Why Bitcoin Uses Energy

Summary: By using energy, Bitcoin is able to issue money in a way that is free and fair for everyone in the world.

It hasn’t been an easy decade for Bitcoin critics.

After arguing at length that Bitcoin was a bubble, a worthless digital trinket destined to fall to zero, observers will notice a recent shift in criticism. Of late, the charge has become that Bitcoin is too successful, and that its success will necessitate an environmental catastrophe.

A former skeptic of Bitcoin myself, I can sympathize with the sentiment. At a time when trust in institutions – be it governments, Wall Street, or Silicon Valley – is low, it’s easy to be critical of claims that Bitcoin’s use of energy is a benefit to society.

Regardless, the unspoken implication is clear: there is a widespread perception that Bitcoin investors are lying about the impact of its energy use for personal gain.

Still, it is the belief of this author that arguments about Bitcoin should be grounded in a faithful examination of the claims on either side, and it is for those who remain open-minded to the potential of a better, fairer monetary system that this article is written.

After all, for someone who has been following the debate, arguments that focus on evaluating the quantity of Bitcoin’s energy use, or the morality of why this level of energy use is justifiable, don’t quite cut to the essential question.

Just as it’s impossible to debate Bitcoin’s price without understanding its value as a money free from government influence, it’s impossible to evaluate Bitcoin’s energy use without learning why energy is essential to the operation of such a money.

Make no mistake, despite claims to the contrary, energy is essential to Bitcoin’s operation.

If Bitcoin did not use energy, its design would simply not offer benefits over existing government monies, and it would fail in providing a viable alternative.

Establishing Trust

If you’re new to Bitcoin, you might not be aware that Bitcoin uses energy to both fairly distribute the money within its economy, and secure its history of transactions. Indeed, it is this very system that is the chief invention of Bitcoin, and it is what allowed its digital money to become accepted globally, where others before it failed.

After all, we must accept that Satoshi Nakamoto did not succeed in creating a new money when he launched Bitcoin. Rather, he launched an experimental software that issued scarce data. By tying Bitcoin issuance to the energy market, however, bitcoins became fairly and widely distributed. Because bitcoins were fairly and widely distributed, its users were able to begin valuing them as money.

In fact, during the first year of Bitcoin’s operation, bitcoins did not have any price. Users who wanted to compete for new Bitcoin issuance were instead required to use electricity and computing resources to acquire bitcoins. In this way, it can be argued these early users actually spent money to acquire bitcoins at a loss.

This is exactly how Nakamoto received his bitcoins, by running computers and paying for the electricity needed to create them. Nakamoto did this in order to instill trust in his new money, which other users at the time had no reason to value or use.

Over time, Nakamoto’s system was successful. Users established a market price for bitcoins, built and launched exchanges, and created a vibrant circular economy. It is because of this spontaneous monetization that Bitcoin can be viewed as a major invention, and why it can be argued the free market deemed Bitcoin money.

It’s worth noting that all cryptocurrencies could implement this kind of model, publishing the code and enabling users to compete for the money they issue by following a clear set of rules.

However, in practice, alternative cryptocurrencies do not do this. Instead, they issue their new currencies to investors, insiders, and project contributors, often selling it at a pre-determined price prior to it even being available to the public.

By using energy, Bitcoin was able to avoid this bootstrapping problem, enabling its money to be issued fairly to anyone who could follow a clear set of rules.

Maintaining Stability

By using energy, Bitcoin was also able to keep two important aspects of this process outside of the code itself. First, the cost of the equipment needed to compete for bitcoins, and secondly, the cost of the electricity to run those machines.

Crucially, these requirements are decided by the users of Bitcoin, not its developers.

Indeed, we have observed great changes in the market for Bitcoin issuance over time. In the early days of Bitcoin, users were able to compete for newly issued bitcoins just by running a laptop or a gaming computer, using only a small amount of electricity.

Today, to compete for newly issued bitcoins, specialty hardware is needed, as is a reliable source of cheap power and abundant energy. This transition has naturally startled those who do not understand how or why Bitcoin uses energy.

But most importantly, no single person or group of users decided on this change or the price of these requirements. Rather, these costs simply increased as the competition for new Bitcoin issuance became more competitive over time. As more people began dedicating energy to compete for new bitcoins, the competition forced efficiencies and forced out those who were unable to compete.

