Energy consumption will become an issue if bitcoin really breaks through

[Adrian-x]

Here is a great idea for next gen ASIC's  3x more efficient heat recovery.

http://www.treehugger.com/clean-technology/worlds-most-efficient-semiconductor-chip-aims-harvest-waste-heat.html
http://www.kickstarter.com/projects/1005823715/micropower-chips-energy-savings-and-energy-efficie

[1715693499]

1715693499

[1715693499]

1715693499

[brenzi]

Here is a great idea for next gen ASIC's  3x more efficient heat recovery.

http://www.treehugger.com/clean-technology/worlds-most-efficient-semiconductor-chip-aims-harvest-waste-heat.html
http://www.kickstarter.com/projects/1005823715/micropower-chips-energy-savings-and-energy-efficie

Interesting development. But according to the text, they operate between 200°C and 600°C. Good luck with your ASIC's.

[Arros]

(edit)
CONCLUSIONS:
 

• according to economical basics, energy consumption of the bitcoin network does not depend on mining gear efficiency!
• the problem described applies to every proof-of-work based currency (including Litecoin) because proof-of-work equals proof-of-energy-consumption at a market equilibrium
• bitcoin value is NOT directly backed by energy consumption. But mining rewards and transaction fees are.
• the slower the bitcoin value rises and the lower the transaction fees, the lower the energy consumption of the bitcoin network on the long run

The OP is more or less correct. As long as extra mining is profitable, more electricity will be pumped in to mine. Efficiency of mining technology isn't important for this question. The important thing is how much the annual distribution of coins are worth at the time. Electricity worth a similar (but smaller) amount will be used for mining.

[Adrian-x]

Good point Arrow,
On that note miners may also heat there homes in winter regardless of the value of coins.

[jubalix]

also as sunny king pointed out, BTC and move to  POS model and has the dev power to do it.

end of problem

[EmperorBob]

Please show me where I'm wrong!

Here's a few nitpicks with your assumptions/reasoning, that do change the results a bit:

1. The monetary base is about 1.2 trillion dollars http://research.stlouisfed.org/fred2/series/MBCURRCIR?cid=124. This is a much better approximation than M2, because most of what goes into M2 (and M1 for that matter) is actually the value of outstanding bank loans. Bitcoin will not replace loans, so it can't "soak up" that value. So you're overestimating future BTC value (assuming it replaces USD entirely) by 10x.

That alone brings down energy consumption to less than 1% of the world's total. Other effects may come into play depending on the nature of bitcoin's behaviour as money (but I can only speculate whether it will drive value up or down).

2. Then your steady state formula assumes equal energy efficiency for all miners. And therefore you assume all miners are at the edge of profitability. Realistically only a small fraction of miners will ever be at that point, as long as energy efficiency increases over time.
Example: Assume 50% of mining hardware 1GH/Joule and 50% is 10GH/Joule, and 1GH/Joule is the breakeven point. Then energy consumption of the network is only 55% of what the everyone-has-the-same-efficiency model would predict. This can be even more drastic (10%/90% split). In other words, real energy consumption can only be equal to or lower than what your model predicts.

Yes, energy efficiency doesn't matter in a steady state world, because eventually enough hardware is brought online to make everyone uniformly efficient, and competition drives revenues down to electrical cost.
But as long as Moore's law holds, there will be significant increases in energy efficiency every year. Which means each year it's profitable to bring new hardware online that outclasses the existing stuff, and takes a while to drop down to near-zero profitability. This keeps electrical usage down by driving the least efficient miners out of the market on a regular basis.
Moreover it introduces the need for mining investments to pay back their fixed costs in a relatively short time (less than a decade), which means that mining cost is mostly dominated by fixed hardware costs, rather than electricity, as long as hardware efficiency keeps increasing.
I honestly don't know what the adjusted formula should look like.

This doesn't change the total amount of money Bitcoin mining will consume, but it does change what portion of it is spent as electricity, versus hiring electrical engineers, or making chips.

3. Subsidy halving means that, if Bitcoin mining is as competitive as you model, miners can't expect to make money for more than four years before needing to throw out their hardware and start again. This means that they will not get into mining unless they expect they can make a net profit in that short time.

Disclaimer: Obviously we're both speculating, no one really knows the economics of mining well enough to actually make good projections right now.

[brenzi]

Thanks for your very interesting review.

Please show me where I'm wrong!

