Why is Bitcoin so wasteful?

Bitcoin Miners are being paid somewhere between US $7-$9 to process each Bitcoin transaction. 

To do this they’re consuming roughly 157% of a US household’s daily electricity usage per transaction. Those numbers don’t suggest a sustainable future for Bitcoin. They suggest an environmental disaster. And this is by design. So why is Bitcoin so wasteful?

Bitcoin is lauded as a solution to a problem known as Byzantine fault tolerance: how do we get a bunch of participants who don’t trust each other to agree on something? With Bitcoin, this something is a set of account balances denominated in Bitcoin, balances that collectively represent all the Bitcoin ever created.

All solutions to the Byzantine problem rely on duplicated work. Practical Byzantine Fault Tolerance, one of the early solutions, relies on all participants involved running the same programme, periodically checking that others have identical results. Bitcoin uses a more indirect method, something akin to bingo.

Bitcoin requires the transactions recorded in the ledger to be partially ordered; the transactions associated with each account must be ordered to ensure that the account balance is always accurate. Bitcoin does this by collecting transactions into blocks, and then appending blocks to the chain of previous blocks (the blockchain).

Each round of creating and appending a new block is a round of bingo. Miners, each working on their own, create a block of transactions and submit it to the mining community. The cost of entry is the ‘Proof of Work’ they must create and attach it to their bingo card. The winner of this lottery is the miner who submits the first correct answer, just like bingo. The winner is paid,  though everyone, including the winner, loses their entry fee.

So this is where Bitcoin’s waste comes from; all those discarded bingo cards.

Any solution to the Byzantine problem involves waste. Participants who can minimise the waste have an advantage. It’s not surprising that Chinese Bitcoin miners represent over 50% of current mining capacity when you consider the rock-bottom prices they pay for electricity.

So what can be done about this? Not much, unfortunately.

We can try and control the number of participants. Fewer participants imply less duplicate work and consequently less waste. However, we need a large enough pool of participants to ensure that a well-capitalised outsider cannot buy their way to domination. A larger mining community provides a more secure ledger. This also implies that there’s a practical lower bound to the size of this community, below which we couldn’t trust the ledger’s integrity.

The only lever we have to control the size of the mining community is the size of the block creation reward, the bingo prize. A higher reward will attract more miners into the community. A lower fee implies a smaller community.

Within these constraints, we can optimise the size of the mining community. However, as the size of the reward strongly influences the size of the mining community (which, in turn, determines the amount of waste) this reward is likely to be higher than we want. As the reward is denominated in Bitcoin we also need to allow for the exchange rates between Bitcoin and the various sovereign currencies in which the Bitcoin Miners’ incur their expenses, possibly by tying the reward to a weighted basket of sovereign currencies.

Bitcoin

Estimating a lower bound for the cost of a Bitcoin transaction is left as an exercise for the reader, though it’s likely to be quite a lot higher that the fees associated with the existing payment networks as Bitcoin need to fund designed-in waste that these networks don’t have.

Another option is to avoid the waste. What if miners could retrieve their bingo entry fees once we’ve established who won? After all, once we’ve established which ledger is the good one we don’t need the evidence anymore. This is what has been proposed with Proof of Stake.

There’s a problem with this, though.

We know from experience and because economics that miners will spend up to the margin regardless of the mining mechanism chosen. If Proof of Stake reduces the operational cost of creating a block, then we can expect miners to invest in mining capacity, either individually via capital deepening or collectively by new miners joining the community, until aggregate cost rises and return the margin from mining to what the mining community feels is the minimum acceptable return for the investment required.

Proof of Stake shifts waste from the physical to the ephemeral. Rather than consuming power, we’re locking up funds, reducing liquidity. While ephemeral, this is still a real cost and implies real waste. It’s just favouring CAPEX over OPEX.

Money – even Bitcoin – only has value as it touches the real world. Ultimately all money is a claim on a real world resource. If our mining process consumes money, then it is consuming resources. This might be obvious, as with Proof of Work, or it might be obscured, with Proof of Stake, but it is inevitable. It’s not surprising that some commentators are calling Proof of Stake ‘Obscured Proof of Work’.

Bitcoin is wasteful as it must be wasteful to work. It isn’t actually waste, it’s really just the cost of securing Bitcoin’s ledger. It is, however, a rather high cost when compared to a more conventional, centralised solution.


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