This contrasts sharply to the issuance of cryptocurrencies that do not use energy. These types of networks go by many names (proof-of-stake or delegated proof-of-stake among them). However, because they do not use energy, these cryptocurrencies need some other way to distribute the currency they issue.

In practice, this means that they need to set specific requirements users must meet to claim the money.

For example, to compete for new money issuance on proof-of-stake networks, users often need to first own or lock up a certain amount of the currency. So, too, do they need to meet certain hardware requirements, which may be dictated by the code.

After Ethereum’s planned transition to proof-of-stake, the protocol will indeed use less energy. However, it will require those who compete for its money issuance to own at least 32 ETH (about $100,000 at today’s prices).

Importantly, it is only users who are able to pay for this investment that will be able to gain a share of the new money issued thereafter, and who will be able to influence such changes in the future.

By contrast, Bitcoin users don’t need to buy Bitcoin at all to compete for its money issuance. Even more importantly, they can lose access to their ability to do so if they are unable to access new equipment or generate cheap electricity.

This means that we have seen a high historical turnover in the companies able to compete for new Bitcoin issuance. It’s at best unclear if we will see the same in models where money issuance is based on wealth and ownership.

Ensuring Security

Finally, you might hear Bitcoin advocates talk about Bitcoin as a “trustless money,” or hear them refer to the traditional fiat system as “trusted.”

Indeed, there are many reasons why Bitcoin might be considered trustless. This starts with the code itself. To begin, users can freely compile the code (meaning they don’t have to trust its developers), and while running the code, they can verify that other users are following the rules (meaning they don’t have to trust other users).

They also don’t need to trust anyone to hold their Bitcoin (instead they can simply hold the private keys to their money anywhere they can safely store them).

This contrasts with the U.S. dollar system, where users need to trust public reporting statistics from institutions like the U.S. Federal Reserve to know basic facts like how many U.S. dollars are in circulation, and trust politicians to maintain these aspects of the economy in a way that promotes their personal or commercial welfare.

Likewise, when new money is issued in the fiat ecosystem, it always occurs at the request of policymakers who work with financial institutions to lend out the new money, entering it into circulation. As on blockchains that do not use energy, new money is awarded based on existing capital and influence.

During this process, any number of stakeholders can be advantaged over others.

By contrast again, because Bitcoin uses energy, anyone who can produce energy can compete for the new money issued by the protocol. This means anyone who has access to a source of energy – be it a wind farm or natural gas that might be otherwise flared – can direct that energy toward the competition for new bitcoins.

There are no geographical requirements or mandates that users use or not use a certain type of energy to compete for new bitcoins.

Because money plays no direct role in this competition, large institutions do not and cannot benefit over small entities. Though there are critics who point out the presence of the large companies involved, these companies enjoy no special privilege over the code or its rules.

The misconception that mining distribution is necessary for Bitcoin’s decentralization is another misnomer that would take another article to debunk. As the history of Bitcoin has shown, it is the users who run the software who secure the code.

Bitcoin’s energy use does provide an important function for transactions, the cumulative computation they conduct making it prohibitively costly to rewrite the ledger itself. But simply put, Bitcoin’s miners do not set the rules, they follow them.

However, the fact remains, anyone can become a miner, and new bitcoins have even been issued to operators of small home mining rigs that are as simple as a collection of a few USB sticks as recently as this past year.

Pursuing the Greater Good

Bitcoin is a complex distributed system seeking to achieve an ambitious goal, and energy use is and will remain fundamental to this system. That said, it’s important to be clear about why this system exists and what Bitcoin is an alternative to.

Ultimately, Bitcoin enables anyone in the world to compete for its money issuance regardless of age, race, or geographic location, and the money it issues cannot be easily seized, confiscated, or debased by any government or entity.

Thus, Bitcoin is an alternative to any system where there are barriers between users and the ability to freely compete for fair money issuance.

Armed with this definition, we can clearly see that energy use allows Bitcoin to be not only an alternative to existing government monies, but blockchains that do not use energy, and instead recreate the hierarchies on which our current money is based.

This argument being accepted, the point of this article is not to dismiss Bitcoin’s environmental concerns outright.

As advocates for Bitcoin, we should still strive to ensure that the companies using energy to compete for new bitcoins are doing so to the benefit of the existing energy grid and our environment.

However, it is only by accepting Bitcoin’s energy use that we can begin working toward finding new ways to use and harness energy for the greater good – and for the greater adoption of Bitcoin.

Pete Rizzo will be speaking at the world’s largest Bitcoin conference next week – get your tickets here.