The mainstream media misrepresents bitcoin mining as wasteful. Nothing could be further from the truth. Bitcoin mining provides an economic supply for otherwise unusable excess energy. Bitcoin will propel humanity towards abundance.
To discuss bitcoin mining, we must first understand how it works: proof of work and difficulty adjustment.
How Bitcoin Mining Works
Bitcoin is a new type of currency that uses a proof of work consensus mechanism to secure the network (SHA-256). The “work” is the calculation that must be done to solve the puzzle. Miners use computers specially designed for bitcoin mining (ASICs) to compete in a race to guess an extremely large number. Every 10 minutes on average, according to a Poisson’s Law, the miner who first guesses a successful number can add a new block to the Bitcoin blockchain, earning the block reward. The overall reward is made up of the deflationary block grantwhich halves roughly every four years, and transaction fees paid by users to incentivize their transactions to be added to the next block.
Proof of work is based on asymmetry. It is extremely expensive and difficult to generate the proof while remaining extremely cheap and easy to verify this proof. Miners must expend a lot of energy to have a chance of solving the puzzle before an even faster competitor does. As of June 10, 2022, this cost amounts to approximately $22,000 per BTC for miners in North America. At the same time, it is virtually free to verify that a block is valid, allowing all other network participants (full knots) to quickly accept or reject a block offered by a miner.
By itself, proof of work would not be enough to secure the Bitcoin network. Miners would adapt quickly by specializing in solving this type of puzzle, improving the efficiency of their miners (CPU → GPU → ASIC), increasing the number of miners and thus increasing the hash rate globally by leaps and bounds. This rush of competition would result in ever-shorter intervals between successive blocks, with bitcoin being issued at a much higher rate than the original supply schedule predicted.
Satoshi Nakamoto solved this problem by implementing the difficulty setting, a remarkable example of algorithmic homeostasis. Over the long term, the difficulty adjustment ensures that new blocks are found, on average, every 10 minutes, readjusting each time another 2,016 blocks (two weeks) have passed. This clever Easter egg is a snap to reverse the effect of Executive Order 6102.
When blocks are mined too quickly (less than 10 minutes between blocks on average), as can often be the case due to online hash rate increases, the puzzle becomes more difficult at checkpoint two weeks in order to slow down the mining rate. On the other hand, when blocks are mined too slowly (more than 10 minutes between blocks on average), the puzzle becomes easier in order to speed up mining to return to the targeted breakeven rate of 2,016 blocks per fortnight. At this rate, the designated halvings every 210,000 blocks occur at roughly four-year intervals.
Over the long term, this homeostatic feedback loop determining mining difficulty generally compensates for any deviation from the expected rate of 2,016 new blocks per fortnight. However, when rapid increases in total hash rate are more common than drops in mining difficulty, this slight cumulative imbalance caused by Bitcoin’s exponential increase in mining power has led to stalled reward halvings. which occur a few months earlier than expected. In practice, when the hash rate is increasing rapidly, adjusting the difficulty upwards every two weeks is not enough to completely counter this trend of blocks arriving earlier than expected. This is ultimately why the first halves of Bitcoin (November 28, 2012; July 9, 2016; and May 12, 2020) were roughly three years and three seasons apart.
This elegant self-correcting system ensures that bitcoin supply schedule set by Satoshi Nakamoto at the start is followed, eventually imposing the 21 million cap with roughly quadrennial halves of the block reward.
Energy consumption of Bitcoin
Bitcoin provides a product of unique value to mankind. It’s the better money in existence. Bitcoin offers a deflationary store of value, a light-speed medium of exchange, and an accurate unit of account for the global economy. Bitcoin, when used with the best security practices, protects an individual’s purchasing power and property rights from seizure, debasement, inflation, counterfeiting, or other political abuse. .
Historically, gold has provided similar benefits to mankind. For generations people have debated the merits and the costs of the gold standard.
Bitcoin miners are able to convert watts of electrical power anywhere on the planet into money (BTC). This is breathtaking and will radically alter energy markets.
Bitcoin is an energy buyer of last resort. It is the only use case that will purchase power anywhere in the world, at any time, for any interval. Due to the competitive bitcoin mining market, miners only thrive using cheap energy that has no other buyers ready and willing to bid a higher price. Using too expensive energy that is also highly sought after by others or exploiting at a loss is doomed to failure. This market system creates new opportunities, such as the use waste of gas flared for bitcoin mining to reduce CO2 emissions.
Bitcoin miners use energy that would otherwise be wasted or unprofitable to use. major sources of energy, such as Hydro Quebec in Canada, often have excess generative capacity that could not be applied before Bitcoin. Now, through bitcoin mining, these clean energy resources have a direct way to monetize their excess electrical capacity. This lowers the cost of production for all electricity consumers because businesses can make the same or more profit by delivering more watts to consumers for the same or less cost.
Wasting any energy increases costs for everyone by lowering the demand curve below the available supply. In order to achieve the same rate of return, producers must raise prices to compensate for the resources wasted in developing sources of excess electrical capacity that are not always able to find a buyer.
For example, imagine there is a rural hydroelectric plant that has 5,000 fixed megawatts available. The operators of the facility want to obtain a profitable return from the operation, since the construction and maintenance of the plant is very expensive. Consumers in the rural town are price inelastic, as they have no other sources of electric power and have to resort to manual labor whenever electricity is not enough. Currently, the city uses only 3,000 MW of the 5,000 MW available. A bitcoin miner arrives and buys the remaining 2,000 MW. Residents of rural areas are no longer dependent and are thus freed from having to subsidize excess electricity that they do not even use. Now, the rural hydroelectric plant is able to reduce the consumer prices of electricity while realizing the same rate of profit. A win-win for everyone.
Today, bitcoin mining is profitable with low-cost energy on many national power grids. Going forward, bitcoin mining will only be profitable at margins where the net energy cost is close to zero or even negative: for example, using waste heat for a Boiler Where food production.
Bitcoin miners stabilize the network. Bitcoin miners are very cost sensitive. If they want to continue to operate profitably, they must not compete with consumers and businesses for high-cost electricity in areas where it is scarcest and most valued by existing market players. They will shut down during high stress events instead of continuing to operate. As flexible buyers of electricity only when economical, bitcoin miners are able to shut down quickly in response to upward fluctuations in demand from the power grid. This is different from other large energy users such as aluminum smelting, which takes 4-5 hours of uninterrupted power to turn off.
Recently, the Texas electric grid operator, ERCOT, asked Texans to save energy due to ongoing heat waves. Texas bitcoin miners responded by shutting down more than 1,000 megawatts of bitcoin mining loadallowing more than 1% of the total network capacity to be pushed back to the network.
Bitcoin miners are encouraging new investment in stable, low-cost staple power. Power consumption is directly correlated to human flourishing and empowerment. Bitcoin miners are increasingly energy-hungry in search of low-cost electric power around the world. Bitcoin miners are directly responsible for bringing new solar, wind and hydraulic plants from all over the world.
Bitcoin mining is good for the planet. It reduces energy costs for all, increases energy market efficiency, stabilizes networks and inspires humanity to rapidly increase energy production to abundance.
**The author generated this image with OpenAI’s DALL-E. When generating, the author reviewed and published the image and takes ultimate responsibility for the content of that image.
This is a guest post by Interstellar Bitcoin. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.