IMO as an expert by Marco Maltese, Bitcoin enthusiast and the author of the book "Enter Bitcoin: How It Works, Why It Works, Why Invest Now, Future Scenarios".
With this document, I want to expose a possible point of failure that could affect Bitcoin (or any Proof-of-Work blockchain) in the future.
We can easily assume that most of the value of a single Bitcoin is dictated basically by two factors:
Mining cost is something like a “bottom threshold”: miners won’t be selling for less than the mining cost plus some profit. But the lesser possible price will always be the mining cost.
On the other side, when there’s more demand, there’s always somebody ready to buy Bitcoins for a higher price, and this brings the price up.
The difficulty factor is a way to normalize the calculation time of blocks, and it automatically increases (or, more rarely, decreases) to bring back the average block time calculation to 10 minutes.
This system is good to keep a fixed amount of time for block mining, but it doesn’t take into account human greed and electricity consumption. In a word: sustainability.
Warning: very rough calculations ahead.
At the actual price, let’s round it to $700, each block found will give the miner around $700*12.5=$8,750. If we assume that miners are taking a fair share of income from that number, we can say that they pay something like $7,000 to mine those Bitcoins. Some of that $7,000 is for hardware, a lot is for electricity. Now, to make it easy, I’ll just assume that 5,000 of those dollars are for electricity. This is, very approximately, the cost in electricity to uphold the Bitcoin network for 10 minutes.
Assuming an average electricity bill, for a house, of $40 per month (globally), this means that 125 houses could be powered for one month with the power used to uphold the Bitcoin network for 10 minutes.
This means that 18,000 houses could be powered for one month with the electricity used to uphold the Bitcoin network for one day (125 * 6 * 24).
We all expect, or at least hope for, Bitcoin’s value to increase a lot. I think most of us just consider Bitcoin taking off at the end of the airstrip and just beginning its flight in the coming months.
So let’s make a hypothesis: suppose suddenly next month (just to make the scene clearer), 1 BTC is going to be sold for $10,000, for the simple reason that it finally begins to enter the mainstream. This means that a miner would get $125,000 for each block mined.
Immediately, or in the space of days or a couple weeks, more computing power would be added to the network because there would be a deep gulf between the cost of production and the miners’ income. It’s only natural that more people would enter the mining business, or existing mining companies would add more power to mine even more Bitcoins.
In a matter of weeks, the computational power in the network would go up again and level up to the point where demand and supply meet.
Now, to make counts easy, I’ll assume 60% of that $125,000 will go to pay the electricity bill: $75,000. Remember, this $75,000 only covers the electricity for one block, meaning for 10 minutes of Bitcoin network uphold.
This means that, at $40 per month, 1,875 houses could be powered for one month with the same money. Or, if you prefer, one day of Bitcoin network uphold could feed… 270,000 houses for one month.
One month of electricity for two hundred and seventy thousands houses OR 10 minutes of Bitcoin network uphold.
And this, if only Bitcoin will reach $10,000.
But if you think that, like me, $10,000 for one BTC is still a very, very low level in respect to what Bitcoin can achieve when the mainstream begins to use it, first as a reserve currency, and later on as a straightforward method of payment.
Let’s assume Bitcoin users, at the moment, number around 1 million, meaning with that, people owning some BTC and trusting in Bitcoin in good measure. Some of them do some trading, some just hold on to what they have, some keep buying more Bitcoins.
Let’s assume the totally legitimate hypothesis that Bitcoin’s value is bound to the user base, which in turn means more traffic, and consequently, more demand. As I will prove in one of my next articles, Bitcoin’s price is strictly bound to the user base and the number of transactions, and that’s really nothing new and no surprise here.
Finally, let’s suppose, that in 5 years the Bitcoin user base grows to 100 million: that’s 100 times what it is now, we can also assume then, that Bitcoin’s value will rise proportionally.
So the easy count is that in 5 years from now, the electricity needed to uphold the Bitcoin network will cost over 7 million USD... every 10 minutes. Just for the sake of completeness, this means that upholding the Bitcoin network for ONE DAY could instead feed electricity to over 25 MILLION houses for ONE MONTH.
You can bet that when the price does rise, more people will try to join the mining club, and computational power required to mine one block will increase so that block mining time will remain at the 10 minutes average. There’s no escape from this equation, it’s human nature, and Bitcoin is completely subject to it. I would say it is its “nature”, at least, with the actual Proof Of Work protocol.
So, are we going to build nuclear plants (but I’d prefer solar or wind) just to feed the Bitcoin network? Or will nations’ governments just ban Bitcoin mining? I think that this is a major point of failure that will reveal itself in a dramatic way as the value of Bitcoin keeps rising. We can expect some countries to ban Bitcoin mining altogether. It’s obvious that this increment in power consumption to uphold the Bitcoin network cannot increase indefinitely and a search for a solution, at least a theoretical one, should start right now.
When I started to write this article, I didn’t think I was the first to think about this problem at all. I was sure many other people had thought about it, and I’ve also read a couple of articles in the past on the same subject.
So, the issue is not new, neither it is unknown, but my opinion is that it is underestimated, and that’s why I decided to write this article. What I wanted to do with this article was to “expand the scope” of the matter.
Bitcoin mining energy consumption is not such a problem today, we know that nobody is lamenting anything about it because there’s clearly energy in excess that is being used somehow. The network consumption is hidden in small patches here and there and Chinese mining farms that use electricity at incredibly low prices.
But as you can see from my calculations, things could change pretty quickly, and that’s when the problems would arise. We may have already one or two plants in the world at work to uphold the Bitcoin network at the moment, but this trend can’t continue indefinitely.
So, I was hunting for opinions from people in the field to see how my view of the matter compared to theirs. Turns out that many of them didn’t catch the issue.
