Proof of Work & Sustainability - A System of Rules.org

Proof of Work & Sustainability (20 min read)

At the bottom of this page you will find a list of helpful resources to educate yourself on Bitcoin’s environmental impact. But first, let’s evaluate if the mainstream media’ narrative of Bitcoin’s “ESG concerns” holds truth and evaluate Bitcoin’s energy use. There is a misconception that Bitcoin is “bad for the environment” and uses over-proportional quantities of energy. This is because mainstream media vastly underestimates the impact that Bitcoin will have and labels its use of energy “wasteful”.

You often read or hear in the news that Bitcoin’s electricity usage is that of a small country or a years electricity usage of Christmas lights. At first, this sounds like a great deal of energy. However, the energy use of Bitcoin needs to be put into the “right perspective”. The Bitcoin network holds the potential to onboard billions of people into an inclusive and open monetary network and is going to replace large parts of the existing financial legacy system, it’s energy use should, therefore, be compared with that of the existing financial legacy system, which is much higher than Bitcoin, as shown in Galaxy Digital’s report on Bitcoin energy consumption. The impacts of gold and banking on the environment relative to Bitcoin are much greater than mainstream narratives suggest (via Bitcoin Magazine).

I do find it amusing that critique of Bitcoin’s energy use is often voiced by players of the existing financial legacy system. Isn’t the history of gold & banking filled with unethical behaviour, where the lust for gold & riches has led to robbery, theft, murder and the extermination of entire peoples ?

According to Michael Saylor, in June 2021, the Bitcoin network secured around 800 billion dollars in monetary energy with about 4 billion dollars in energy cost spend annually, which sums up to around 5 bases points – making Bitcoin’s use of energy in proportion to its purpose highly effective. To compare, Google puts around 180 billions dollars of energy into their business to create around 1.8 trillion dollars of market cap. Bitcoin secures monetary energy like no other store of value in the history of mankind. Once this is understood, it becomes clear that Bitcoin’s energy consumption is not over proportional, neither wasteful.

Why does Bitcoin use energy ?

The consumption of energy per se is nothing bad, but follows the laws of thermodynamics, where output is the result of input. Output in the Bitcoin network is its value proposition of being an independent and censorship resistant payment network and secure store of value. “People are choosing bitcoin because it possesses almost all of the necessary characteristics of useful money with its brilliantly engineered design. Paraphrasing Michael Sayor, “bitcoin is a perfectly engineered closed thermodynamic system”(Satoshi Energy).

Traditional centralized banking systems like the Federal Reserve are subject to boards and government institutions controlling the supply and distribution of money. In contrast, bitcoin is entirely produced collectively by the network, at a rate which was defined when the system was created and known to the public, to paraphrase Andreas Antonopoulos in “Mastering Bitcoin.”

Because Bitcoin is not governed by a central authority there needs to be a set of rules amongst the users to govern communication and secure the network. The Bitcoin network is secured by the proof-of-work consensus algorithm, which consumes electricity/energy, the networks Input.

Proof-of-Work

Proof-of-Work is the algorithm used in Bitcoin mining. Bitcoin mining works by adding blocks of transaction records to Bitcoin’s public distributed ledger, making sure no coins are double spend. Overly simplified, proof-of-work asks network actors to feed „work“ in the form of costly electricity/energy into the network. The network rewards honest actors for their contribution with newly minted bitcoin (the block reward) and transaction fees, both paid in bitcoin. The energy that’s fed into the network secures the network and keeps it “alive”. The system can only work, if actors act honestly. The proof-of-work algorithm allows for a working consensus mechanism, because it ensures that a majority of the network participants act honestly. Users that have cost contributing to a network are incentivised to not act dishonest, as this would create cost without reward.

The proof-of-work concept fits in well with the natural order. “Biology gives us the most suitable framework for understanding it. There is an idea from biology called the Handicap Principle which resolves conflicts amongst social groups and governs behaviour. Handicap principle evolutionarily evolved to let animals prove the “honesty” or reliability of their signal. To my knowledge, any alternative consensus mechanism like proof-of-stake has no equivalent applications in either human history or biology (Demeeser, T.). This mechanism allows the Bitcoin network to be governed without a central authority, which is most important, as the Bitcoin network receives its utility from being independent and censorship resistant. Proof-of-work should not, therefore, be seen as a mysterious or wasteful system, but as something functional, natural, and potentially of value for the design of any communication protocol.” (Krawisz, D. [2013] “The Proof-of-Work Concept“).

