Bitcoin Mining and Energy
A look into Bitcoin mining and its potential impacts on the global energy industry.
In this post, we will be looking into Bitcoin mining and how it is tied in to the energy sector.
First, I will provide a short primer on Bitcoin mining, so everyone has a basic understanding of how mining even works in the first place.
In previous posts, I described that miners of bitcoin provide the security necessary to allow the entire network to function. How exactly does this process work?
Bitcoin works by sending a ledger to anyone that runs a full node, so that the network is completely transparent to all users. Everyone can verify for themselves each block of transactions that takes place. Anyone who would like to participate in updating this ledger can do so. The ledger of transactions is known as the blockchain. To update the blockchain, all you have to do is operate computing hardware that attempts to guess a random number that solves an equation generated by the system. Sounds kind of simple, right?
The more powerful your hardware is, the better chance you have of guessing the correct solution. All miners are competing to solve the exact same problem, and the miner who first guesses correctly wins. If your mining computer comes up with the correct solution, your computer gets to determine which pending transactions will be included in the next block. Then, that block is sent out to the whole network in order to be verified. Each computer that validates your block updates its copy of the ledger.
As a reward, you get a fixed amount of bitcoins and also transaction fees that are based on the transactions in your block. The rewards are compensation for the time and energy your computers spent towards solving the problem. It is quite difficult to win the competition, but it is very easy to validate which miner won. Think of it like a Rubik’s cube - hard to solve, but easy to see that it is solved.
With that primer on Bitcoin mining in mind, let’s take a look at some of the consequences of the competitive mining market.
Miners are incentivized to find the cheapest sources of electricity.
The miners that can power their computers with the most cost-efficient energy sources will be more profitable than miners with more expensive energy expenditure. In other words, as the cost of mining operating expenses goes down, the reward for mining goes up - this is very promising for the future of our world’s energy consumption.
Take solar energy for example - the cheaper that solar energy gets, the more profitable mining bitcoin using solar energy becomes. The Bitcoin mining environment is a continuous program that promotes innovations in energy production.
Bitcoin mining is not restricted by geographical access. Anyone in the world can operate mining equipment from any location - Bitcoin is a “green” coin!
It may seem easy to criticize Bitcoin for its use of energy because the entire Bitcoin network does, indeed, use a lot of energy. However, as the network grows stronger, energy costs will continue to decrease over time.
Consider the amount of energy necessary to operate our traditional financial system. When we swipe a credit card, we see only a tiny fraction of what is happening. We do not think about the buildings filled with servers that are responsible for fraud detection or criminal surveillance. We do not think about the offices, trading floors, or armored transportation that are a part of the operation of our financial institutions. Is that an environment that contributes towards a promising future for our world’s energy sector?
Compare that to a censorship-resistant and decentralized network which is perpetually secured by miners competing to expend energy as cheaply as possible.
Bitcoin automates many of the functions of our traditional financial system and even has a better system of energy expenditure.
Furthermore, an important aspect about Bitcoin to understand is that mining rewards steadily decrease over time because there are less and less new bitcoins rewarded as time goes on. The final amount of bitcoin will be mined around the year 2140.
Currently, around 18.6 million bitcoins exist which means that only 2.4 million are left to be mined.
This means that if miners cannot continue to decrease their cost of energy, they will be rewarded less and less over time or they will demand a higher fee payment. If energy can be generated by miners at a near-zero cost, the entire Bitcoin network can be secured very cheaply.
If the Bitcoin mining industry continues to lower the cost of energy worldwide, the implications would be be massive. This would make Bitcoin an energy-dependent, immutable asset. Said differently, we would finally have a global final settlement network which anyone can access at a perpetually lowering cost.