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Bitcoin sparks passion, curiosity, and has gained increasing media attention, especially after climbing the ranks of the decade’s best financial assets. But every time the price rises, many doubts and questions arise, especially around the origin and energy consumption of miners.

The Bitcoin protocol has created a unique digital asset

To understand how Bitcoin (BTC) is created and what mining is, the key is the double expenses issue.

Before Bitcoin, there was neither a digital value to be transferred nor a digital asset to be divided into different parts. That is, if you have scanned a $ 100 bill and want to send it to someone, you can only send a copy of this bill.

We are all already used to smartphones and computers. We send emails, photos, but we don’t realize that process in reality: we send a copy of the email (and not the original email), a copy of our photos (and not the original). When we click the send button on a smartphone or computer, a copy of the original always remains on our device.

Likewise, with regard to financial transactions, when we click on the send button in our internet banking accounts or at an ATM, there is always an intermediary who transfers the money from one account to another. And that is the problem that Bitcoin wants to solve: the problem of double spending.

For example, when you click the Send Bitcoin button on your mobile phone, you are not sending a copy, you are essentially sending a digital item. Once a transaction is made in Bitcoin, it becomes irreversible and cannot be tampered with.

For that reason, it is impossible to cancel or undo a Bitcoin transfer after it has been validated by the blockchain network, as the Bitcoin protocol has solved the double spending problem. It made a single asset, Bitcoin, digitally unique, enabling value transactions on the Internet without intermediaries (independent of a central entity).

Who issues Bitcoins?

While money is traditionally spent (created) through (central) banks, Bitcoin is issued by algorithms, the rules of which are pre-defined in the protocol – the Bitcoin blockchain.

The Bitcoin blockchain in turn is a transaction registration system, maintained in an open (distributed) network of “suspicious” participants, who do not know or trust each other.

So when Satoshi Nakamoto wrote the source code for the Bitcoin protocol software and published it on the Internet, he suggested the following: If you secure this network and help this financial network function, you will be rewarded.

The logic of the pre-established rules in the Bitcoin protocol was very transparent and written in a programming language. The breakthrough of the first blockchain, after years of research into digital currencies, isn’t just about computer science solutions.

The secret is in incentives

To create the Bitcoin blockchain architecture, Satoshi Nakamoto looked at existing research – bit-gold, b-money, hashcash, time-stamped cryptography – and added game theory.

Using game theory, Satoshi implemented a stimulation mechanism (consensus mechanism) called proof-of-work that enabled a new area of ​​economic coordination, now called “crypto-economics” (the areas of economics and computer science to study the decentralized markets and applications that can be built by combining cryptography with economic incentives).

It is this economic incentive system that makes Bitcoin network participants behave in favor of the security and perfect functioning of the system. This is the main reason why the Bitcoin blockchain has yet to be hacked.

The importance of mining

As more and more people realized the potential incentives in Bitcoin and started plugging in their computers to secure the network, the Bitcoin blockchain became more and more viable and secure. Now there is enormous computing power that guarantees transactions: Bitcoin is computing power.

A Bitcoin is “extracted” from the blockchain protocol by miners (validators) who must solve mathematical algorithms to earn the right to enter and be rewarded for Bitcoin transactions on the blockchain network.

Before being added to the blockchain, every Bitcoin transaction is sent to the “mempool”, a retention area for pending transactions, where it waits for inclusion in a block. The miners then take the pending transactions waiting to be recorded and combine them to create a “block” of transactions.

Realize that the miners are competing with each other, so their computers are chosen to record the most recent transactions in the next block that is included in the network. And the best way to win this competition is to solve the algorithms as often as possible (before someone else gets the correct result, a so-called “nonce”).

Since it takes trillions of tries to guess the correct nonce, only those who have more computing power to win this competition will get Bitcoin as a reward for their efforts.

We can draw two important conclusions from what we have said so far.

The first consequence is that PoW prevents miners from bypassing the system and creating Bitcoin from scratch. Miners must burn real computer energy on every attempt and find the opportunity to mine Bitcoin. Since electricity to provide miners is not free, proof-of-work therefore generates financial costs for Bitcoin mining.

The second consequence refers to the fact that PoW makes Bitcoin’s transaction history immutable. If an attacker tries to modify a transaction, that attacker would have to redo all the work done since then to recover and establish the longest network. This is theoretically impossible and that is why miners are said to “protect” the Bitcoin network.

As mining has become a legitimate industry over the years, it is backed by dedicated professionals with specialized hardware, requiring large data centers and plenty of electricity.

