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.

  • prabath

    Isn’t this exaggerating the things a bit?

    What is the average US household’s daily electricity usage? I guess it should be less than $1.5 (assuming a $45 monthly bill)? Then the electricity cost for mining would be around $2.4 per transaction. That is to earn $7-9. Why those numbers don’t suggest a sustainable future for Bitcoin?

    Can you please share the source of the following..

    “To do this they’re consuming roughly 157% of a US household’s daily electricity usage per transaction. “

  • Chris DeRose

    Mining is nearly 100% efficient. Miners convert registered value into fungible value. Seniorage costs might be a place to save money… but it’s a very competitive market, and that’s probably not a ‘wasted’ expense.

    • Nice turn of phrase: “Miners convert registered value into fungible value.”

      As we point our in the conclusion: “It isn’t actually waste, it’s really just the cost of securing Bitcoin’s ledger.”

  • StopTheBull5hit

    The issue with this article is that you haven’t really compared the wastefulness of Bitcoin to any existing infrastructure.

    For example, have you considered that the traditional banking system incurs costs for:
    – buildings (rent, maintenance, furnishing, insurance, lighting)
    – staff (Bankers, lawyers, security, clerical, maintenance)
    – bank vaults (metal production, manufacturing)
    – transportation of assets (armoured cars, gas, personnel)
    – FDIC insurance
    – fraud
    – physical ATMS

  • John Cunningham

    Bitcoin is not wasteful when you compare it to the cost of operating millions of branch offices of banks and fleets of armored cars all over the world!

  • FreezeCake

    The cost per transaction will go down once they build a layer 2 called “lightning”. This will allow for extremely cheap, p2p, trustless transactions.

  • Bitcoin exists because governments subsidize it. It represents the need for fungible value and its value is derived solely from the result of regulation. One would think the bankers would have more sophisticated responses than this. That said, I’d like to welcome Deloitte to 2013. Time to start down the long, embarrassing road of finding out that you believe in perpetual motion.

  • Peter Williams

    Transaction Fees are different to cost per transaction, Usually a small amount is offered as a fee as outlined by Mike, but the actual cost of per transaction based on the mining effort is tracked in this chart https://blockchain.info/charts/cost-per-transaction . This is where the $7-$9 comes from

    • mike

      In ascribing the total costs to mere transactions you are therefore valuing the blockchain at zero.

  • mike

    Fees are not $7 – 9 they are a few cents, even to send $10’s millions in one transaction.

  • mike

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

    Incorrect by orders of magnitude. You can send transactions for free. However to prevent spam (or ‘bitcoin dust’), fees of typically a few cents are added. Transactions of 10’s of millions have been made for just a few dollars.

    • Current revenue to miners per transaction ~10 USD https://blockchain.info/charts/cost-per-transaction

      Current price for users is quite small as most of that is due to seigniorage. It’ll be interesting to see what happens to fees and BTC-fiat exchange rates at the next halvening http://www.thehalvening.com

    • FreezeCake

      I think they are including the block subsidy/block reward in their calculation too. (Transaction fees + block subsidy ) / average number of transactions per block.

    • sum BTC

      They take the block reward subsidy also into account (25 bitcoins per block, still).

  • Peter Speros

    “It is, however, a rather high cost when compared to a more conventional, centralised solution.” -> And those centralized solutions have inflated away our wealth for over 40 years and put restrictions on it. The energy consumed is well worth the price for the first global decentralized trust-less medium of exchange in human history. 11+ billion dollars and growing believes the same as well.

    • Aaron Sevivas

      I agree! and in addition-

      Think of the cost of all those brink trucks, electricity powering skyscrapers with hundreds of IT employees maintaining the IT infrastructure around payment networks like SWIFT/VISA. How much $$/year does one Federal Reserve employee make? How many employees do you think work for the federal reserve? Add that cost too. The banks, each and every one of which, creates money out of thin air through loans (a task that is done in Bitcoin via mining in the Bitcoin space). Each of which need security for their home cooked systems for clearing. Now addup that cost. We hit a trillion dollars yet worldwide?

      Bitcoin’s PoW provides security a power of magnitude better than any IT system/physical system in existence and is a power of magnitude cheaper when you genuinely attempt to find a cost for security of fiat money.

      You cant counterfeit a Bitcoin. You cant illegally create money out of thin air. PoW is worth the cost x100!