Okay, the energy consumption for the proof-of-work (PoW) consensus mechanism in Bitcoin mining is high.
That is definitely a fact.
But Bitcoin mining is now also a business case, which also strongly influences the attitude of miners towards energy or energy consumption. Heavy energy consumption is the price we pay for security and trust in a decentralized and distributed ecosystem.
What is special about PoW is that for the security of the network, a mathematical puzzle should be solved every time a block is created so that transactions can be performed and stored securely on the blockchain.
The miner who solves the puzzle for this first, is rewarded by the system.
What is the puzzle?
So it's all about securing data or information. In order to securely store information in the blockchain and protect it from forgery and attempts at counterfeiting, the information in a block generates a cryptographic hash and is recorded in the blockchain as a block.
Information can be:
- Values or monetary transactions such as bitcoin transactions from user A to B.
- Smart contracts and corresponding contract data can also be processed in a blockchain, such as the former PoW Ethereum blockchain was able to do so.
Side note: Incidentally, this is also possible with the Bitcoin blockchain, whereby other protocols (RSK), blockchains (Stacks) or Taro interact together with Bitcoin as a further layer or using connecting “bridges”.
However, let's stay with the transaction of values as follows:
The puzzle takes cryptography as an aid. For cryptography, the so-called SHA256 hash is used.
SHA256 generates a message digest or fingerprint of some information so it cannot be tampered with, without changing the corresponding hash. Furthermore, SHA256 hashes are one way functions, which mean that you cannot get the information which the hash was generated from starting from the hash.
Secure is secure.
In order to securely and chronologically join the blocks in a chain, the hash of the predecessor block is integrated into the newest block being mined.
On DemoBlockchain.org this is presented very clearly. In the image below you can see the reference to block #1 under “Prev” in block #2.
Secure is secure.
However, the puzzle only becomes a puzzle due to the following challenge: The hash must be below a certain value (typically referred to as “starting with a certain number of zeros”), as specified in the Bitcoin protocol. Of course, this makes guessing the hash more difficult.
And it is precisely this calculation that drives up the computing power once again. And high computing power requires more energy, i.e. electricity.
Working time (computing power) and energy (electricity) are therefore essentially required to operate a PoW blockchain. Both strong computing power (in the form of hardware) and energy are expensive. This means that profitability is a very important issue for miners. “What are my costs versus my return (reward for mining a block)”. So what can a miner contribute to his/hers profitability?
The business of mining has become very professionalized, both in terms of hardware and access to energy.
- Meanwhile, there has been produced specifically mining hardware over the years (ASIC computer), which processes relatively quickly the computation-hungry task of mining blocks. The hardware is not only consuming lots of energy but also expensive.
- Miners join together in pools to have a greater chance of capturing the reward that is given about every 10 minutes for mining a block. This at least participate more people at winning the reward.
- The hardware is relatively compact and is easy to transport.
Neglecting electricity costs is definitely not a sustainable way for miners to operate, as electricity costs account for about 80% of operating costs, according to the Arcanes report. Meanwhile, electricity prices have skyrocketed in 2022, miners need to look at how to get cheaper electricity to make the business even worthwhile. And when you're dealing with cheap electricity, you can't get past renewable sources of electricity.
Therefore, a miner is quickly confronted with whether to go for the more expensive, fossil energy resources or cheaper, sustainable resources when it comes to electricity.
Keeping this in mind, one quickly comes to the thought that PoW mining can impact the energy industry.
Mining can be a lucrative business for both sides:
for miners, when energy costs are low,
and for energy providers, it is the case when the corresponding demand for renewable energy sources come from the mining industry
Bitcoin mining and the energy economy
Bitcoin mining can have and already has positive impact on the energy industry.
Arcane Research has published the interesting paper “How Bitcoin mining can transform the energy industry” where you can find four theses that are put forward.
- Strengthening power grids through bitcoin mining.
The continuous demand for electricity from mining can stabilize power grids, especially wind and solar.
Previously, in fossil power grids, supply could be flexibly controlled for demand, also called “demand response”.
Demand response can no longer be controlled flexibly with wind and solar. Wind or solar cannot be planned as well as burning coal, gas or oil. And if the demand for electricity also varies, then the cycle falters and becomes unstable.
The more continuous the demand, the more stable the power grid. This can be achieved, for example, by providing rigs at the appropriate points of electricity generation (see image below).
This makes solar and wind networks more stable and economical.
- Improving renewable energy economy through bitcoin mining.
Through mining, the demand can be served continuously. Energy surpluses generated by wind and solar can be constantly taken by Bitcoin mining. Regenerative energy sources have a grateful outlet through mining and promote the economy of renewable energy sources.
