Bitcoin Energy Consumption Index

https://digiconomist.net/bitcoin-energy-consumption

Key Network Statistics

DescriptionValueBitcoin's current estimated annual electricity consumption* (TWh)70.1Annualized global mining revenues$6,185,261,213Annualized estimated global mining costs$3,504,984,284Current cost percentage56.67%Country closest to Bitcoin in terms of electricity consumptionChileEstimated electricity used over the previous day (KWh)192,053,933Implied Watts per GH/s0.196Total Network Hashrate in PH/s (1,000,000 GH/s)40,765.00Electricity consumed per transaction (KWh)1,012Number of U.S. households that could be powered by Bitcoin6,490,712Number of U.S. households powered for 1 day by the electricity consumed for a single transaction34.19Bitcoin's electricity consumption as a percentage of the world's electricity consumption0.31%Annual carbon footprint (kt of CO2)34,349Carbon footprint per transaction (kg of CO2)495.77

*The assumptions underlying this energy consumption estimate can be found here. Criticism and potential validation of the estimate is discussed here.

Did you know?

Ever since its inception Bitcoin’s trust-minimizing consensus has been enabled by its proof-of-work algorithm. The machines performing the “work” are consuming huge amounts of energy while doing so. The Bitcoin Energy Consumption Index was created to provide insight into this amount, and raise awareness on the unsustainability of the proof-of-work algorithm.Note that the Index contains the aggregate of Bitcoin and Bitcoin Cash (other forks of the Bitcoin network are not included). A separate index was created for Ethereum, which can be found here.

What kind of work are miners performing?

New sets of transactions (blocks) are added to Bitcoin’s blockchain roughly every 10 minutes by so-called miners. While working on the blockchain these miners aren’t required to trust each other. The only thing miners have to trust is the code that runs Bitcoin. The code includes several rules to validate new transactions. For example, a transaction can only be valid if the sender actually owns the sent amount. Every miner individually confirms whether transactions adhere to these rules, eliminating the need to trust other miners.The trick is to get all miners to agree on the same history of transactions. Every miner in the network is constantly tasked with preparing the next batch of transactions for the blockchain. Only one of these blocks will be randomly selected to become the latest block on the chain. Random selection in a distributed network isn’t easy, so this is where proof-of-work comes in. In proof-of-work, the next block comes from the first miner that produces a valid one. This is easier said than done, as the Bitcoin protocol makes it very difficult for miners to do so. In fact, the difficulty is regularly adjusted by the protocol to ensure that all miners in the network will only produce one valid bock every 10 minutes on average. Once one of the miners finally manages to produce a valid block, it will inform the rest of the network. Other miners will accept this block once they confirm it adheres to all rules, and then discard whatever block they had been working on themselves. The lucky miner gets rewarded with a fixed amount of coins, along with the transaction fees belonging to the processed transactions in the new block. The cycle then starts again.The process of producing a valid block is largely based on trial and error, where miners are making numerous attempts every second trying to find the right value for a block component called the “nonce“, and hoping the resulting completed block will match the requirements (as there is no way to predict the outcome). For this reason, mining is sometimes compared to a lottery where you can pick your own numbers. The number of attempts (hashes) per second is given by your mining equipment’s hashrate. This will typically be expressed in Gigahash per second (1 billion hashes per second).

Sustainability

The continuous block mining cycle incentivizes people all over the world to mine Bitcoin. As mining can provide a solid stream of revenue, people are very willing to run power-hungry machines to get a piece of it. Over the years this has caused the total energy consumption of the Bitcoin network to grow to epic proportions, as the price of the currency reached new highs. The entire Bitcoin network now consumes more energy than a number of countries, based on a report published by the International Energy Agency. If Bitcoin was a country, it would rank as shown below.Apart from the previous comparison, it also possible to compare Bitcoin’s energy consumption to some of the world’s biggest energy consuming nations. The result is shown hereafter.

Carbon footprint

Bitcoin’s biggest problem is not even its massive energy consumption, but that the network is mostly fueled by coal-fired power plants in China. Coal-based electricity is available at very low rates in this country. Even with a conservative emission factor, this results in an extreme carbon footprint for each unique Bitcoin transaction.

Comparing Bitcoin’s energy consumption to other payment systems

To put the energy consumed by the Bitcoin network into perspective we can compare it to another payment system like VISA for example. According to VISA, the company consumed a total amount of 674,922 Gigajoules of energy (from various sources) globally for all its operations. This means that VISA has an energy need equal to that of around 17,000 U.S. households. We also know VISA processed 111.2 billion transactions in 2017. With the help of these numbers, it is possible to compare both networks and show that Bitcoin is extremely more energy intensive per transaction than VISA (note that the chart below compares a single Bitcoin transaction to 100,000 VISA transactions).Of course, these numbers are far from perfect (e.g. energy consumption of VISA offices isn’t included), but the differences are so extreme that they will remain shocking regardless. A comparison with the average non-cash transaction in the regular financial system still reveals that an average Bitcoin transaction requires several thousands of times more energy. One could argue that this is simply the price of a transaction that doesn’t require a trusted third party, but this price doesn’t have to be so high as will be discussed hereafter.

Alternatives

Proof-of-work was the first consensus algorithm that managed to prove itself, but it isn’t the only consensus algorithm. More energy efficient algorithms, like proof-of-stake, have been in development over recent years. In proof-of-stake coin owners create blocks rather than miners, thus not requiring power hungry machines that produce as many hashes per second as possible. Because of this, the energy consumption of proof-of-stake is negligible compared to proof-of-work. Bitcoin could potentially switch to such an consensus algorithm, which would significantly improve sustainability. The only downside is that there are many different versions of proof-of-stake, and none of these have fully proven themselves yet. Nevertheless the work on these algorithms offers good hope for the future.