I then faced two options when writing this article: write their opinions straight in it and discord with them straight up, or omit their names. I chose the latter because I didn’t feel it right to publish people’s opinions with their names and then deny them on an article.
This article is then a single person opinion, and below I expose the comments, just to show the readers how difficult it is to catch the issue, even for people that have worked in the cryptocurrencies field for years.
A spokesperson for one of the main Bitcoin mining pools says that Bitcoin mining today is a serious waste of energy and is not sustainable in the long run (and we agree here), but that in the future a part of the wasted energy, that is essentially transformed into heating, could be recycled to warm up buildings.
Now, I can’t say that this is not a viable solution for some Bitcoin mining farms, but surely it’s nothing elegant, nor anything that can be easily adopted and spread out in wide adoption as a technology. Additionally, this could only be set up in cold countries, or in winter. In other words, it can be conceived just as a patch that some mining farms could use in the future but nothing else.
The same person said that everything depends on the efficiency of the energy conversion and growth of Bitcoin price.
But there’s a contradiction here: Bitcoin price is not determined by the energy efficiency of the hardware, while it’s true that the Bitcoin price growth influences the computing power added (or subtracted) to the network.
The Bitcoin price has in fact, two threshold factors:
how much money people are ready to pay for Bitcoin, which decides the higher price level
how much a miner spends to mine that Bitcoin, which decides the lower threshold (in some measure).
If people will want to pay more for Bitcoin, the price will go up.
And so will the computing power added to the network, because as price goes up, more money will be spent on electricity.
There’s no escape from this mechanism. And so it will be if Bitcoin’s fortunes decline: people will not want to pay as much for Bitcoin, so its price will decrease, and computing power will be taken off the network.
This is the only mechanism that must be taken into account, and I repeat: there is no escape from this, because of the automatic difficulty adjustment built into the Bitcoin’s software itself, at least at this moment, but I doubt that in the future this will change anyway. So, it doesn’t matter how much better performing the next generation of ASICs are: Bitcoin’s price is not based on how much computing power is added to the network, but on the electricity needed to mine it, and more exactly on the COST of that electricity!
You could slash an ASIC’s power requirements 10 fold tomorrow, and in a couple of weeks time, you would have 10 times more computing power added to the network, which would again bring power consumption levels to the previous state.
Sorry for repeating, but I want this to be perfectly clear, as it seems many people can’t catch it or accept it. It seems to me that the Cognitive Dissonance mechanism is at work here.
Another person who worked in the past for one of the main Bitcoin mining pools said that the network will continue to function as long as the price of Bitcoin is high enough such that the value of the block reward is greater than or equal to the operating costs of bitcoin mining.
This is true. But we know that. This is not the point. The point is: what will governments do when Bitcoin energy requirements are so high that great measures will have to be taken to not let cities fall in blackouts due to the huge demand for electricity.
Another person I talked to is very optimistic: he said that as most Bitcoins are mined in China at the moment, we can expect that China itself will deal with the problem. And China is, right now, already dealing with a terrible pollution problem.
As the Fukushima incident in Japan has turned the tides in regards to nuclear power, we should expect a swing onto solar and wind energy. So, having China switching to renewable energy should solve the problem all at once. This is surely a good turn, but is it a solution that will come in time? Will the rise curve of Bitcoin be slower than the expansion of renewable energy infrastructures?
It’s difficult to say: solar energy research is taking huge steps month by month, producing prototype materials with ever increasing performance, but on the other side these materials are not yet on the factories chain production, while Bitcoin installation is trivial for a small company or a shop, and only takes a few hours or days for large companies to be integrated into their systems. To better understand the problem, let’s draw a parallel with what happened with cars in the early years.
When the first cars began circulating, nobody could imagine humanity could extract, refine and distribute millions of barrels of petrol per day. This is good: Bitcoin growth could collaterally help spread solar and wind energy, giving a kick to renewables. In the beginning, oil had a prohibitive cost, and only rich people could afford a car and also petrol to run it.
We know that, with time, more and more people and investors began oil extraction, and the price got lower and lower, allowing cities to be so crowded with cars, that pollution became a problem. But the analogy is not matching completely. While in the last couple of decades we never had a real problem with oil supply, the early times were different, and gas stations could easily run out of oil. Demand was higher than supply.
But if people bought all the petrol from a city’s gas station, that city would still go on moving with older forms of transport. Gas stations would remain empty. Cars would stay home. The problem wouldn’t be global, city life would still go on. Cars would simply stay parked. Cities never had a global transport collapse due to oil scarcity.
Electricity is another story. Today’s life is dependent on electricity. If people drain too much power off the circuit, the grid can malfunction and collapse. Continuously. The damages can be high, as well as losses in production.
Imagine thousands and thousands of private citizens draining the grid of electricity to mine Bitcoins, causing continuous blackouts. Governments and city Mayors wouldn’t allow it to happen. Heat would be another problem: you can have a solar power plant send you electricity at home without pollution, but if thousands of homes in a city begin mining Bitcoin, heat will irremediably go up. This could be good for cold countries, not so much for equatorial and temperate zones.
Another factor we can add to the equation is the fact that solar energy production can be pretty granular. People could install their own array and mine at their home without influencing the power grid. Will Bitcoin push this widespread individual solar and wind energy production systems adoption in the future? There are good chances.
So am I sounding an unjustified alarm? Of course, it’s possible, only time will tell.
The positive point is that, as Bitcoin is growing right now, when facing power outages, governments couldn’t push for the construction of new nuclear plants: those require at least 20 years to become operative. They could only choose solar and wind power plants, as these only take at max a couple of years to set up.
Whatever happens, be ready to see solar panels and wind turbines all around you!