It’s worth noting that while there are other consensus mechanisms, PoW is most commonly used in blockchains as it is the most effective in terms of cybersecurity.

How Much Electricity Does Bitcoin Mining Use?

Cambridge University operates a live Bitcoin network energy estimator Since 2015. The transparency of Bitcoin allows anyone to see the amount of hash power being applied to the network, which is usually measured in the number of hashes per second that the network performs as part of the mining process.

You can estimate how much power the network uses to perform these hashes based on the energy efficiency of hashing the mining hardware used.

According to Digiconomist’s Bitcoin Energy Consumption tracker, mining currently consumes 77.78 terawatt hours per year. This is comparable to the total energy consumption of countries such as the Netherlands and the Czech Republic.

Based on the above estimates, many argue against Bitcoin and the use of proof-of-work.

However, can we consider these “estimates” as absolute truth? Do these estimates take into account that miners do not always work efficiently? Is it believed that the electricity used could come from clean sources?

Let’s consider these arguments one by one.

Anti-PoW arguments

The arguments against proof-of-work and the incentive mechanism created by Satoshi Nakamoto are:

  • A1 – Bitcoin mining consumes a lot of energy.
  • A2 – The vast majority of Bitcoin miners are in China.
  • A3 – Bitcoin miners in China mainly use dirty, coal-based energy.
  • A4 – Bitcoin mining has a relatively extreme carbon footprint.
  • A5 – Bitcoin is bad.

Argument A1 is true, as we showed in the previous topic. It’s one of the fundamental reasons the Bitcoin network is so incredibly secure.

Argument A2 used to be true, but the situation is changing as more regions worldwide enter the BTC mining industry. Since this does not matter for the energy consumption by the Bitcoin network, we will consider it true.

Regions of high relevance are highlighted in teal, Sichuan province in China is in yellow, and regions of less relevance are in red.

Finally the argument A3 is false, as we will see in the next topic, which negates arguments A4 and A5.

Bitcoin is an energy pig, but … renewable

A recent survey published by CoinShares Research has found that most of the electricity consumed to mine Bitcoin actually comes from clean sources, such as wind, solar, and hydropower.

To be more specific, 60% of the global mining takes place in China, where only Sichuan produces 50% of the global hash rate, while the remaining 10% is more or less evenly distributed among the provinces of Yunnan, Xinjiang and Mongolia.

It is important to note that Sichuan’s dominance in both China and the world has a direct relationship with the hydroelectricity-rich provinces of Yunnan, Guizhou and Sichuan in southwest China. During the rainy season, electricity prices are among the lowest in the world, making Sichuan one of the most attractive mining regions in the world.

On the other hand, of the remaining 40% of mining companies, 35% of global hashish production is evenly distributed between Washington, New York, British Columbia, Alberta, Quebec, Newfoundland and Labrador, Iceland, Norway, Sweden, Georgia and Iran.

Still, the report points to a broader problem of how renewable energy is currently deployed globally: Many renewable energy generators are poorly located and underused, which is why Bitcoin mining has become the only viable use for this electricity.

In this context, the study concludes that the Bitcoin network gets 74% of its electricity from renewable sources, making it more focused on clean energy sources than almost any other large-scale industries in the world.

Take

Everything requires energy, and the extra use of energy has always improved our standard of living. Are the benefits of Bitcoin worth the extra use of energy? Miners are no longer looking for ways to reuse wasted energy, such as CO2 released during oil drilling?

Since the physical location of mining centers does not affect the Bitcoin network, do miners no longer migrate to areas that generate surplus electricity at a lower marginal cost? And in this case, it could not solve the problem of renewable energy that has predictable capacity and would otherwise be wasted, such as hydropower and methane burning.

Everything is energy – the waste is by not using it intelligently to improve economic and social standards of living.

The views, thoughts and opinions expressed here are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Tatiana Revoredo is a founding member of the Oxford Blockchain Foundation and is a blockchain strategist at Saïd Business School at the University of Oxford. She is also an expert in blockchain business applications at the Massachusetts Institute of Technology and is the chief strategy officer of The Global Strategy. Tatiana has been invited by the European Parliament to the Intercontinental Blockchain Conference and invited by the Brazilian Parliament to the public hearing on Bill 2303/2015. She is the author of two books: Blockchain: Tudo O Que Você Precisa Saber and Cryptocurrencies in the International Scenario: What is the Position of Central Banks, Governments and Authorities on Cryptocurrencies?