Bitcoin has come to primacy within the cryptocurrency world, both due to its position as one of the first iterations, and as the most valuable one. From the latter months of 2017, Bitcoin spiked in value, reaching the staggering total of $20,000 before stabilizing at nearly $15,000. Within the space of months, Bitcoin went from a relative outsider, to being one of the most talked about concept on social media and the news.
All the while, experts and speculators were deliberating whether or not Bitcoin is currently a bubble on the verge of bursting. And while it may not essentially matter whether or not Bitcoin is a bubble, there is another matter regarding the spiraling energy costs associated with mining the digital currency, and if it were to continue without any solutions could prove its downfall.
According to an energy consumption index according to the Digiconomist, as of Thursday May 17th of this year, Bitcoin’s current estimated annual electricity consumption stands at 67.14 TW/h.
In order to understand what kind of crisis this represents for Bitcoin and other cryptocurrencies is to look at the important facts regarding its consumption:
Understanding Bitcoin – Mining And Its Energy Cost
First of all, blockchain functions as a digitized, decentralized public ledger, a receptacle where all cryptocurrency transactions are recorded. New transactions are put into blocks of data, being fully recorded onto the end of a chain of existing blocks that make up the blockchain.
The whole process of creating new blocks is also referred to as mining, and is known to consume a great deal of electricity. While it’s not such common knowledge, one of the reasons that the process of mining takes up so much electricity is because there’s a great deal of computing power involved in extracting cryptocurrency.
The various blocks are created through a hashing process, which transformed the data associated with a group of transactions. This is all in order to get a hash which started with the requisite number of zeroes, this is something that changes after every 2,016 blocks mined, and usually increases every two weeks. As a result, the miner has to tweak the data and then hash it, they then have to check whether or not the results have the proper number of zeroes, and, if not, commence the process again. That process of hashing and rehashing usually goes on thousands of times and consumes lots of energy.
After the miner successfully finds a valid hash on the network, it is used to form a block, and is subsequently added to the existing chain. As a result of this success, the miner is then rewarded with a typical block reward of newly minted Bitcoin. This process of recording transactions on the public ledger or blockchain through mining is referred to as the Proof of Work concept.
Due to the fact that these mining systems include a number of complex calculations, the energy costs related to mining Bitcoin is high in contrast with that of other financial institutions and transactions. For example, according to one estimate, processing a Bitcoin transaction consumes a lot more energy than 100,000 transactions through VISA’s existing system.
As a result, the proof of work consensus algorithm has a competitive nature and incentivizes miners to utilize as much computing power to the blockchain as possible. The more computing power that a miner has access to, the faster and more effectively they can solve complex mathematical equations and have a higher probability of finishing the block first and get the related block reward.
Initially, as much as cryptocurrency mining operations was initially developed to be something everyone and anyone could do with their own level of computing power, but that has proven to be a completely idealized perspective of how mining would evolve. Today, whether you’ve been mining Bitcoin, DASH, or a vast range of other cryptocurrencies, the most effective way to do this is through using the . latest, more expensive pieces of hardware such as ASIC miners.
These ASIC miners differ from a usual graphics card or CPU mining system in that those more general pieces of hardware sometimes used in mining are developed with a wider utility in mind instead of purely mining. Application Specific Integrated Circuits, otherwise known as ASICs, function as chips that are otherwise designed with a singular purpose, veering from audio processing, to managing a mobile phone call. In the specific case of cryptocurrency mining though, these chips are developed with a specific function and are placed into specifically designed motherboards and power supplies, constructed into a single unit.
So, even if you own a single ASIC, the underlying chance you . have of conducting a successful mining operation are pretty slim. These days, mining has morphed from the ‘everyman’ mining system envisioned, to one that employs vast mining operations, including hundreds of these ASICs to amass the correct level of processing power in order to successfully mine. What is even more disconcerting is the fact that they have to be competitive with other mining pools, as a result, there is a constant tug of war in terms of making sure that rival pools monopolize the mining of their particular crypto.
We also have to take into consideration too, that the difficulty mechanism involved with the process of mining Bitcoin does periodically increase every 2,016 blocks. The purpose of this gradually increasing difficulty is to ensure that no mining pool can continually solve complex equations at too fast of a rate and take all the newly minted coin. The direct result, an increase in the level of difficulty, and a knock-on effect for the style of mining system used in order to mine, increasing computing power, workload and energy consumption.
Should the price and popularity of Bitcoin continue to rise, so too will the number of transactions. And as this number increases, so too will the number of miners that join the community. As a result, it’s made pretty clear that the level of energy consumption will increase by a staggering amount.
Proof of Work – The Working Alternatives
During an interview with the founder of the Ethereum blockchain, Vitalik Buterin, stated back in November 2017, that he believed that Ether, the blockchain’s native cryptocurrency, should only exist in a limited supply. According to Buterin, one way to limit the overall supply, at least on a temporary basis, was through locking up some of the ether that is currently in circulation. And as Ethereum moves towards another way of verifying the transactions on its network, that’s the planned system. This is referred to as Proof of Stake, and requires users who otherwise want to be rewarded for validating transactions to deposit ether for a set amount of time. The more ether they manage to set aside, the bigger their overall reward is for verifying the network. Buterin said the ethereum community may transition to Proof of Stake as early as the end of the year.
The proof of stake algorithm was created as a functioning alternative to the previously operating proof of work, as a method of alleviating the issue of energy costs in a increasingly used cryptocurrency. With the proof of stake system, owners create blocks as opposed to miners within its ecosystem, this also doesn’t require power spending machines which produce as many hashes per second as possible. As a result, the energy expenditure and use under a proof of stake system is negligible in contrast to proof of work. Some of the first cryptocurrencies to utilize this alternative method included Peercoin, with the likes of NXT, BlackCoin and ShadowCoin eventually following suit.
The proof of stake concept seeks to address the underlying issue of energy consumption by attributing mining power to the amount of coins that a miner has in their possession. By using this system, instead of placing the utilization of energy to answer Proof of work puzzles, a PoS miner is limited to mining only a percentage of transactions which is a reflection of their own stake within the cryptocurrency. As an example, a miner that owns roughly 3% of Bitcoin in circulation will be able to mine 3% of the total number of blocks.
While this presents an interesting and effective alternative to proof of work, Bitcoin will likely never make a switch to this consensus algorithm, but its more likely that the majority of altcoins will actively choose this mechanism as the path moving forward. One of the only downsides to this is that there are a greater number of iterations of this same consensus algorithm, and none of them have had a distinct enough number of real use cases. Regardless, the work on these various algorithms offers a significant hope for the future of cryptocurrency mining.