Does Bitcoin mining accomplish anything useful?

Does Bitcoin mining accomplish anything useful?

Most people think that the # Bitcoin work prisoners program is “useless”. The cryptopocalypse is coming – the Bitcoin protocol (PoW) is so serious that it will destroy the world in 2020! You may have noticed that most of the “doomsday” articles were based on the results of an analysis provided by Alex De Vries, a “financial economist and blockchain specialist” working for PWC Netherlands and author of the Digiconomist site. His estimate has already been the subject of much criticism because of its low calculation of energy consumption. But the KPI of his choice was intentionally misleading: “electricity consumption per transaction” for several reasons:

• The energy expended is per block, which can include a variable number of transactions. More transactions does not mean more energy

• The economic density of a Bitcoin transaction is constantly increasing (batch, Segwit, Lightning, etc.). As bitcoin becomes more and more a settlement network, each unit of energy is gaining more and more economic value.

• The average cost per transaction is not an adequate parameter to measure the effectiveness of the Bitcoin PoT, it must be defined in terms of the security of an economic history. Energy spending secures the stock of bitcoins and this percentage declines over time as inflation declines. A Bitcoin “accumulates” the energy associated with all the blocks extracted since its creation. LaurentMT, a researcher, has empirically discovered that Bitcoin’s PdT is indeed becoming more efficient over time: the increase in costs is offset by the ever-greater total value guaranteed by the system.

Now that we know what is the good performance indicator for the return on investment of energy consumption, let’s look at the evolution of energy costs for Bitcoin PoW.

The rate of improvement in ASIC efficiency is slowing down. As efficiency gains slow, we can expect increased competition from manufacturers as margins shrink.

The total cost of mining will increase from the initial cost of accessibility of ASIC equipment (capex) to ongoing energy costs related to operations (opex). Since the physical location of mining centers is not important for the Bitcoin network (they are mobile), miners flock to areas generating surplus electricity for the lowest marginal costs. In the long run, this could potentially produce more efficient global energy markets, with Bitcoin miners performing electricity arbitrage between global centers. The cost of operating Bitcoin becomes the lowest (highest) value of electricity. This can solve a problem with renewable energy sources that have predictable capacity otherwise wasted, such as hydropower and methane burned. In the future, Bitcoinmining could help with variable-yielding renewable energy sources – energy producers can plug in miners and store excess energy in the form of bitcoin.

Aluminum was a popular means of “exporting” electricity from a country with abundant sources of blocked renewable energy (eg Iceland). The melting of bauxite (or aluminum ore) has enormous energy requirements and its conversion to aluminum is a one-way function (just like a hash). The same concerns about “unfair” energy use existed for aluminum almost 40 years ago – 1979 (including centralization concerns). All of these companies have constantly explored the planet for cheap energy and other concessions. As the manufacture of aluminum has matured over the decades, the kWh per kg of aluminum produced has become more efficient. Bitcoin’s PoW is the buyer of last resort for all electricity, creating a floor that encourages the construction of new power plants around disparate sources of energy that would otherwise have been untapped.

When will the energy used for PoW *stop* growing? Precisely when enough energy producers have started doing PoW directly that the marginal return from burning a kWh of energy through PoW = the marginal return from selling that kWh to the grid — when the “premium” on PoW is reduced to zero. I call this equilibrium the “Nakamoto point.” I suspect PoW will use between 1–10% of the world’s energy when this equilibrium is reached.

— Dhruv Bansal

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