Energy consumption model and key assumptions

Even though the total network hashrate can easily be calculated, it is impossible to tell what this means in terms of energy consumption as there is no central register with all active machines (and their exact power consumption). In the past, energy consumption estimates typically included an assumption on what machines were still active and how they were distributed, in order to arrive at a certain number of Watts consumed per Gigahash/sec (GH/s). A detailed examination of a real-world Bitcoin mine shows why such an approach will certainly lead to underestimating the network’s energy consumption, because it disregards relevant factors like machine-reliability, climate and cooling costs. This arbitrary approach has therefore led to a wide set of energy consumption estimates that strongly deviate from one another, sometimes with a disregard to the economic consequences of the chosen parameters. The Bitcoin Energy Consumption Index therefore proposes to turn the problem around, and approach energy consumption from an economic perspective.The index is built on the premise that miner income and costs are related. Since electricity costs are a major component of the ongoing costs, it follows that the total electricity consumption of the Bitcoin network must be related to miner income as well. To put it simply, the higher mining revenues, the more energy-hungry machines can be supported. How the Bitcoin Energy Consumption Index uses miner income to arrive at an energy consumption estimate is explained in detail here (also in peer-reviewed academic literature here), and summarized in the following infographic:Note that one may reach different conclusions on applying different assumptions (a calculator that allows for testing different assumptions has been made available here). The chosen assumptions have been chosen in such a way that they can be considered to be both intuitive and conservative, based on information of actual mining operations. In the end, the goal of the Index is not to produce a perfect estimate, but to produce an economically credible day-to-day estimate that is more accurate and robust than an estimate based on the efficiency of a selection of mining machines.

Criticism and Validation

Update: the methodology underlying the Bitcoin Energy Consumption Index has been anchored in peer-reviewed academic literature since May 2018. The full paper can be found here.Over time, the Bitcoin Energy Consumption Index has been subject to a fair amount of criticism. Entrepreneur Marc Bevand, who argues that there are serious faults in the way the Bitcoin Energy Consumption Index is calculated, is often quoted in this regard. In his own market-based and technical analysis of Bitcoin’s electricity consumption Bevand argues that Bitcoin’s real energy consumption is much lower (~18 terawatt hours/year per January 11, 2018) than the number provided by the Bitcoin Energy Consumption Index. But this alternative approach, based on analysis of Bitcoin’s hashrate (computational power), is not without controversy either. Morgan Stanley accurately captured the main problems in this approach in their report “Bitcoin ASIC production substantiates electricity use” (January 3, 2018), explaining that “the hash-rate methodology uses a fairly optimistic set of efficiency assumptions and may not allow enough for electricity consumption by cooling and networking gear”. The impact of this can be significant, as becomes apparent from BitFury CEO Valery Vavilov’s earlier comment that “many data centers around the world have 30 to 40 percent of electricity costs going to cooling” (40 to 65 percent relative to non-cooling electricity costs). It’s thus not surprising that a hash-rate based approach produces a lower energy consumption estimate.In the same report Morgan Stanley does argue that Bitcoin’s energy consumption must be at least 23 terawatt-hour per year (per January 3, 2018). Morgan Stanley finds this number based on “Quartz’s report of its tour of the Bitmain mining data center, equipped with the most recent 1387-based mining rigs, this past fall”. At the time, this data center was drawing 40 megawatts per hour and represented 4% of the global Bitcoin network capacity (6M TH/s). Morgan Stanley continues by stating that “the Bitcoin network’s recent active hash rate has been ~15.2M TH/s, which implies total hourly Bitcoin electricity consumption is well more than 2700 megawatts/hour (23 terawatt hours/year)”. The company also notes that a realistic number is likely to be higher because “the most efficient mining rigs used by Bitmain in its facilities are not yet widely available” (the Bitcoin Energy Consumption Index was showing ~37 terawatt hours/year on the same day). For this reason, Morgan Stanley concludes that “current use estimates are probably in the right general range”.Of course, the Bitcoin Energy Consumption Index is also very much a prediction model for future Bitcoin energy consumption (unlike hashrate-based estimates that have no predictive properties). The model predicts that miners will ultimately spend 60% of their revenues on electricity. At the moment (January 2018), miners are spending a lot less on electricity. On January 25, 2018, the Bitcoin Energy Index was estimating just 22% of miner revenues ($2.2B versus $10.4B) were actually spent on electricity costs. Based on this, the Energy Consumption Index would thus predict a possible energy consumption of around 130 terawatt hours/year (assuming stable revenues). This increase appears to be in line with expected miner production.With regard to future energy consumption, Morgan Stanley estimates that Taiwan Semiconductor Manufacturing Company “has Bitcoin ASIC orders for 15-20K wafer-starts per month for 1Q18”. With each wafer capable of supplying chips for “~27-30 Bitcoin mining rigs”, the total Bitcoin mining pool “could see up to 5-7.5M new rigs added in the next 12 months” if “1Q18 production rates are maintained through 2018”. By the end of 2018, this means that “the Bitcoin network could potentially draw more than 13,500 megawatts/hour (120 terawatt-hours/year)”, or even 16,000 megawatts/hour (140 terawatt-hours/year) based on “90% utilization and 60% direct electricity usage”.Altogether, it can be concluded that the relatively simple Bitcoin Energy Consumption Index model is supported by both emprical evidence from real-world mining facilities, as well as Bitcoin ASIC miner production forecasts.