Why does Bitcoin need so much Energy?
Currently the bitcoin network consumes more energy than the Netherlands. In other words, if the bitcoin network were a country, it would be the 33th largest in respect to energy consumption.
If we break it down per transaction: One bitcoin transaction uses the same amount of energy, as an U. S. household in 40 days or the equivalent of 800'000 VISA transactions.
But why?
In simple words, bitcoin is a decentralised blockchain. The blocks contain the bitcoin transactions (for a deeper dive in how Bitcoin works, look at my previous article). Once a block is added to the blockchain, it can’t be changed anymore. The decentralised blockchain is the main advantage of bitcoin and other decentralised cryptocurrency: You don’t need to trust a central party who runs the blockchain. The blockchain is distributed over all its participants.
But if there is no single authority who can add data to the blockchain, who adds new blocks to the blockchain and verifies its validity? The blockchain uses a cryptographic consensus algorithm — called «proof of work» — to add blocks to the blockchain.
What ist Proof of Work?
A blockchain is a decentralised database, supported by a network of independent participants called «nodes». If a participants wants to add a block to the blockchain, they must spend computational power to solve a cryptographic problem. Participants who compete to add new blocks to the blockchain are called «miners».
The mining is competitive, i.e. the participant who finds a valid block first is rewarded with 6.25 bitcoins, all the other miners don’t get a reward for this block. This reward ensures, that enough miners contribute their computational power to the network to keep it going.
To find a valid block, a miner must find a hash that satisfies some special properties. This rule is called difficulty. It is chosen in a way that every 10 minutes a block is generated. Roughly every two weeks the difficulty is adjusted to keep the blockrate constant. If more computational power is available, the difficulty increases and vice versa.
A bit simplified the imposes the following requirerments on a hash (the unsimplified rule): A valid hash must start with a certain number of zeroes (19 at the time of writing). Based on probability theory this means that in average 16¹⁹ (a 7 followed by 22 zeros) hashes must be generated to find a valid one.
This makes the proof of work algorithm quite resistant against attacks. Since an attacker needs more than half of the computational power of the bitcoin network change the blockchain. If attackers gain control of the majority of the computational power in the blockchain, they can add blocks faster than other miners and consequently, reverse past transactions, double-spend Bitcoins, or prevent new transactions from being confirmed. It is almost impossible to gain 50% of the computational power of bitcoin because of its huge number of competing participants.
But with an increasing value of a bitcoin, the computational power of the network increases too and with it the consumed energy. Since only every 10 minutes a block is created, the additional computational power ist wasted in the increased difficulty.
Can we do better?
There is an alternative consensus algorithms called «proof of stake», which uses much less resources to maintain a blockchain. Ethereum — the second largest cryptocurrency — is transitioning to proof of stake in some years. But for bitcoin, there is no plan to move to proof of stake.
