Bitcoin is often criticized for the power used to secure the network--an activity known as “mining.” From Paul Krugman complaining that Bitcoin is a waste of resources in December of 2013, to the latest in Motherboard on the energy used in one transaction, the focus is often on the energy cost of security using proof of work. The claim is that Bitcoin and similar cryptocurrencies cannot scale because of the huge energy costs of mining. Bitcoin mining uses proof of work to make it very expensive to commit fraud, but very cheap to detect fraud. An embedded assumption in such criticism is that traditional credit card transactions and banking transactions present a lower energy cost than “trustless” approaches like Bitcoin, Ethereum, Litecoin, and the other open blockchains. In this paper we will look at these assumptions and show that blockchain technologies may actually be more ecologically friendly and far more secure than traditional banking transactions.

Understanding Proof of Work

Global distributed and autonomous systems to maintain consensus (agreement over data between several networked computers) were considered impossible or at the very least impractical until the invention of Bitcoin. Key to the Bitcoin consensus protocol is ”Proof of Work” (PoW).

To simplify PoW, we start by understanding that miners collect transactions, validate transactions, and publish them to the entire network in the form of “blocks.” For each block of transactions miners create, miners are rewarded bitcoins. All miners compete to create new blocks, and when a miner successfully gets the network to accept their block, this can be viewed as “winning” the block, and that results in a payment. The payment is made up of a “reward” and the transaction fees for that block. So how does a miner “win” a block? By demonstrating a certain level of “work.”

To understand Bitcoin’s PoW mechanism, one must first understand hashing. A hash is an algorithm or program that reduces a digital input into a deterministic yet seemingly random set of 32 bytes. The same digital input always yields the same 32 bytes, which in practice is unique to any digital input, of any length. Each block contains:

The hash of the previous block

The transactions included in the block by the miner

A nonce (a random number) that can be freely changed by the miner to manipulate the value of the hash of the block.

A miner thus “chains” their block to the previous block by including its hash (yielding the term “blockchain”), and providing a nonce in their block that manipulates the hash of their block so that it has a particular number of leading zeros (a prerequisite for any block to be valid, where more zeros indicates a greater difficulty).

And this is where the work comes in. The only way to find such a nonce is to search for it by trying different values for the nonce and hashing each such value. Only after many, many hashes (which consume electricity to generate) can a miner hope to find the nonce that will make the network accept their block. And doing so gives them the reward of bitcoin and the transaction fees from the block. The production of a valid block can only be done by truly doing the work, and the public can verify the block with trivial ease by comparing the hash with the nonce and associated block data. Thus providing a nonce that mathematically matches with the hash of a block is PoW, quite literally proof that miners around the world did work.

The importance of PoW is so simple that it is pure genius. If it requires huge resources to build a thing, but a trivial amount of resources to prove the thing is invalid, then there is no path for fraud. It costs too much to attempt to commit fraud (too much power, too many resources) to make these attempts profitable. No thief is going to spend millions of dollars on a scam that cannot possibly succeed, because their fraud is detectable by a tiny amount of processing.

But here lies the accusation. Bitcoin does require a great deal of power to ensure its security. And with the increasing value of Bitcoin, the amount of power securing the network has gone up. One estimate on November 1, 2017, was that “215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction.”

Sounds terrible. But is it?

Comparing Apples and Oranges

Let’s first figure out exactly what a miner accomplishes via the mining process in Bitcoin:

Verifies the PoW on the blocks the miner knows about to ensure they are correct, and to select the chain of blocks that is correct, and has the greatest PoW

Chooses the last block in that chain to build upon, and serve as the basis for validating transactions.

Includes the hash of this “last block” as the prior block to the block the miner will build, and thus adding to the security of all past transactions.

Validates all transactions that could be included in a new block

Selects the transactions to be included in the miner’s block

Secures all the transactions in the block by constructing a particular hash (PoW)

When the miner finds a hash with the right difficulty, broadcasts it to the network.

If the miner’s block is included in the chains built upon by all miners in the network, the miner receives the block reward (currently 12.5 bitcoins) and any fees paid by transactions in the block.

So a primary assumption made by many of those critical of the amount of power used to mine is that the power is only used to record transactions. This isn’t true; the power is used to maintain the security of all the value in Bitcoin. Currently, one bitcoin is valued at about $15,000 USD, for a market cap of about $300 billion. So the electricity used for PoW is securing $300 billion of assets, in addition to enabling transactions.

But it doesn’t end there. Many other data-centric technologies anchor into the Bitcoin network to apply the security of Bitcoin’s massive PoW to secure nearly unlimited amounts of data external to the Bitcoin blockchain. The author founded and led the development of Factom, one of many projects leveraging Bitcoin’s PoW for data integrity and security. Using Factom, we are applying Bitcoin’s security to medical records with a Bill and Melinda Gates Foundation Project, securing sensors and IoT devices for the Department of Homeland Security, securing documents with dLoc and SMARTRAC, as well addressing the need for audit trails in the document management for banking and finance. The list of applications that can leverage the PoW of Bitcoin, at massive scale, is a huge value above and beyond simple transaction processing.

