A Beginner’s Guide to Bitcoin (Part 12): Bitcoin Problems – Electricity, Centralization

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Electricity

Paying People To Run The Network

At the start of this series of articles I mentioned that Bitcoin uses as much electricity as a small nation.  How is that possible?

We’ve seen that Bitcoin gets people (the miners) to add computing power to the network by paying them in Bitcoin.  A miner gets paid if and only if they add a block to the blockchain, which happens about every ten minutes regardless of how much computing power there is in the network.

How Much Gets Paid?

The amount that gets paid varies over time.  The mining fees rather arbitrarily reduce by 50% every 210,000 blocks, which is about every four years.  Currently (2018) the block reward is 12.5 Bitcoin.  When Bitcoin started it was 50 Bitcoin.

When Bitcoin started anyone could add their own computer to the network and get a small payment in Bitcoin occasionally.  Individuals were just setting their personal computers to mine when they were otherwise idle.

In 2010 the price was about 6 US cents for a Bitcoin, so 50 Bitcoin was $3.  No-one was going to get very rich with mining in total generating about $432 per day.

By 2018 the calculation has changed radically.  You only get 12.5 Bitcoin for mining a block, but the current price is about $7,000 (and has been as high as $19,000).  That makes 12.5 Bitcoin worth about $87,500, and at 6 blocks per hour daily revenues for all mining are about $13 million.

Modern Mining

As you can imagine thirteen million dollars a day really incentivizes people to add computing power to the network.

The result of this has been that miners have set up huge server farms (lots of computers in a warehouse) to try to get a slice of this daily reward.  They’ve done this in places where electricity is cheap, as once they have the farm their outgoings are just electricity and maintenance.

The miners have also started using specialized chips (ASICs) that are very good at solving the hashing puzzle.  This has meant that it’s almost impossible for an individual with a PC to mine a block: one PC’s computing power is tiny compared to all these specialist computers, and the chance of mining a block is proportional to computing power.

How Much Electricity?

From here it’s fairly straightforward to estimate how much electricity is being used by Bitcoin.

We’ve estimated that total revenues for all miners is about $13m a day, or $4.5bn for a year.  Miners expenses are electricity, rent, maintenance and they will want to generate some sort of profit.  However you’d expect the main expense to be electricity.  Let’s rather conservatively assume that 50% of that $4.5bn gets spent on electricity.  A quick internet search shows that electricity is about 8c/kWh in the cheaper parts of the world.

That means we can guess that Bitcoin uses roughly 28 billion kWh per annum (4.5 x 0.5/0.08), which is 28 terawatt hours (tWh).

Note that this calculation depends directly on the Bitcoin price.  If we assume that the price will go back to $19,000 per Bitcoin and stay there then we can assume that mining will expand to about 76 tWh per annum.  This is intuitive: the more money miners can make the more they will be prepared to spend on electricity.

There are some internet sites that claim to do this slightly more scientifically than the analysis above, although the basic idea is the same and the results are similar.

A Country’s Worth

There is of course a lot of uncertainty in an estimate like this: it’s really only correct in its order of magnitude.  However according to Wikipedia 28 tWh is about as much electricity as Serbia uses in a year.  76 tWh is slightly more than Austria uses in a year.

Take A Step Back

If you stand back and look at this it’s really the ultimate craziness of Bitcoin.  Satoshi Nakomoto has invented something that is tying up a fair proportion of the world’s computers to try to slow his new money’s payment processing down.  As we’ve seen, as more computers get added to the network Bitcoin adjusts itself to ensure that payment processing does not get any faster.

The only real benefit of all that computing power is that it’s harder to attack Bitcoin via a 51% attack.  Bitcoin proponents like to claim that all this mining makes the network more secure, which it does, but in that limited sense only.

Centralization

As discussed, mining is now done by highly professional miners with specialized kit in specific countries with cheap electricity.  This leads to another problem: there are fewer of them, and often they work together in ‘mining pools’ to share block rewards and smooth income.

This means the mining power gets centralized into the hands of just a few groups of people.  We’ve already seen that if one group of people has control of more than 51% of the computing power in the Bitcoin network then they can manipulate the ledger via a 51% attack.  So this centralization is a genuine problem, as well as being contrary to the ideological decentralized nature of Bitcoin.

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