Here's a few nitpicks with your assumptions/reasoning, that do change the results a bit:

1. The monetary base is about 1.2 trillion dollars http://research.stlouisfed.org/fred2/series/MBCURRCIR?cid=124. This is a much better approximation than M2, because most of what goes into M2 (and M1 for that matter) is actually the value of outstanding bank loans. Bitcoin will not replace loans, so it can't "soak up" that value. So you're overestimating future BTC value (assuming it replaces USD entirely) by 10x.

At first thought, I didn't agree with you because it could well happen that BTC is no longer traded in the sense of "full reserve" (Who really knows if mtgox still operates with full reserves?). As soon as fractional reserve comes into play, I guess M2 would be the correct reference. But you might be right indeed, because the leverage ratio would not benefit the miner but the exchanges or BTC banks. But what would happen if mining (or pooling) would be taken over by banks?

That alone brings down energy consumption to less than 1% of the world's total. Other effects may come into play depending on the nature of bitcoin's behaviour as money (but I can only speculate whether it will drive value up or down).

2. Then your steady state formula assumes equal energy efficiency for all miners. And therefore you assume all miners are at the edge of profitability. Realistically only a small fraction of miners will ever be at that point, as long as energy efficiency increases over time.
Example: Assume 50% of mining hardware 1GH/Joule and 50% is 10GH/Joule, and 1GH/Joule is the breakeven point. Then energy consumption of the network is only 55% of what the everyone-has-the-same-efficiency model would predict. This can be even more drastic (10%/90% split). In other words, real energy consumption can only be equal to or lower than what your model predicts.

Yes, my calculation is the worst-case limit. But the absolute numbers are not my concern. It's the underlying dependencies that are worrying me. Even if I'm overestimating by a few decades, it remains an awful lot of energy.

However: Your point is valid and I should mention it in the OP.

Yes, energy efficiency doesn't matter in a steady state world, because eventually enough hardware is brought online to make everyone uniformly efficient, and competition drives revenues down to electrical cost.
But as long as Moore's law holds, there will be significant increases in energy efficiency every year. Which means each year it's profitable to bring new hardware online that outclasses the existing stuff, and takes a while to drop down to near-zero profitability. This keeps electrical usage down by driving the least efficient miners out of the market on a regular basis.
Moreover it introduces the need for mining investments to pay back their fixed costs in a relatively short time (less than a decade), which means that mining cost is mostly dominated by fixed hardware costs, rather than electricity, as long as hardware efficiency keeps increasing.
I honestly don't know what the adjusted formula should look like.

This is true and has been mentioned upthread. One should keep in mind that hardware needs energy to be produced, replacing mining gear more often reduces the overall lifetime efficiency of the gear and therefore (at least partly, but possibly even over-) consumes the gain in "runtime efficiency".

This doesn't change the total amount of money Bitcoin mining will consume, but it does change what portion of it is spent as electricity, versus hiring electrical engineers, or making chips.

3. Subsidy halving means that, if Bitcoin mining is as competitive as you model, miners can't expect to make money for more than four years before needing to throw out their hardware and start again. This means that they will not get into mining unless they expect they can make a net profit in that short time.

Disclaimer: Obviously we're both speculating, no one really knows the economics of mining well enough to actually make good projections right now.

Thanks again for your reasoning on the matter.

[odolvlobo]

At the point when energy is the dominant cost and it nearly equals the value of the mining revenue, then miners have two ways to increase profits. One is to add capacity and the other is to reduce energy usage. I think that rising energy costs and a rising difficulty will favor energy efficiency as a way to increase profit since a higher energy efficiency will reduce costs and extend the productive life of the mining equipment.

[Ekaros]

Dunno if this could lead to situation where in countries like Germany there would be large pools of rather inefficient, but cheap hardware which is only run when energy cost is low or zero...

[NewLiberty]

Dunno if this could lead to situation where in countries like Germany there would be large pools of rather inefficient, but cheap hardware which is only run when energy cost is low or zero...

Waiting for the "Heating my pool to tropical temperatures while feeding my pool hashes" rig.  The miner/water-heater combination!

[halfawake]

Dunno if this could lead to situation where in countries like Germany there would be large pools of rather inefficient, but cheap hardware which is only run when energy cost is low or zero...

Waiting for the "Heating my pool to tropical temperatures while feeding my pool hashes" rig.  The miner/water-heater combination!

That's actually a really clever idea.  Someone's bound to invent it eventually. 