Another assumption is that Bitcoin’s reward will always drive unreasonable energy requirements forever, or that more energy will be required for more transactions. This assumption is incorrect. The block reward amounts to the monetary policy for Bitcoin, and it is spelled out in code that dictates the inflation schedule for Bitcoin. The block reward halves about every four years until it drops to nothing. So while today the reward is as much as 10 times the amount paid in fees by Bitcoin users, it will not always be so. As the reward decreases, the amount of mining power (and as a result the electrical power used) may decrease. Certainly the amount of power from fossil fuels used to mine Bitcoin will decrease, because that is already happening.

The number of transactions secured by Bitcoin’s PoW will increase, too. The vast majority of Bitcoin transactions occur off-chain today on exchanges, and are only settled on the Blockchain. Payment processors like Coinbase and BitPay can process Bitcoin Transactions off the blockchain as well. Lastly, other technologies for peer-to-peer transactions off-chain, like the Lightning Network, are being developed to multiply the number of transactions of Bitcoin that can be handled with the security of Bitcoin’s PoW.

Are we really counting the power used to support credit card transactions correctly?

Another assumption made by critics is that the energy costs of a credit card transaction are the entire ecological footprint of a transaction via credit cards. A recent article in Motherboard estimated Visa’s energy costs by referencing the energy used by their data centers. Visa’s two U.S.-based data centers were estimated to use enough energy to power 50,000 U.S. households.

This assumption that the data centers are the total of the energy requirements for credit cards is incorrect. In short, credit cards don’t exist without banks, and banks don’t exist without government oversight and the entire banking system. Bitcoin is itself the entire economic system in total, not just one little piece of the system. It’s the whole system. So any energy comparison should compare system to system, not just cherry pick some transaction processing component off the top. As discussed earlier, Bitcoin mining is the security, the regulation, the monetary policy, the governance—basically everything required. Visa only processes one small aspect of the transaction.

So let’s look at some other costs which are ignored by focusing only on data centers:

Data centers supporting banks

Physical security of physical money

Computer security of electronic money

Credit card fraud

Counterfeiting (regulation, prevention, investigation, prosecution, etc.)

The Federal Reserve (lender of last resort, monetary policy, bank regulation)

Government oversight of payment systems

Compliance costs to support government oversight

To compare:

Bitcoin has no data centers for holding balances separate from processing transactions. Bitcoin only has mining and the blockchain; it is the complete ledger

Bitcoin requires no centralized physical security like bank vaults, secure buildings, etc.

Bitcoin transactions are recorded in distributed ledgers, requiring no computer security of electronic money for Bitcoin itself. Customers have security needs for both banking and Bitcoin, but it isn’t much different.

Credit card fraud (as in intercepting transactions and creating fraudulent transactions from credit card numbers intercepted) is not possible with Bitcoin.

Counterfeiting isn’t possible with Bitcoin

No central authority or monetary policy outside of the code is necessary with Bitcoin

No regulations are required to secure payment systems (like audits, standards of operations, etc.)

No government oversight of mining is required

Individuals and businesses that use Bitcoin are highly regulated, despite claims to the contrary. A host of government agencies and departments have issued guidance on cryptocurrency. This regulation certainly adds something to Bitcoin’s carbon footprint, but on the side of users and businesses rather than on the underlying Bitcoin protocol.

Security: Traditional finance vs. Bitcoin

While cryptocurrency exchanges have been subject to fraud and hacking, exchanges are independent enterprises from Bitcoin itself. There have been many thefts of Bitcoin from wallet companies, exchanges, individuals, and companies. This can be compared to being mugged going to or leaving a bank. This is very different from identity theft in the traditional financial network, where money can be stolen directly from the banking system or credit card payment system. In fact, we have many cases of systematic theft from banking and payment processors that leverage inherent security flaws in banking and transaction processing.

Bitcoin itself, as a protocol, has not been hacked. All thefts of bitcoin have involved attacking users and their security. On the other hand, we can see that the Bitcoin address 1FeexV6bAHb8ybZjqQMjJrcCrHGW9sb6uF balance is about $1.3 million at the time of this writing. The total security keeping that balance safe for its owner is solely the security of Bitcoin. The richest addresses are easily displayed from the blockchain, and include addresses that have collectively as much as $2 billion. In total, all $300+ billion of value in Bitcoin are totally secured at the transaction level by PoW and Bitcoin’s security, without relying on a single physical vault or electronic firewall.

