Why is the energy consumption caused by Bitcoin mining necessary?

According to Cambridge University researchers, the Bitcoin protocol consumes about 120,000 terawatt hours of energy per year, which is equivalent to the annual energy consumption of Argentina or the Netherlands. If prices remain the same, this trend will inevitably continue. So, let's try to understand why energy consumption is so important to the security of its protocol and why it is closely related to price.

Energy Consumption <br />As we all know, for Bitcoin to work, a large number of distributed computers are able to put their computing power at the disposal of users to verify their transactions. In exchange for the consumption of energy and computing resources, the Bitcoin protocol rewards "miners" with brand new coins. Bitcoin's monetary policy, through the halving mechanism, will allow miners to create a maximum of 21 million Bitcoins, making BTC the only truly absolutely finite asset in the world. Therefore, the protocol's consumption of energy comes from the fact that computers that are now specialized in solving specific "puzzles" are used to authenticate transactions made in the network. The specialization of mining has led to the creation of buildings and warehouses dedicated to this activity, which has significantly increased the average energy consumption in some specific parts of the world.

Security of the protocol <br />As it is easy to imagine, mining activity is crucial for cryptocurrencies, which makes Proof of Work its distributed consensus algorithm. Besides the base layer operations where transactions take place, energy consumption is crucial for another reason that many people overlook. The energy consumed by Bitcoin is necessary in order to make the cryptocurrency immune to cyberattacks and tampering with the data within the protocol. One of the cyberattacks most associated with the cryptocurrency world is the so-called 51% attack. A hypothetical hacker, in order to modify the data within the protocol at will, would need to have at least 51% of the protocol's total computing power. Since computing power is equivalent to the energy consumed by a machine, the higher the latter, the more secure the network. As pointed out by Nick Szabo, the creator of Bitgold.
"Prolific resource consumption and poor computational scalability unlock the security needed for independent, global, automated integrity."

Positive price drivers <br />Bitcoin is explicitly designed to make mining increasingly competitive, attracting large amounts of capital now more than ever. Similar to the case with physical gold and its mining, the more the price of an asset rises, the greater the incentive for miners to invest in mining. What happened in the case of Bitcoin is that the rise in the price of the cryptocurrency to almost $60,000 also increased interest in mining. In this sense, mining is definitely a positive driver for cryptocurrencies and a sign of growing interest in digital assets. Another point of fundamental significance is that for the first time in history there is an asset whose extraction/construction does not depend on the resources spent by investors, but is predetermined by an algorithm. Energy consumption increases due to the rise in its price, but does not in any way affect the supply of circulation and the laws of regulation.

Bitcoin, Banks, and Gold Mines <br />As mentioned before, the energy consumption of Bitcoin miners is certainly high, but if you compare it to the banking system or gold mining, the picture changes significantly. As Ark Invest points out in its research, "Traditional banks consume 2.34 billion joules (GJ) per year, gold mining 500 million joules, and Bitcoin consumes 184 million GJ." The energy consumption of the Bitcoin protocol is small compared to them. For the first time in history, we can turn energy into "money" and make assets more secure at the same time.

Source: ARK Investment Management, LLC, 2020. ARK Investment Management, LLC, 2020.
Data source: https://medium.com/@danhedl/pow-is-efficient-aa3d442754d3
Therefore, Bitcoin mining is not a waste of energy, but allows the network to survive, progress, and provide decentralized services. The higher the price, the greater the energy consumption, and the higher its reliability as a protocol. The greater the consumption, the greater the interest in cryptocurrency. The question is not how much energy Bitcoin consumes, but how much energy use we accept. This is true for banks and gold, and it will be true for Bitcoin. (Crypto Valley Live)

Gianmarco GuazzoAuthor

Translated by Li Hanbo

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