Bitcoin and Electricity: Things You Don’t Know VOL.126th June 2019
Bitcoin and Electricity: Things You Don’t Know — VOL.1
I’m a fan of cryptocurrency, more precisely, a half-expert fan and a Medium beginner. Also, I know something about finance, economy, and investment, and may know Asia better than many of you (especially if you are from Europe or America). I’m always willing and ready to share my knowledge, ideas and personal views, not least in the field of cryptocurrency. Now welcome you to joining me for this discussion!
Bitcoin is the world’s largest and longest running cryptocurrency.
Bitcoin uses the POW Mechanism, which consumes power (electricity) to ensure system security.
With the two put together, Bitcoin has well consumed a host of power to this day. This, indeed, is a truth certainly worthy of our closer look and deeper study.
As early back as six months ago, the total Bitcoin power consumption could stand with that of a small or medium-sized European country (such as Ireland and the Czech Republic). Even more horrifying is that, some believe in the near future, Bitcoin power consumption is completely possible to surpass that of any European country.
The huge electricity consumption has sent Bitcoin, this cryptocurrency, out of the scope of a mere technical solution, but rather placed it well into a problem facing the whole society. Centering on this issue, I have seen too much the fight of too many misunderstandings, arguments, fallacies, and even burning confrontations. All that makes me realize the need to share my thoughts on some of the worthy-of-discussion topics (as I hereafter may outline and summarize). Be you a newcomer or an old pro in the field of cryptocurrency, I believe, there will always be some fruits here bearing for you!
Topic 1: Is Bitcoin wasting too much power?
This, in fact, is a very basic question, but is also the most complicated and subtle one concerning Bitcoin.
If you just get a glimpse of Bitcoin from above, or having had a bit mixed messages about it, this, I believe, will also be what in your mind. That’s why I put it all the way in front of the whole series, not only because it is a must concern that draw nearly all newcomers, but it stands highly crucial to the understanding of the nature of Bitcoin. And even if you do understand a lot about Bitcoin, this is also worth your second thinking!
Bitcoin Mining (or technically — Block Production) is based on an algorithm that exhibits a high degree of randomness, the SHA256 hash algorithm. You normally stand no chance to predict where a given input will bring you to. This means, in most cases, that the output value is completely random.
Miners, in a mining process, will scramble to enumerate an amazing number of Nonces expecting the very hash output to meet a highly demanding requirement — for instance, a hash value less than 0.000000000000001. Once a lucky miner happens to find such a Nonce, he then gets the accounting rights for the current block, becoming the generator of the block and getting the new Bitcoin reward in Coinbase.
The Coinbase rewards, however, are just a side bonus, but have dramatically become the power source of the entire economic system. And that’s what makes the whole Bitcoin POW mechanism so much fascinating, and also a fine embodiment of the true genius of Nakamoto. The profound philosophy behind the POW is therefore worthy of all deliberate and careful thinking in our minds.
This mechanism has imposed a requirement on the miner that he/she must use a computational unit (a chip, or a specially designed circuit) that can calculate the hash function to continuously enumerate Nonce by working around the clock, not to miss any possible chances for snapping the accounting rights of a given block.
Is Bitcoin truly wasting a great deal of power? The heart of the debate is on whether the SHA256 calculation behind Bitcoin is really meaningful or not. For those who stand against SHA256, they claim that SHA256 cannot produce value, and Bitcoin is hence purely a waste of energy. Those SHA256 defenders, however, believe that although SHA256 itself is a Pseudo-Random, the competition of computing power has enhanced the security Bitcoin and made it tampering-free, so that computing power (and the power consumed behind) should be regarded as the inevitable and necessary costs paid for Bitcoin maintenance.
These are all but clichés. So I want to share a version of mine. The security, market value, and power consumption of Bitcoin together constitute a loop of positive feedback. Neither is any single factor a cause nor a result. The time-honored and robust development of Bitcoin computing power, or its real-time power at the moment, is only the result of boosting people’s confidence in Bitcoin and indirectly increasing its market value.
But contrary to our intuition, market value is by no means an inevitable result of power accumulation. We do not and never accept such a binding. Boldly speaking, it is entirely possible for Bitcoin to still come to the end of go-to-zero at some time in the future even after having accumulated such a huge hash calculation. Although the chance of happening is very slim (I don’t think it will be seen in the foreseeable future), this logic nevertheless works. And we must prepare ourselves to face it and accept it.
So my answer to the power-consumption problem is that the power consumed by Bitcoin actually represents the “daily expenses” used in maintaining the security of the Bitcoin ledger system, which is needed by the system in a reasonable, stable and sustainable manner. And those beyond this scope of maintenance may not, as some believe, be able to increase the security and network value in proportion. Thus, if the current Bitcoin ledger has been considered by the market to be “tampering-free”, I don’t think it would be of any special significance to increase 10 times more power to it now.
Topic 2: Is the Bitcoin market value determining the mining cost or vice versa?
It’s kind of like the chicken or the egg, which goes first. But it’s actually not.
The miners’ mining, as mentioned earlier, is spontaneous. It’s an act based on the hypothesis of economic rational man. This is very important.
Nakamoto hides a fixed amount of Bitcoin in the Coinbase transaction of each block, and it is those lucky miners assuming accounting rights who jot the transfer transaction down to their own address.
So the behavior of the miners is entirely profit-driven, as if a set-up program, waiting for players to join one after another. When miners are overflowing and the computing power excessive, the ensuing reduced income will naturally drive away some miners who don’t gain the upper hand in cost. That’s also why for POW mining centralizing is so difficult to avoid. Yet this is another question, something not to be discussed here.
This stylized behavior gives us a clear logic. The market value of Bitcoin determines the amount of the legal tender a block generator receives as reward, which further prompts the miners to calculate their cost and benefit (note: the hardware cost of the mining machine and the electricity alike are calculated by the legal tender, so such a calculation is real and not made up). Hence such a simple cost-benefit calculation can determine whether or not a miner chooses to continue the mining. The real situation, of course, can be more complicated. Miners may need to combine both static and dynamic conditions or consider the sunk costs (already invested fixed assets and their depreciation) and continuing investment (electricity, which is in nature the cost on the balance sheet).
Yet we are not complicating the whole thing here. It doesn’t matter if you really have no idea about the balance sheet, because the principle behind it is quite simple. That is, the changes of the Bitcoin market value will trigger every miner to think: Should I stay the course mining? Broadly speaking, higher market prices will attract miners to mining, also including increased number of new miners and reduced sensitivity to electricity bills…and vice versa. Under this spontaneous adjustment mechanism of market, the miners will naturally adjust their cost to a point where it is just profitable. All the miners will always strike such a balance. This is a macroscopic manifestation of the micro-economy, as always effective as it is.
To this point, our logic has perfectly explained it is the market value of Bitcoin that determines the cost of mining, not the other way around. This may be somehow counter-intuitive, but my conclusion well fits my logic. Do you think so?
Bitcoin and Electricity: Things You Don’t Know VOL.1 was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.