Executive Summary

It’s become popular today to dismiss Bitcoin’s Proof-of-Work as wasteful and bad for the environment. We believe this is a narrow view that misses the forest for the trees. We wrote this paper with the intention to illustrate the other side of the story and what we believe to be the positive externalities of Proof-of-Work mining.

You can make Bitcoin’s electricity usage seem relatively large — ‘Bitcoin uses more electricity than a country!’. You can also make it look relatively small — ‘Bitcoin uses less electricity than Christmas lights worldwide’. The closest comparable, global data centers, which today consume over 2% of worldwide electricity (a measure that is 133x larger than Bitcoin’s usage) are also often ignored in most critical analysis. Why is it claimed that Bitcoin’s electricity usage is wasteful yet these other uses are largely considered ‘fair’.

Those critical of this increasing energy usage will often compare and calculate ‘Bitcoin’s energy usage per transaction’. We note that it is inappropriate to calculate ‘per transaction’ metrics with regards to Bitcoin’s current energy usage and hashrate. This calculation incorrectly assumes that the current hashrate only secures the active transactions occurring on the network. Bitcoin’s security model (a blockchain) by design results in the hashrate securing all transactions that ever occurred on the ledger (dating back to 2010), it is actually increasing in efficiency as time passes.

The wider opinion on Bitcoin’s electricity usage is harshly critical due to the views discussed above. Thus, the positive externalities driven by the intuitive incentive mechanism in Proof-of-Work is rarely explored. We identified and explored a few within this paper:

Development of new ASIC industry players: Incentivized by the revenue opportunity of efficient and powerful mining operations, an industry of chip developers has spawned. This lead to an increase in mining hardware efficiency of 872% over the last four years. Now that these semiconductor companies are well capitalized they are exploring alternative applications for their hardware, such as ASICs for machine learning.

Incentivized by the revenue opportunity of efficient and powerful mining operations, an industry of chip developers has spawned. This lead to an increase in mining hardware efficiency of 872% over the last four years. Now that these semiconductor companies are well capitalized they are exploring alternative applications for their hardware, such as ASICs for machine learning. PUE (power usage effectiveness) optimization: Every watt of electricity not used directly in mining operations has an impact on the bottom line of operators. This has pushed operators to squeeze every bit of efficiency from their mining data centers. We explored the opportunity to transfer any innovations and best practices developed in the mining industry to traditional data center operators.

Every watt of electricity not used directly in mining operations has an impact on the bottom line of operators. This has pushed operators to squeeze every bit of efficiency from their mining data centers. We explored the opportunity to transfer any innovations and best practices developed in the mining industry to traditional data center operators. The global electricity arbitrage opportunity: Electricity is a homogenous good with massive price differences between global regions. Bitcoin miners are essentially arbitraging this opportunity as they flock to areas of oversupply. We posit that this mechanism introduces an opportunity to improve the overall efficiency of electricity markets globally.

Electricity is a homogenous good with massive price differences between global regions. Bitcoin miners are essentially arbitraging this opportunity as they flock to areas of oversupply. We posit that this mechanism introduces an opportunity to improve the overall efficiency of electricity markets globally. Renewable energy usage: As the cost curve for miners shifts from upfront capital towards ongoing operating costs, there will be an increased focus on maximizing margins in order to increase profitability. The cost competitiveness of renewable energy versus traditional fossil fuels will continue to drive Bitcoin miners to increasingly seek out these sources. This will result in future capital investment in renewable energy development.

As the cost curve for miners shifts from upfront capital towards ongoing operating costs, there will be an increased focus on maximizing margins in order to increase profitability. The cost competitiveness of renewable energy versus traditional fossil fuels will continue to drive Bitcoin miners to increasingly seek out these sources. This will result in future capital investment in renewable energy development. Transforming ‘wasted’ energy: The race for cheap, reliable, off-the-grid sources of electricity is paramount for miners. We explored two recently developed innovations to transform what would have otherwise been wasted energy into electricity for mining operations. We expect this trend to continue as others in the industry look to innovate new ways to gain cheap electricity produced traditionally wasted sources.

Economic incentives are powerful. This industry provides one of the first global mechanisms in which there is a reward to participants for efficiently utilizing energy. Our analysis captures a few early signs of the positive impact provided by the Bitcoin mining industry. As more competitors continue to enter this space and the ecosystem continues to grow, we expect the trends identified above to accelerate. This will result in Bitcoin’s innovative Proof-of-Work mining system improving the efficiency and allocation of our energy usage worldwide.