Bitcoin’s top feature is also its Achilles heel, according to new research from Australian economists. They argue the open, decentralised nature of bitcoin is also what makes it waste so much electricity.
The cryptocurrency bitcoin now represents many billions of dollars in value. It weighs nothing, travels at the speed of light, and has no ruling body. Don’t get the impression its real world impact is ethereal however.
Bitcoin relies on vast quantities of coal being burned in China, pumping the skies full of carbon dioxide. According to one recent estimate, if bitcoin were a country, just 57 nations would sit ahead of it on the list of energy users.
The energy is used by highly-focused computational machines that process bitcoin transactions in return for earning bitcoins. The bitcoin network is not efficient. Last year it used 75 times more energy than Visa’s network, which processes around 1000 times as many transactions.
The wasteful nature of the bitcoin drama is locked in by its very design.
“Bitcoin mining is now essentially an arms race.”
That is the argument of a new paper by economists June Ma, Joshua Gans and Rabee Tourky. (Ma and Tourky are from the Australian National University, Gans is an Aussie at the University of Toronto.) They examines the game theory of bitcoin mining. They conclude the incentives of the current structure make its lust for power inevitable.
Anyone can mine bitcoin and pocket the rewards of doing so. “The problem is that this very openness also contributes to the overall social cost of the network,” they say.
The very best thing about bitcoin is the following trick: the cryptographic work that secures the transactions is also the process that creates new bitcoins. It is a truly clever way to motivate a loose network to make a digital currency secure.
At the beginning, you could do that cryptographic work on your home computer. Your CPU would do some calculations and you’d be rewarded with bitcoins. (They call this mining bitcoins.) But over time more people began mining. The reward for mining is winner-take-all for the first computer to solve the puzzle, while the rules of bitcoin provide that the difficulty of the calculations be increased to keep the speed of transactions constant. Before long the calculations required grew far out of reach of a regular computer.
Fast forward a few years and a small number of giant Chinese bitcoin mines — located where electricity is cheap — are doing the vast majority of the mining, using huge warehouses packed with extremely powerful computer hardware. (Please do click that link. It’s mind-boggling.)
A miner now receives 12.5 bitcoins per block mined, plus around two bitcoins in transaction fees. At the current price of just over $10,000 per bitcoin that’s around US$150,000 per block. There is a block to process every ten minutes. Top bitcoin mining pools make millions in revenue every day.
(A side-effect: the price of processors that can provide the high “hashrates” needed to mine bitcoins has more than tripled. This is making computer gamers very cross as they rely on the same hardware for machines that can run the latest computer games.)
How long will China put up with coal darkening its smoggy skies just to feed the bitcoin mines? That is anyone’s guess.
The Aussie researchers’ modelling suggests the solution to wanton escalation of energy use lies in regulating the number of people who can mine bitcoin.
“[A] network could provide a means of ensuring that only a limited number of miners play the game at any stage,” they write.
Probably they are not deliberately trying to antagonise the bitcoin community, but that is also the exact thing you’d suggest if you really wanted to see them foam at the mouth.
Bitcoin is a favourite of internet libertarians to whom a centralised set of rules is anthema. A breakaway cryptocurrency called Bitcoin Cash – designed for lower transaction fees – is already a punchline among bitcoin’s hardcore adherents because a few technical changes make it more centralised.
But bitcoin’s protocol is not set in stone – it could be changed. Experience suggests bitcoin fans are reluctant to agree on change. The true tragedy of bitcoin might be fans of revolutionary change defending to the death a protocol that desperately needs reform.