University of London professor: Bitcoin mining is worth spending $4 million a year

The University of London (UCL) Center for Blockchain Research has found that bitcoin's current proof-of-work (PoW) mining costs are necessary to maintain the network's trustless and decentralized nature. In a recent research paper, Tomaso Aste, director of the UCL Center for Blockchain Technologies and professor of complexity science, provided a rough measure in calculating the "equilibrium fairness cost" of bitcoin's PoW system, suggesting that the fairness cost is about $10,000 per block - less than the amount earned per block found today. The finding is noteworthy given the long-standing debate over bitcoin mining for transaction verification, a process that has often been considered by institutions and academics as either too wasteful or an unnecessary part of the system's architecture. Aste believes that the money spent on each block makes sense when viewed from the perspective of maintaining a decentralized transaction network. "I think the current cost, while large, is a very reasonable amount for an anonymous system operating within a distrusting group," he wrote. At current bitcoin prices, the reward for each block is 25 bitcoins, or about $15,600. The upcoming halving this weekend will bring the reward down to 12.5 bitcoins. Bitcoin mining has been compared in the past to a form of energy arbitrage, whereby mining operators earn profits by generating more money than the electricity costs. The less electricity you use and the more you mine, the more Bitcoin you can produce. Aste estimates that Bitcoin miners around the world spend $50,000 per hour on electricity. Estimating the cost to produce a standard block of transactions every 10 minutes (in practice this figure can fluctuate widely), Aste puts the electricity cost per block at $8,333. That figure will soon halve, he writes, "leaving very little profit left by the above estimates." “The amount of electricity consumed in a full year of Bitcoin mining is over $400 million, which is a large amount and in some ways a huge waste,” Aste wrote, continuing: “On the other hand, proof of work is a mechanism that keeps the blockchain pure, allows the community to compete, verifies the validity of transactions, and imposes a huge cost on external attacks. The question I raise in this note is whether these electricity costs are justified.” In the case of a double-spending attack, Aste estimates the cost of proof of work, using a block of transactions worth about $1 million as an example. He points out that in order for a double-spending attack to succeed, the attacker would need to have some guarantee that their transaction is confirmed on the network at least six times. Because a double-spending attack may not attract attention – “it is a very unrealistic assumption to assume that no one will notice that it takes so long to propagate a hard fork,” he wrote. Aste believes that in this case, the fair cost of Bitcoin’s proof of work balance is equal to the portion of the block value that is duplicated divided by the total number of blocks that need to be settled. “For current values, to keep the calculations simple, we can assume that the attacker duplicates 60% of the typical block value, which is $600,000 for a double-spending,” Aste wrote. “Six blocks are needed for settlement, so the equilibrium fair cost of proof of work per blockchain can be estimated to be $100,000.” Aste went on to write that based on the concept of actual transaction costs, especially if double spends are discovered early, most double spends are likely to be in a smaller range, with a rough estimate of 10%. “This is indeed the amount of electricity consumed by Bitcoin proof of work at present,” Aste wrote, concluding: “Thus, we can conclude that the current cost of Bitcoin proof of work is large, wasteful, but necessary.”