The Cost of Proof of Work in Bitcoin Mining: Big, Wasteful, But Fair

Is the cost of Proof of Work (POW) justified in Bitcoin mining? Tomaso Aste of the UCL Blockchain Technology Centre, located in the Department of Computer Science at University College London, believes that the current mining costs are too high and wasteful, but nonetheless fair and reasonable. Aste recently took a closer look at the factors involved in Bitcoin mining and decided to write a paper on the recent issue of Proof of Work costs titled “Is the Cost of Bitcoin Proof of Work Justified”.

Aste pointed out that Bitcoin has proven that two parties who do not trust each other can exchange value on the Internet without any third-party intermediary or trusted institution. The market value of Bitcoin has reached 10 billion US dollars, and tens of thousands of transactions every day face serious attack challenges.

Intensive computational process

The verification and encryption sealing mechanism is crucial to the Bitcoin network because it involves intensive computational processes. Many nodes in the Bitcoin network are engaged in the verification process.

This process provides a mechanism to prevent false repetitions by voters and to force voters to prove their computational performance. To ensure the security of valid votes, the system uses a cryptographic sealing process that is computationally intensive. This process involves a mechanism called "proof of work". The first node to complete this challenge will be rewarded with Bitcoin. This mechanism is called "mining" and can create new Bitcoins.

Miners around the world are able to generate billions of hashes per second. Using existing equipment, calculating 1 billion hashes consumes 0.1 to 1 joule of energy. Therefore, about 1 billion watts of electricity is used every second around the world to create an effective proof-of-work mechanism.

The process consumes about $50,000 of electricity per hour, although the cost of electricity varies around the world.

Miner Reward: 12.5BTC

At the current rate that the Bitcoin system processes 10,000 transactions per hour, the cost of each transaction is about $5. Users do not have to pay this money. Miners have to pay this cost and are rewarded with new Bitcoins.

The individual proof-of-work reward was 25 bitcoins, equivalent to $15,000 at today’s prices, but the reward has now been halved.

The mining community spends 50,000/6 of electricity to create a block every 10 minutes, which is about $8,333, and they receive a reward of about $15,000, which makes mining profitable even after accounting for infrastructure and hardware costs.

Mining operations spend a total of about $400 million a year on electricity costs. This can be seen as a huge waste.

Aste pointed out that the block reward has now been halved to 12.5 BTC, which has made miners' profit margins even smaller.

Benefits of Proof of Work

Proof of Work ensures that the blockchain remains a pure mechanism, allowing the entire community to compete to prove the validity of transactions while making it costly for anyone to attack the Bitcoin network.

Is the cost of this proof of work reasonable? Aste claims that this cost should make double spending directly prohibitive when seeing this cost.

A double spending attack occurs when a person tries to spend the same bitcoin to trade with different users to get more bitcoins. The attacker will try to double spend as many bitcoins as possible. This spending is usually limited to one block, and this value is about $1 million.

If the amount of a transaction in a block is higher than the total value of all transactions, it will attract the attention of the network. This fact will limit the double spending value to 1 million US dollars. Although repeated spending will be repeatedly verified, it does not affect the current calculation results.

Free from attacks

The attacker can also try to get a portion of the $1 million. To do this, the attacker must ensure that the duplicate transactions are confirmed. This requires a fork, where both blocks are linked to the previous block.

If the attacker has enough computing power, it is possible to generate two valid hash values ​​to pack the block generation stamp, so that two transactions can be confirmed. For the final settlement, he must wait for 6 new blocks to be added to the blockchain to ensure that the transaction is unlikely to be modified and restored.

The attacker must generate 6 valid hash values ​​before the double spending is settled. The attacker must also artificially legitimize one of the two forks in the shortest possible time. This way the system will consider the other fork to be valid, and allow other miners to continue to expand the blockchain. The attacker can also expand the blockchain.

Aste pointed out that it would be unrealistic if no one advocated for a fork to expand capacity, but this assumption is the ideal goal of this hypothesis.

Attackers are deterred

The cost of artificial extension fraud of the fork is 6 times the cost of proof of work. The attacker will verify whether the cost he spends is less than the benefit. The break-even point is expressed by the following formula: Fair equilibrium cost of proof of work = value of repeated consumption in a block / number of blocks to be settled.

Based on recent prices, if the attacker double-spends 60% of a block’s value, he has double-spent $600,000.

Six settlement blocks are needed to estimate a fair equilibrium cost per block in proof of work:

Fair equilibrium cost of proof of work per block = $100,000.

This calculation overestimates the cost of the attack. In order to avoid being noticed, the attacker can only double-spend the block value as little as possible. It is impossible for a long fork to be confirmed by all blocks after an hour and then extended by the same miner without being discovered by others. Then, it is reasonable to consider a cost of 10%, which is already a sufficient deterrent for attackers.

Proof of Work is Wasteful, but Necessary

Aste summarized the current cost of Bitcoin's proof of work, saying it is costly and wasteful, but also necessary. Costs can be reduced by increasing the number of blocks used for settlement or detecting forks at an early stage. At the same time, attackers can also reduce costs by attacking mining pools or stealing electricity.

Aste noted that there are other mechanisms for building blockchains that don’t require the computationally intensive nature of proof of work.

The proof-of-work mechanism is to create qualified voters in an anonymous and trustless system. This mechanism verifies the identity of voters or avoids duplication of uncontrollable voters, which can remove or reduce the need for proof-of-work. However, this mechanism must be able to relax other characteristics such as openness, egalitarianism, distributed verification or anonymity.