Does Bitcoin Waste Energy? Proof-of-Work Energy Consumption Explained

2021/05/12 03:39:58

Bitcoin uses approximately 41 terawatt-hours of energy per year, which is roughly equal to the annual energy consumption of the entire country of New Zealand, according to CoinShares’ June 2019 mining report. In other words, Bitcoin is bad for the environment, claim Bitcoin opponents and environmental activists.

People who make this argument usually have a specific bias or agenda. These critics associate energy production with energy consumption. This would equal saying that electric cars harm the environment because they use more energy in total than gasoline cars. Claiming that would mean ignoring the side effects of concentrating production of energy and regulating it as well as distributing the consumption in that way.

The distribution of gas and oil is much more harmful to the environment. At least theoretically, if you're producing the electricity for your Teslas with coal-fired power plants they're more damaging to the environment. You don't hear Bitcoin opponents stating this argument because it is much easier to regulate the production of energy in one place (at the electricity plant) than regulate the emissions of millions of vehicles scattered across the roads. So, if you shift the emissions from the endpoint to the source you've achieved a great deal of environmental impact.

Energy Consumption in Bitcoin is Not Linked to the Number of Transactions on its Network

Energy consumption in Bitcoin does not grow linearly with the number of people using it. Bitcoin mining can happen anyplace around the world as it does not require a specific location. Bitcoin mining is attracted to renewable energy and waste energy that either cannot be distributed or cannot be used in a cost-effective manner because it is remote. Things like off-flaring of gas hydro that exceeds local demand or other renewable forms of energy that exceed local demand and do not have distribution mechanisms.

Now that we have uncovered an obvious bias against Bitcoin’s energy consumption, let’s take another example – traditional finance.

Accounting for the energy of a single transaction doesn’t even scratch the surface of the dollar’s carbon footprint, which includes the entire financial infrastructure supporting fiat currencies - around 8.4% of GDP in the US alone. This includes 80,000 bank branches, 470,000 ATMs in the US alone, and forests of skyscrapers towering over most cities across the planet. It is estimated that it would take somewhere between 500 and 1,000 years of mining just for Bitcoin to match the carbon cost of the 2008 recession alone.

Paper money allows governments to print unlimited amounts of debt, which contributes to all sorts of collateral damage such as inflation, business cycles, and trillions in wasteful spending where the true costs are hidden by debt financing.

The State of Texas’ ‘Duck’ Problem

Bitcoin may not only consume far less energy than the traditional financial system – it may even assist energy products and effective energy distribution. In the state of Texas, Layer1 Technologies has found a way to help sustain Texas’s energy grid and even allow for the sustained growth of renewable energy.

Solar energy provides peak capacity during the middle of the day, and wind energy peaks at night. Retail energy demand, which is Texas’s largest driver of demand, peaks in the late afternoon once people come home from work and turn on their air conditioners.

The misalignment of peak production and peak demand messes up the economics of electricity generation. This situation is known as the “Duck Curve” where there’s too much energy being generated which ends up getting curbed or sold at negative prices.

Since you cannot control when the wind or sun will yield consistent energy, the only solution is to find a way to reduce demand for energy during the hours of peak consumption. Bitcoin produces a (partial) fix.

Bitcoin mining consumes energy 24/7 at a consistent rate. Bitcoin mining operations are also flexible and easy to shut down because mining doesn’t require continuous operations. This is where Layer1 saw the opportunity to help combat the Duck curve.

Layer1 worked out what’s called a demand response contract with Texas’s energy grid regulator (ERCOT). This contract specifies that Layer1’s mining operations will shut down at a moment's notice at times of peak energy demand. In return, they’ll collect an annual premium that effectively lowers their energy cost to less than $0.01 per kWh.

Final Thoughts

On a global scale, Bitcoin is much more efficient than traditional banking and gold mining. Renewables, particularly hydroelectric power, are accountable for a large percentage of Bitcoin’s energy mix. Bitcoin mining’s estimated dollar cost per giga-joule expended is 40 times more efficient than that of traditional banking and 10 times more efficient than gold mining.