynamic cauldron of development. Technological advances in both cryptocurrencies and energy are changing more rapidly than any of us can keep up with. We must keep that in mind.

On that note, point number one: Lightning is coming. While its payment channels solution isn’t specifically aimed at energy efficiency, if we think about the cost issue as a per-transaction metric, it could help making bitcoin less damaging to the environment – at least when assessed relative to its utility as a payments service.

Whether Lightning succeeds in encouraging more people to use bitcoin for small transactions, rather than hoarding it to capture price gains, remains to be seen. But if you compare what it costs to run the tiny amount of computer processing power to send peer-to-peer payments over a network of Lightning channels against those of the banking and infrastructure needed to process card payments over the Visa network, this future model for bitcoin starts to look far more efficient.

Point number two comes via Coin Center’s Peter Van Valkenburgh, who astutely argued that the more miners are enticed to compete for bitcoin – again, a function of its rising price – the more they are encouraged to seek ever-more efficient sources of power to boost margins and secure an advantage over others.

With the price of solar and wind energy in some places now at 2 cents per KwH or lower, that search will increasingly lead them in the direction of renewable sources.

Where the argument gets really interesting is when we assume that a rising bitcoin price will drive demand for hashing power so high that the network, as some alarmists say, will consume more power than the U.S. by 2019.

Bitcoin saves humanity?

If that happens, then it should not only incentivize miners to seek low-cost renewable energy, but also drive energy firms to work hard at developing solutions for them, with spillover benefits for the rest of the world.

In other words, the incentives that bitcoin demand puts in place could not only drive efficiency and green energy solutions in the crypto world but help to spur them in the wider economy too.

In retrospect, Van Valkenburgh’s point should have be blindingly obvious to all familiar with how Moore’s Law and the incentives of economic competition have driven technology toward greater efficiency for the past 50 years.

It wasn’t obvious because, as I mentioned, people tend to think in terms of a stasis. They fail to see the dynamic feedback loops generated by rapidly changing technologies such as bitcoin.

This, I think is the most important lesson from the many debates that roil the bitcoin community.

In an industry where technological change – rapid, relentless technological change – is the only constant, any debate about the future must acknowledge it as a variable.

Solar power image via Shutterstock