The True Cost of Bitcoin

Bitcoin was developed to create a decentralized electronic currency system, and since the direct transfer of assets is not plausible electronically, information now becomes the store of value.

But unlike the traditional concept of a commodity, there is no actual definition of an object that represents a Bitcoin. Rather, the network operates on a ledger that is accepted by all participants.

This ledger contains the entire transaction history of the Bitcoin network, representing the changes of ownership, of amounts of a definition less entity called Bitcoin, since its genesis in 2009. This shared ledger is maintained by thousands of computers worldwide, called nodes, operating on a peer-to-peer network.

Each node keeps a separate copy of the entire ledger and combined they form the public permission less voting system that validates every transaction. When a transaction occurs, the sender’s balance from a previous Bitcoin transaction is transferred to one or more public recipients of an asymmetric cryptographic key pair.

Once a transaction is created, it’s sent to the closest node where it is subsequently distributed throughout the network. A special transaction, known as a block reward is also added to the block, as an incentive mechanism for miners to build upon the network by block creation.

Each mining node can independently choose which transactions will appear in a new block, but only one can earn the authority to add their block to the chain of existing blocks, that every participant on the network accepts as the Bitcoin blockchain. Finding this hash is called proof of work or PoW. Once a valid hash is found, the new block is broadcasted to the rest of the network where it is validated and added to each node’s copy of the blockchain.

As of February 2021, it takes roughly 90 sextillion hash guesses to create a valid bitcoin block. This dramatic rise in the needed computational power is a direct result of an inbuilt mechanism of the bitcoin network that raises or lowers the lead zero count requirement of a block hash, in order to keep the average creation time of a new block to around 10 minutes.

At its inception, each bitcoin block created, rewarded 50 bitcoin.

As of February 2021, one block reward is worth 6.25 bitcoin. 

POWER CONSUMPTION

As the value of bitcoin rises, miners collectively unleash more computing power at the network to capitalize from the higher prices. This inherently forces the network difficulty to increase and eventually, an equilibrium is reached between the profitability of mining and network difficulty. And within this feedback loop that regulates the network, lies a key link between bitcoin and a real-world resource, power consumption. 

As of February 2021, the total network hash rate has hovered around one hundred fifty quintillion block hashes calculated every second, globally. In this case, the total hash rate of the network can be said to be 150 million TH/s. Because these devices are the most efficient miners on the network, it sets the theoretically lower limit of energy consumption at 4.5 gigajoules per second or about 40 terawatt-hours per year if the current total hash rate is maintained.

This approach assumes that all mining participants in the network aim to make a profit and that all new Bitcoins produced by mining, must at least, be higher on average to the\an operating costs of mining.

SCALE OF POWER

Even the most conservative estimate of the network ranks it as high as the 56th most power-consuming country in the world, New Zealand. At the current best estimate of the network’s power consumption levels, each bitcoin transaction took around 700-kilowatt-hours to process. 

Further compounding bitcoin's power consumption issues is the fact that mining hardware must run continuously to be effective. This makes it difficult to employ excess power generation strategically for mining use, effectively making mining consumption a baseline power demand on infrastructure.

In fact, it’s estimated that China single-handedly operates almost 50% of the bitcoin network, with the nation of Georgia following in second with a little over 25% of all mining, and the US in 3rd place with 11.5%. The annual carbon footprint of the bitcoin network is estimated to be around 37 Mt of carbon dioxide.

FUTURE

Alternative consensus mechanisms, like proof of stake (PoS), have been developed to address the power consumption associated with proof of work.

Many experts still warn that in its current growth trajectory, it is simply unsustainable for bitcoin to become a global reserve currency as this would require the network to consume a significant portion of all energy produced globally.

by New Mind