How Bitcoin uses energy

Published in Parmen Media

You often hear or read in the news that “Bitcoin wastes” energy. It saddens me to see a technology as beautiful and empowering as Bitcoin being so misunderstood. In this piece, I will explain why Bitcoin uses energy to clear up some misconceptions.

Bitcoin is not governed by a central authority. Therefore, there must be a set of rules between users to regulate communication and secure the network (consensus building). The Bitcoin network is secured by the Proof-of-Work consensus algorithm, which uses energy – why this works will become clear as you read on.

In contrast, traditional centralised banking systems like the Federal Reserve are governed by boards and government agencies that control the supply and distribution of money, which makes them susceptible to manipulation.

Proof-of-Work

The problem of consensus building in computer systems is known as the “Byzantine Generals Problem”, which addresses the following dilemma: Imagine a group of Byzantine generals outside a city they are about to attack. They can only win the battle if all generals attack at the same time, and to do this they must communicate when to attack. There must be a messenger (trusted third party) to relay the information of the attack to the other generals. The problem with this is, that the messenger must be trusted to carry the message without alteration (malicious or accidental). It is the trust in the messenger that needs to be solved because we have to accept that some people are unreliable. 

 Source: https://medium.com/swlh/bitcoins-proof-of-work-the-problem-of-the-byzantine-generals-33dc4540442

Satoshi Nakamoto solved the Byzantines Generals Problem by introducing the Bitcoin blockchain with Proof-of-Work for the validation of the transaction history. The blockchain is the ledger of the Bitcoin network that stores the history of confirmed transactions. Miners take transactions to put into the next block of the blockchain. The act of mining a block is the search (by brute force) for a combination of meaningless data (to be included in the block), to solve a difficult mathematical challenge set by the Bitcoin protocol. If the problem is solved, the block (transactions + meaningless data) becomes valid and is added to the tip of the blockchain. When a miner is successful, they receive a reward for their efforts in the form of newly minted bitcoin and transaction fees.

All generals only accept the “message” with the greatest amount of work as true. This means that if a miner has successfully confirmed a valid block of transactions, everyone can assume that the other generals will act on the same message (accept it as true). This allows all generals to arrive at a consensus without relying on a messenger (trusted third party). This is how the Bitcoin network can function without a central authority or trust. The rule of trusting the message with the most work cannot be changed and is embedded in the Bitcoin protocol. 

The proof-of-work chain is the solution to the synchronisation problem, and to knowing what the globally shared view is without having to trust anyone. Satoshi Nakamoto; 9 Nov 2008.

Bitcoin uses electricity to underpin its security function.

As explained by Arman The Parman, this computer effort is NOT WASTED energy. It is a defence mechanism; it is there to defend the Bitcoin blockchain from edits; to make the ledger immutable without needing to trust a central authority. 

The miners spend this energy, seeking a reward in bitcoin. Any attacker (e.g. someone who wishes to tamper with the blockchain) must compete by spending more energy than the entire world’s mining power combined, and potentially receive NO REWARD if they fail. The more energy spent by miners, the more expensive it is to attack Bitcoin. This game-theoretic equilibrium is one of the reasons the Bitcoin network functions.

In summary, Proof-of-Work is one of the core inventions used by Bitcoin. It ensures two important things:

1. The ability to achieve consensus in a decentralized computer network without trust or the need for central party coordination.

2. That the transaction history can’t be tampered with (virtually impossible).

The Handicap Principle

The Proof-of-work consensus algorithm works in accordance with processes observed in the animal world. Biology gives us the most suitable framework for understanding it. There is an idea in biology called the Handicap Principle which resolves conflicts amongst social groups and governs behaviour. The Handicap Principle evolutionarily resulted to let animals prove the “honesty” or “reliability” of their signal. For example, many animals have lush feathers not because they are necessary for survival, but because they are ‘signallers’ and enable consensus in a group, which is important for survival. Proof-of-work should not, therefore, be seen as a mysterious or wasteful system, but as something functional and natural, and potentially of value for the design of any communication protocol.” (Krawisz, D. [2013] “The Proof-of-Work Concept”).

The Bitcoin network works according to the laws of nature. To my knowledge, any alternative consensus mechanism such as Proof-of-Stake has no equivalent applications in nature or biology (Demeester, T.).

Bitcoin & the First Law of Thermodynamics 

The mainstream media narrative is that Bitcoin is “consuming” too much energy. This is a linguistic attack on Bitcoin. It assumes that Bitcoin is destructive. It is not. Contrary to popular belief, energy is not consumed; it is used. The first law of thermodynamics (a study of a group of physical quantities, such as temperature, energy, and entropy, that are fundamental to physics and other natural sciences), also known as the law of conservation of energy, states that energy can neither be created nor destroyed, but it can be changed from one form to another. For example, children eat food in order to grow. Miners use electrons to produce bitcoin. They effectively channel available energy into a higher, more useful form, namely bitcoin.

Energy use per se is not bad if the purpose justifies it and the energy production is environmentally friendly. This is the case with Bitcoin. The use of renewable energy in mining is disproportionate to other industries, as renewable energy provides a cheap source of energy for miners, who in turn are helping to innovate the renewable energy market. In addition, there are many positive side effects of Bitcoin mining such as grid efficiency and energy monetisation, as I showed in my last article. 

In the near future, through financial incentives, Bitcoin mining will become an integral part of our energy markets and act as a grid stabiliser. For the first time in history, we have a global buyer of electricity: Bitcoin miners. Global energy asset owners now have the optionality of selling to two energy buyers: the grid, or the Bitcoin energy market, and because of this energy will likely be priced in bitcoin at some point. Theoretically, any available energy could be converted into bitcoin. By linking energy to bitcoin, energy can be priced correctly.

Conclusion 

Considering that the Bitcoin network could theoretically store all of the world’s wealth (Global wealth reached a record high of $530 trillion in 2021), it may be the most efficient way we humans have found to store value ever. Once this is understood, it becomes clear that Bitcoin’s energy use is not excessive or wasteful. 

Resources: 
I would like to thank Arman The Parman for his time and generous insights. He helped me tremendously in putting this piece together. 

Continue reading: Why Bitcoin is good for the environment

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