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Bitcoin’s energy consumption is a necessity and has positive impact on the environment

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Why proof of work is a necessity

“Energy expenditure is a key to the safety and security of the network, allowing it to maintain an honest record of transactions and a predetermined fixed credible monetary policy.”

Saifedean, Bitcoin Mining: Energy and Security, 2018, Volume 1, Issue 3

Bitcoin is the first and only cryptocurrency with the unique feature of predetermined fixed bitcoin issuance and difficulty adjustment based on a sound consensus mechanism that makes the blockchain resistant to attacks. It is necessary to understand the underlying mechanism of Bitcoin to grasp its transformative value which is explained in the following.

For having a consensus about which blockchain is the one containing the common version of truth, a measure must be applied. In proof of work, the chain which has the most accumulated energy is considered as the one chain everybody can rely on as the truth. The resource on which this decision is made must be scarce and costly to make it resistant to attacks. Energy is this scarce resource Bitcoin relies on (here the ready to consume energy is meant not the potentially available energy). Thus, energy consumption is the essential feature for securing the Bitcoin blockchain. Bitcoin miners secure the network and the amount of energy consumed is directly related to the security of the network. Bitcoin is computationally expensive by design which is expressed in the wording “proof of work”. This implies resistance to forgery, inflation, and theft.

But how exactly does the securing mechanism of the bitcoin network function? The costs of an attack on the Bitcoin blockchain are directly related to the mining costs and the energy consumption. Assume an attacker aims to undo blocks to create a double-spend, which means that the same digital token is spent more than once. For doing so, the attacker first needs to be in control of at least 51% of the hashpower and then spend the energy to run the hardware. Obtaining as much mining hardware to receive a 51% share is very unlikely due to delivery constraints especially when hashrate is increasing (Saifedean, Bitcoin Mining: Energy and Security, 2018, Volume 1, Issue 3). In addition, an extrapolation shows that if someone would be able to order the needed amount of hardware, the costs would be above 6 billion USD (as of writing this article) and daily energy costs are more than 4 million USD. This means that there are ongoing costs involved after having reached majority, namely the costs to perpetuate the attack which comprises the operational costs of constantly mining with at least 51% hashrate. Through such an attack merely the history may be rewritten to create a double spend. This skyrockets overall costs for performing an attack and undermines almost every utility of doing so. Importantly, as the consensus is determined by all participants running full nodes, and not only the miners, it is also not possible to change the consensus rules for one’s benefit. To conclude, a majority in hashrate cannot override consensus rules, confiscate any bitcoiner’s coins or change the monetary policy (Saifedean, Bitcoin Mining: Energy and Security, 2018, Volume 1, Issue 3).

Apart from securing the Bitcoin network, high energy consumption incentivizes more features:

  1. The network only accepts non-fraudulent blocks which incentivizes miners to act honestly. In case a miner acts fraudulently and proposes a block that does not fit the criteria, the mined block will be discarded by the network.
  2. Miners need to sell some of their mined bitcoins to finance their operational costs. This ensures are proper distribution and usage of bitcoins.

Bitcoin secures a censorship-resistant, permission- and trustless network for value exchange that is open and decentralized by means of proof of work. An alternative to Bitcoin must support these features with a more energy efficient mean. So far, there is no better solution available than energy as proof of validity in form of proof of work. Proof of stake is no alternative. Proof of work ensures that attacks on the network are too costly and the mechanism allows to resolve conflicts in case of a chain split because there is energy at stake. In addition, the proof of work mechanism minimizes trust as the valid chain, which is the one with the most accumulated work, can be proven easily by everyone. Both is not the case in the proof of stake mechanism. Further information on proof of stake and its flaws can be found in the Coinshares Bitcoin Mining Network report. If you want to deep dive into the differences of PoW and PoS, I can recommend to start with the following:

The stability and security of Bitcoin makes it an alternative to fiat currency. Due to new developments such as the Lightning Network that allows the processing of instant transactions with nearly unlimited scale, Bitcoin may eventually become a stable world currency used for daily transactions. This is in particular important since the US-Dollar is about to lose its position as a global reserve currency. Bitcoin might also overtakes or at least complement gold as a world currency for several reasons as shown in the figure below. Instant settlement and lower costs are the most important features which make bitcoin superior to gold (the costs for bitcoin mining in comparison to gold mining are found in the last figure of the first section). Some may argue that Bitcoin merely serves as store of value but a very good and widely adopted store of value automatically becomes medium of exchange and eventually unit of account and hence inherits all important attributes of money.

A global world currency would eliminate currency risk due to a variation in exchange rates. This simplifies global trade. In addition, it could lead to an extinction of national monetary policy. This eliminates the artificial printing of money which otherwise leads to inorganic risky growth and costs imposed on society by political and special interest groups. Roger Garrison in The “Costs” of a Gold Standard summarizes costs under paper standard more precisely as follows:

  1. the costs imposed on society by different political factions attempting to gain control of the printing press,
  2. costs imposed by special interest groups who persuade controllers of the printing press to misuse their authority (print more money) for the benefit of special interests,
  3. inflation-induced misallocations of resources as a result of misused monetary authority, and
  4. costs incurred by businessmen in their attempts to predict what the monetary authority will do in future.

Bitcoin is independent of any central third party and therefore fully resistant to any kind of corruption.

Proof of work allows to secure the network, enforce proper incentivisation and honest behavior, enables consensus among thousands of participants and ensures the development of the network. In addition, Bitcoin serves as an alternative to central bank money and is already used as a nation state independent world currency which wich does not know jurisdictions or borders. These highly sophisticated and crucial features justify the high energy consumption. In addition, Bitcoin may provide a more energy efficient money supply than the current system: The yearly costs of banking, paper currency printing, digital minting and auditing are more than 400 times higher than the current costs for bitcoin mining based on the figure in section one.

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