- Efficiency in the emergence of natural gas in oil production through bitcoin mining.
Oil producing countries provide emissions in the process of oil extraction by simply burning the gases generated by the process uselessly (called gas flaring). The product of this process, methane, is simply released into the atmosphere.
To turn the waste of gas flaring into a more efficient use, oil companies are now offering to combine gas combustion with an electricity generator so that the electricity can be used for Bitcoin mining.
So to keep mining profitable, it is also a driver in business models around energy efficiency in traditional energy production.
- Reuse of + heat from bitcoin mining.
Bitcoin mining also generates heat from the hardware that does the mining. Now bitcoin mining companies have also discovered heat recovery for themselves. This innovation is happening especially in colder latitudes, such as Canada or Scandinavia, as Arcane reports.
Thus, Bitcoin mining can be turned into an additional profitable business by providing heat (district heating) or reducing electricity costs for heat generation.
From PoW to PoS – what does the Ethereum upgrade actually mean?
We now know that the Proof of Work (PoW) consensus mechanism is based on cryptography. Mathematics is therefore the basis of the algorithm's functionality. The control for the correctness of transaction on a PoW blockchain is distributed in a decentralized fashion across all network nodes.
Bitcoin uses PoW.
Ethereum was originally built using the PoW consensus. mechanism, but has switched to Proof-of-Stake (PoS) with an upgrade on Sept. 15, 2022.
There are a few points or arguments in favor of PoS: PoS does not require hardware or energy for consensus. Energy consumption on Ethereum has been reduced by 99% as a result of the switch. Wow, that's a lot. But what else does that mean?
It means that the cost factor that a PoS network node (called a staker or “validator”) must carry is non-existent. Stakers are the equivalent of miners in PoW, and are responsible for storing data, processing transactions, and adding new blocks to the blockchain. In order to become a staker, the staker must acquire stakes (ie. own and lock a certain amount of the cryptocurrency as collateral) in the PoS network.
The selection of a staker in the PoS consensus mechanism is randomly selected by an algorithm and receives transaction fees, not rewards.
The larger the stake I have in the network, the greater the chance that the algorithm will select me and I will be able to release transactions. The minimum stake required in Ethereum to become a validator is currently 32 ETH. In my view, this moves Ethereum into an elitism or oligarchy-like construct where money, and those who have the money, rule the system.
This is further encouraged by the fact that many Ethereum nodes are run on cloud systems like AWS (Amazon Web Services). This gives such service providers an enormous position of power. Theoretically, they can shut down those nodes at any time.
What are the weaknesses of PoS?
Block producers of some coins can have incredible power when the number of block producers in a network is small. And this even increases when producers, in order to generate more transaction costs, generate more forks. In order to address this issue, the PoS coins have additional protection mechanisms built into their protocol. The more I need to build the more insecure it gets.
Many people are understandably excited because of the lowered energy consumption. Many people are also excited that transaction time has been reduced.
That sounds very good at first.
On ethereum.org, it is said that the upgrade ensures that the blockchain is more scalable.
But the reasons is very short thought from my point of view.
Stakers, who need to own a large stake to participate in the consensus mechanism in the first place, and technical service providers can greatly influence what happens on the blockchain.
This is all very counter to the idea of decentralization and security and is a very high cost.
There are already interesting applications (e.g., RSK , Taro, or Stacks) that run on bridge connections with Bitcoin (as off-chain or layer2). They use the security provided by Bitcoin to securely manage and run the corresponding applications or smart contracts. Additionally, this leverages the efficiency level of the consumed energy required by Bitcoin to secure DApps or smart contracts. Secure is secure.
It is good to look at the high energy consumption in PoW, because this creates awareness and new potentials for new, efficient and sustainable ideas. This young Bitcoin network is experiencing transformation. It is part of the disruption the energy economy is experiencing. The demand for sustainability and associated lower costs transform also the energy industry for better solutions to the problem.
We should be looking at
- How we connect bitcoin mining to sustainable sources as quickly as possible
- How we add more value to the process of mining, e.g., efficiency in electricity generation for mining or for heating through district heating
- How we maintain decentralization and security in the bitcoin blockchain, and without giving up control to a few
- How to build easy to use and experience node interfaces or software in order to strengthen and fortify at the same time the network's security
How bitcoin mining can transform the energy industry: Summary; September 2022, Arcenae Research
Upgrading Ethereum to radical new heights
Proof-of-Work (PoW) vs. Proof-of-Stake (PoS)
ConiTelegraph, Oil giant ConocoPhilips reduces gas flaring emissions via Bitcoin mining
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Blockchain Institute of Technology.
The German version of this post can be found on bitcoeln.de