Actually, Germany would be a good place for mining, cost wise.  Because it's so subsidized in Germany, they have one of the highest rates of solar panel use in the world.

[JaSK]

And if you own a company you pay a lower electricity price than regular people because the German government is corrupt like hell

[Come-from-Beyond]

Let's say that Bitcoin takes the place of the USD within 10 years and see what the energy consumption of the bitcoin network will be...

Bitcoin can be replaced by a proof-of-stake currency. Seems to be an elegant solution to the energy consumption issue, isn't it?

[NUFCrichard]

Let's say that Bitcoin takes the place of the USD within 10 years and see what the energy consumption of the bitcoin network will be...

Bitcoin can be replaced by a proof-of-stake currency. Seems to be an elegant solution to the energy consumption issue, isn't it?

If you haven't spent thousands of dollars on mining equipment, yes!

[NewLiberty]

Dunno if this could lead to situation where in countries like Germany there would be large pools of rather inefficient, but cheap hardware which is only run when energy cost is low or zero...

Waiting for the "Heating my pool to tropical temperatures while feeding my pool hashes" rig.  The miner/water-heater combination!

That's actually a really clever idea.  Someone's bound to invent it eventually.  

I don't know, have been mentioning it for years so may have to do it myself.  Well heated pools are good things.  Also dual use engenders efficiency gains that reduce mining cost and more mining is also a good thing.

[ulhaq]

Energy consumption of the bitcoin network continues to increase. visa, eg, is thousands of times more efficient per transaction.

https://motherboard.vice.com/en_us/article/ywbbpm/bitcoin-mining-electricity-consumption-ethereum-energy-climate-change

What is the solution to this? The way I see it, as the value of bitcoins increase, the energy consumption will continue to increase. The miners will not care how much electricity they are using and what the carbon footprint is (for the same reason that so many ppl have caused tremendous damage to the planet in order to make money, because the consequences may not affect the one causing the problems). Therefore the limits on the use of electricity will be imposed by government. This will shift the miners to use renewable energy.

I do not see increased energy consumption as increasing market cap of PoS coins (assuming that the security is equivalent), because there is no economic incentive for someone (or all bitcoiners) to move from bitcoin to ethereum, eg. But, if there is government interference in bitcoin mining, will that shift the interest to PoS coins?

[brenzi]

I don't think government intervention will change anything. There will always be some government somewhere that won't restrict PoW mining.
4 years after the OP, we're still at the same point. The problem has maybe gained a wider awareness, but solutions are either not very popular (PPC, NXT...) or need yet to be proven (Ethereum's Casper PoS, Cardano's Ouroboros PoS)

edit: there's not only PoS solutions. IOTA could be an ecological alternative too.

[ulhaq]

I don't think government intervention will change anything. There will always be some government somewhere that won't restrict PoW mining.
4 years after the OP, we're still at the same point. The problem has maybe gained a wider awareness, but solutions are either not very popular (PPC, NXT...) or need yet to be proven (Ethereum's Casper PoS, Cardano's Ouroboros PoS)

edit: there's not only PoS solutions. IOTA could be an ecological alternative too.

Let's say that PPC has equal security, etc, to bitcoin, that both of them have the same transaction fees, and PPC uses dramatically lower energy consumption. What would cause a shift to PPC? It seems to me that there is no economic incentive for anyone to switch from bitcoin, now and in the near future.

[Misshi]

Yes. We are all need electricity because we are all surrounded by technology. It has now become part of our daily lives. Almost devices we used at home and in our businesses are running because of electricity. It may be the issue, as we go along electricity will be more expensive as the days goes by. That is why we should think about shifting to energy resources.

[Bramanti]

I don't think government intervention will change anything. There will always be some government somewhere that won't restrict PoW mining.
4 years after the OP, we're still at the same point. The problem has maybe gained a wider awareness, but solutions are either not very popular (PPC, NXT...) or need yet to be proven (Ethereum's Casper PoS, Cardano's Ouroboros PoS)

edit: there's not only PoS solutions. IOTA could be an ecological alternative too.

Let's say that PPC has equal security, etc, to bitcoin, that both of them have the same transaction fees, and PPC uses dramatically lower energy consumption. What would cause a shift to PPC? It seems to me that there is no economic incentive for anyone to switch from bitcoin, now and in the near future.

a motivation for environmental friendly products.

Early bitcoin investors believed in ideas not in quick money.