“We need to use a proof-of-work system because we need something that is native to the digital realm. Once you understand that the digital realm is informational in nature, the obvious conclusion is that computation is all we have. If your world is made of data, manipulation of data is all there is. Proof-of-work works in a peer-to-peer setting because it is trustless, and it is trustless because it is disconnected from all external inputs — such as the readings of clocks (or newspapers, for that matter). It relies on one thing and one thing only: computation requires work, and in our universe, work requires energy and time.” (Gigi)

Bitcoin functions as Commodity money, which “is money whose usefulness as a measuring stick, i.e. monetary value, comes from the commodity of which it is made. In other words, the money is “backed” by the resource used to make it. Gold, as money, is effectively backed by the work done to mine new gold. Bitcoin, as money, is backed by the work done to mine new bitcoin. Work is equivalent to energy, so both gold, bitcoin, and effectively any other type of money are all energy backed money because they take work to produce. In practice, it makes sense for energy to be the monetary backing of an economy because it is the very foundation of the known universe.” (Satoshi Energy)

In fact, Bitcoin mining helps to facilitate a much more environmental friendly use of electricity. Bitcoin “miners over time will be forced towards ever cheaper energy. This is because miners are incentivised to cut cost, represented by electricity and as a result, move into using cheap forms of energy, which are renewables. This helps to innovate the use and efficiency of renewables overall (one of the oldest hydro-power stations in the U.S. is mining Bitcoin). “Fortunately, and perhaps by design, we are moving toward a society with abundant low cost renewable energy to back our new digital money supply. Over the coming decades, bitcoin miners will continue to utilize low value surplus renewable energy to mine the remaining 2.4 million bitcoins and compete for transaction fees from the late 21st century economy and beyond.” (Special Report: Energy Backed Money)

There are different estimates for Bitcoin’s energy mix spanning from 29% and 39% renewable (The Cambridge Centre for Alternative Finance) to 73% renewable (CoinShares). The figures for the rest of the world look worse, with 29% of the electricity grid and 17% of all energy use being renewable Bitcoin vs Financial Sector Energy Use.

The Cambridge Bitcoin Electricity Consumption Index (CBECI) showed an electricity consumption of 133.7 terawatt hours per year. We will assume that Bitcoin’s energy mix is 34.5% renewable, based on the average of Cambridge’s 29% to 39% renewables, giving Bitcoin a carbon intensity of 458 kilograms (kg) of carbon dioxide equivalent per megawatt hour. This means that Bitcoin emits 61.2 million tons of carbon dioxide, or, under 5% of what the financial services industry does. In the scheme of global carbon dioxide equivalent emissions, this is 0.12%.

“Bitcoin’s price and energy use will continue to grow, but its carbon intensity is on a clear downward trajectory. Mining entrepreneurs are innovating in the oil and gas field, and there is more than enough waste methane on earth to power Bitcoin several times over. Instead of just having no emissions at all, Bitcoin could actually become an emissions mitigator. Large established firms such as the Aker Group (and its Bitcoin-specific subsidiary SeeTee.io) have cataloged their commitment to pursue these avenues in their letter to shareholders.” Bitcoin vs Financial Sector Energy Use

As a result, Bitcoin miners, contribute towards creating more efficient and cheaper use cases for electricity and will be one of the thriving dynamics in driving innovation in energy efficiency. The way that Bitcoin scales, is that over time it uses less and less percentage of its market capitalisation in energy. The absolute market capitalisation goes up and its energy use goes down.

“In closing, bitcoin is taking the variable out of money using modular interruptible data centres, bitcoin miners, which work like battery energy storage systems with inverse cash flows. A battery participating in the energy market stores surplus energy when demand is low and sells it back to the grid when demand is higher, while a bitcoin miner stores surplus energy by converting it directly into hard money. As open wholesale power markets continue to offer increasing amounts of abundant low cost renewable energy, the market will find new ways to utilize that energy to improve the way we all live and work. One innovation that will be a foundation for many other society advancing innovations is bitcoin – energy backed money for a pro-human future.” (via Satoshi Energy)

Bitcoin a “energy money”

In its essence, money is energy. The exchange of money, always involves the exchange of energy. This is true for the actual exchange of money (physical or digital) and for the product or service that is exchanged for money. It takes energy to produce a good or service and involves energy to exchange a good or service. Thus, money is the universal language through which we can store and exchange energy. “Money is a tokenised form of energy in a social political framework. Energy is the most fundamental reality about which humans can measure, communicate, and transact. Energy animates all life and all action. The universal utility of energy, combined with the fact that it cannot be artificially forged or counterfeited, gives it great exchange value among humans. Purposeful action is almost always directed toward the accumulation of more energy: this is at the heart of the entrepreneurial pursuit of profits, the industrial drive toward higher productivity, and the animalistic appetite for food. As the good most easily exchangeable for any form of energy or product of energy, money is the epitome of energy” (Robert Breedlove). It follows, that the use of energy in proof of work to produce bitcoin, as a tokenised form of money, follows the laws of physic and bitcoin fits perfectly in the natural state of thing. As a result, Bitcoin does not waste energy, it harnesses energy.

The following resources will help you to dice into the topic of Bitcoin & Sustainability

Thank you for taking the time to read though this piece, if you have any questions, thoughts or advice, please reach out.

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