Some articles will enumerate hacks of Bitcoin companies and services without mentioning that 6 cents out of every $100 of VISA transactions are fraudulent. Sounds great until you realize that is over $500,000 million of fraud in 2016, for Visa alone. This is fraud possible with Visa that isn’t possible with Bitcoin at all. World wide, estimates run as much as $32 billion for 2016 for Credit Card fraud. This doesn’t count massive data breaches of traditional companies (projected at 1,500 for 2017 in the US. These data breaches don’t impact Bitcoin (because users never provide their private keys in transactions; no merchant payment processor collects and makes vulnerable bitcoin user data as a necessary consequence of their operations). Even when traditional companies accept Bitcoin, they do not maintain the information required to hurt their customers should a data breach occur, because they never had it in the first place.

Physical Security for traditional financial systems is massive. Just take transportation requirements. There are 820 armored security carriers, that employ 31,000 employees in the U.S. alone. Trucks designed to haul heavy cargo (like coins, metals) weigh 55,000 pounds each. Route trucks doing pickups and deliveries and servicing ATMs typically weigh 25,000 pounds each. On average 4 people die per year working for security carriers, which is second only to nightclub security guards for dying on the job. Gas mileage is between 7 to 9 mpg. Estimates of miles driven a day by armored trucks is not available, but are quite significant to support cash transactions in stores, and to service ATMs.

Banks: employees, manual processes

One thing about Bitcoin is that it automates everything. There are no vaults, there are no employees, there are no branch offices, and there are no skyscrapers in every major city in the world. Wells Fargo employees 240,000 people alone. JP Morgan Chase Bank has 188,000 employees, and Citibank has 172,000 employees. There are a lot of banks. Lots of buildings, lots of employees. And that’s lots of energy and a massive carbon footprint.

Worldwide numbers for employees of banks and financial services are hard to come by. But in the U.S., there were 1.91 million persons employed by FDIC-insured commercial banks in 2016. Europe employs 2.95 million persons in banking. It is tough to figure out what the carbon footprint of a bank really is, but one British estimate is that 160g of carbon are required per pound transacted in mortgages. That would be about 118g of carbon per dollar, if the same guess applies to the U.S. This calculation may or may not include many factors (as the work is not shown), such as the carbon cost of infrastructure to provide working space to the millions of employees of banks, and their transportation to and from work, central banks, security, law enforcement, etc.

Adding all the employee support, customer support, call centers, data centers, the costs of construction of infrastructure, maintenance of resources, computer security, physical security, transportation, government compliance, government oversight, law enforcement, criminal investigation, prosecution, insurance, the U.S. Treasury and Mint, banking system, oversight by central banks, and more, the actual carbon footprint might be several times 118g of carbon per dollar estimated. Each $200,000 mortgage in the U.S. then would burn 174 barrels of oil, for just the mortgage processing. That is what is estimated a person uses in the U.S. in about eight years. The estimate for Bitcoin of 126 kg per transaction for Bitcoin may only be slightly higher than an average transaction in the traditional financial networks.

And all of this is really required for a credit card transaction to work. Credit cards can be viewed as a simple application that runs on top of, and between banks and businesses. If one is going to compare the cost of credit card transactions to Bitcoin transactions, one cannot pretend credit cards would work in isolation if nobody had banking accounts. And one cannot pretend bank accounts would exist without the massive infrastructure of the banking system.

Improvements

Unlike the traditional financial network, Bitcoin requires no centralized infrastructure, does not operate according to any particular timetable, and requires no particular presence in particular locations. This means Bitcoin is well situated to utilize waste power from renewable resources.

Many Bitcoin mining operations rely on hydroelectric dams in rural China. Cooling costs are high, so Bitcoin is also mined where cooling is free and geothermal energy is plentiful, like Iceland. And as better mining hardware becomes available, miners can be used to heat homes and businesses while mining. returning a small refund to homeowners and businesses, and perhaps even turning a profit. Wind is being used to mine Bitcoin, and solar power may mine Bitcoin in the future.

The point here is that mining cryptocurrency can be done where renewable energy produces waste power, or where the heat generated by mining would have required the power anyway. If cooling is expensive, mining can be done where it is cold, even if that’s far away from population centers. Location and the type of power used can be optimized with cryptocurrency mining.

Banking requires power where it is the most expensive, and the most polluting, in the middle of population centers, and distributed across all the cities of the world. As an industry, traditional banking and finance is not sensitive to energy costs, but to location and access. As a result, banking and finance sees little pressure in their operations to reduce their energy footprint.

In addition to being able to choose type of power and location, Bitcoin is scheduled to add to the pressure to be energy efficient as the reward for mining halves every four years. Third party transaction and payment services, lightning networks, and other technologies will increase the transaction volume supported for the same (and more than likely tighter) power budget.

In summary, the innovations possible with Bitcoin are staggering, especially when compared to the existing financial system built on transaction toll booths, massive manual processes, money distribution networks based on armored cars, worldwide central banks, and massive barriers to entry. Critics of Bitcoin’s energy costs fail to take into account the way Bitcoin pressures miners into renewable energy, and energy efficiency. Because of the nature of how Bitcoin works, and the simplicity of its security, and its automation of what are manual processes in banking and finance, Bitcoin has a massive potential for reducing the carbon footprint of payments.







