Why does bitcoin consume a lot of electricity?

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Bitcoin

From a simple concept of digital currency, bitcoin and other cryptocurrencies such as bitcoin cash, ethereum, monero, ripple, stellar, litecoin, cardano, dogecoin, electroneum, ravencoin, feathercoin graft and other cryptocurrencies now also represent physical assets such as high-end computer hardware, servers, low-temperature rooms, fast Internet and electricity.

This is because cryptocurrency mining, or the process of verifying encrypted or password-protected transactions and adding to the public ledger or blockchain, requires the use of high-performance computers with graphics processing units (GPUs) that are normally found in gaming computers or Application-Specific Integrated Circuit (ASIC). To ensure that these machines with great processing or computing capacity perform at their optimum level round the clock, cooling solutions, a lot of electricity and a fast Internet connection are needed.

Miners use these powerful computers to approve, verify, compile or add transaction data into blocks and solve difficult computations or Mathematical equations in the form of encrypted transaction. By solving a puzzle, a number of cryptocurrencies are released as a reward or incentive.

Cryptocurrencies are released in a blockchain—a public ledger or a continuously growing list of records, called blocks, which are linked and secured using cryptography. Blockchain, the decentralized ledger network, allows users to transact directly, peer to peer, without a middle man acting as central authority.

Blockchain employs cryptography to secure transactions, manage the creation of additional blocks and verify the transfer of assets. A blockchain transaction is encrypted, secure, unalterable and decentralized, which means it cannot be controlled by one user. It needs to be verified and approved.

The miner that first solves the puzzle is given the right to place the next block on the block chain and claim the rewards in the form of cryptocurrency, which is a digital medium of exchange in place of money. The reward is based on how much one's hardware contributed to solving an encrypted transaction.

The payment goes to a coin wallet—a password-protected cryptocurrency exchange that holds different types of digital coins. In short, a cryptocurrency miner acts like an auditor or bookkeeper of a digital transaction and gets paid in bitcoin or other types of cryptocurrencies.

A bank executive in the Philippines explains that in bitcoin, every single node has a copy of the same ledger. "If there are a thousand participants, a hacker will consume a significant and uneconomical amount of energy to change all the ledgers. Every 10 minutes or so there is a block of deals recorded, and the blocks are chronologically connected and referenced. That’s why it’s called a blockchain,” Union Bank Senior Executive Vice President Eugene Acevedo said.

Sometimes, the cost of electricity needed to mine a cryptocurrency is even higher than the value of the currency itself. High-processing computers generate a lot of heat which need to be managed like data centers or servers of companies.

It is said that cryptocurrency mining as an industry has grown so big that it now consumes more electricity than the whole of Argentina does. Digiconomist estimated that bitcoin’s annual electricity consumption reaches 29.05 terawatt-hours or 0.13 percent of the total global electricity consumption.

This is also why many bitcoin miners choose to operate in countries where electricity is cheaper.

A report by Reuters states that cryptocurrency miners are now moving to Norway and Sweden to take advantage of cheap hydro-electric energy and low temperatures to power and cool their servers.

A study by Morgan Stanley said bitcoin miners' use of electricity will exceed the usage of all the world's electric vehicles by the mid-2020s.

“Mining a single bitcoin requires $1,400 to $1,800 worth of electricity, up to a quarter of the total costs and about the annual power bill of a four-person household in Germany,” according to the Reuters report.

Bitcoins are becoming popular and in the Philippines, Senator and boxing legend Manny Pacquiao invested in the "PAC Token" which would allow fans to buy the Filipino world champion's merchandise and interact with him via live-streaming, according to a report by Agence France-Presse.

Pacquiao said he would launch a cryptocurrency to connect with fans, following the lead of Floyd Mayweather and former England striker Michael Owen.

Two banks in the Philippines are also testing the blockchain platform for digital transactions—UnionBank of the Philippines and unit City Savings Bank.

Union Bank Senior Executive Vice President and CitySavings Chairman of the Board Eugene Acevedo has recently discussed the 'Digitization Trends in Banking'.

“We’re starting to make banking more interesting. In UnionBank, for example, we came out with The Ark – it’s a branch that has no tellers. A customer can go to the Ark and do their own banking via a tablet while sitting on a nice chair having coffee. It’s a self-service banking facility that is completely paperless. Banks now need to focus on user experience,” he said.

Bitcoin’s digital backbone created by the blockchain is what makes it a distinct and important technology feature. It represents an innovation in information registration and distribution that eliminates the need for a trusted party to facilitate digital relationships. Bitcoin increases system efficiency and enables the provision of financial services at a drastically lower cost, giving users more power and freedom, according to Acevedo.

“The blockchain technology is now being used to create a payment gateway to make it easier for rural banks to transfer money to each other,” he said.

19 April 2018

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