[reddit] The real cost of bitcoin? - Breaking Down the Math

[BitcoinPorn]

Hi, I recently read an interesting post on the bit coin forums about the electricity cost of keeping bitcoins secure. I did some of my own calculations base on figures from bitcoinwatch

kilowatts per gigiahash * cost per kilowatt * gigahash per hour = bitcoin running cost per hour
So at 650 watts per gigahash at 15 cents per kilowatt hour.
0.65 * $0.15 * 13,300 = $1,297 per hour
Divide that by the number of transactions per hour (309)

1,296.75 / 309 = $4.20 per transaction. I was unable to find figures, but i can't imagine it costs anywhere near that amount for visa or paypal to process a transaction. When all blocks are mined won't bitcoin transaction fees need to significantly increase to cover these costs?

Or to look at it another way bitcoin miners will spend over $11 million dollars this year on electricity, which is 17.6% of bitcoin's market cap. In contrast the federal reserve printing budget is ~$650 million or 0.0812% of USD value.

A first glance this doesn't seem very efficient to me. This money is going straight to the electricity companies and not back into the bitcoin economy. Where does the money come from to pay for this and how is it sustainable in the long run?

From http://www.reddit.com/r/Bitcoin/comments/jgpcz/the_real_cost_of_bitcoin/

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[1713489835]

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[jackjack]

on the bit coin forums

Isn't that the guy who is crying on the wiki because his links were removed? bawwwww


Also I don't see the point
It's not the people exchanging money that pay $4.2 per transaction so why talking about paypal/visa?
If miners can afford $4.2 par transaction everybody is happy

[hugolp]

Funny guy.

First the guy deliberately ignores that Bitcoin is money AND a system of transmiting this money. So the price of electricity goes to pay for both things, not only one. To compare Bitcoin you need to do it against the cost of the Federal Reserve printing money, its employees, the cost of the government imposing the monopolly on money, AND all the companies that work in making transactions in the dollar economy, that is VISA, Master Card and part of the banking system.

It is true that this could change in the future and there could be money handeling companies around Bitcoin, but at this moment that is the situation.

And as always he ignores that Bitcoin is young and still does not have a lot of activity. That is one of the reasons why miners get a fixed amount (right now 50 bitcoins) with each block, and its also why this amount will decrease as time goes by expecting that more activity will produce more fees.

I wonder why people is so dishonest in regards to Bitcoin.

[cbeast]

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

[BitcoinPorn]

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

[Meni Rosenfeld]

Both the post and the comments on reddit ignore the critical distinction between the inflation era and the tx fees era.

Right now, the total cost of mining has nothing to do, quantitatively, with the value of security, and everything to do with the implementation choice of 7200 BTC minted per day. The network has more hashing capacity than is due for protecting the network with its current value. The electricity costs are basically paid for by those wishing to get their hands on the new coins.

In the future, there will be no issuing of new coins, only transaction fees. The total hashrate, hence the network security, will be proportional to the total fees paid. An optimal balance should be sought between the need for security and the cost of transactions (how to reach such an optimum is an open problem). The electricity costs will be paid for by those who wish their transactions to be quickly confirmed against double-spending. And the cost per transaction will be much less than $4.

[hugolp]

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

The problem is that solar energy is not (yet?) even comparable in cost to fosil fuel energy. At the beggining solar energy was not even profitable, it costed more energy to produce a panel and the rest of the electronics than the energy it would obtain in its lifetime. Go figure. At the beggininng solar energy was more of a lobbying things than anything else.

But even right now, its infinitevely more profitable to buy fosil fuel created electricity than buying a solar panel. If solar panels increase in efficiency this might change, but that is a big if.

[ctoon6]

right now, solar technology for person, home use is barely worth it. it takes several years to start saving money. wait and it will get cheaper, and produce more power per square inch/cm whatever.

[evoorhees]

His math doesn't work. He is calculating the fixed cost for running the network at a given point in time. That cost isn't variable with the number of transactions.

If the number of Bitcoin transactions doubles tomorrow, the Gigahashes spent in the network will remain roughly the same. So his calculated cost of $4.2/transaction is cut in half. If Bitcoin transactions increase by 100-fold, the cost per transaction similarly falls by that magnitude.

[BubbleBoy]

The guy has a correct systemic approach. If a large amount of real-world resources are spent to maintain the system operation, it's a really good question on who pays for it all, at least if you believe in thermodynamics, no free lunch and the like.

If I buy one bitcoin I trigger this economic chain:
1. people buy hardware made using scarce resources such as copper and oil
2. said people to run said hardware 24/7 and consume electricity
3. these resources are irreversibly spent for bringing one bitcoin in existence

Therefore a minute quantity of wealth as expressed in natural resources has been irreversibly destroyed in order to give me one shiny bitcoin to play with. Who pays for it ? In the short run, every member of society by higher real commodity prices. In the long run, the investors left holding the currency when the show's over.

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

[Raoul Duke]

When bitcoin is adopted universally, they will make a solar powered GPU for roofing your home. =p

This.   This and this.  Still surprised the super geeks haven't promoted this as a big part of Bitcoin.  Technology ready to be advanced.

I'm willing to lease my roof top for it I have around 300m² of roof top to use and I live in a sunny country. So sunny that the 2nd biggest solar field is here, it was the biggest when it was built.

[Meni Rosenfeld]

His math doesn't work. He is calculating the fixed cost for running the network at a given point in time. That cost isn't variable with the number of transactions.

If the number of Bitcoin transactions doubles tomorrow, the Gigahashes spent in the network will remain roughly the same. So his calculated cost of $4.2/transaction is cut in half. If Bitcoin transactions increase by 100-fold, the cost per transaction similarly falls by that magnitude.

The incentive to attack the network is proportional to the total worth of the Bitcoin economy, and hence to the number of transactions. Therefore, The need for security, and by extension, the cost of mining, also increases with the number of transactions.

So eventually we will reach a point where cost/transaction is more or less constant... But that will be only after the need for security will have relevance to the total mining done.

[hugolp]

The guy has a correct systemic approach. If a large amount of real-world resources are spent to maintain the system operation, it's a really good question on who pays for it all, at least if you believe in thermodynamics, no free lunch and the like.

If I buy one bitcoin I trigger this economic chain:
1. people buy hardware made using scarce resources such as copper and oil
2. said people to run said hardware 24/7 and consume electricity
3. these resources are irreversibly spent for bringing one bitcoin in existence

Therefore a minute quantity of wealth as expressed in natural resources has been irreversibly destroyed in order to give me one shiny bitcoin to play with. Who pays for it ? In the short run, every member of society by higher real commodity prices. In the long run, the investors left holding the currency when the show's over.

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

[zby]

Here is the original discussion that I've started: http://bitcointalk.org/index.php?topic=28780.0  My main concern with this is that this cost needs to grow together with the total market cap of the bitcoin system - so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.  This is a kind of arms race situation - the equilibriums are very wasteful.  What is more a system like the one proposed in http://www.links.org/files/distributed-currency.pdf could avoid this cost (and be even more secure).

[hugolp]

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.

[ctoon6]

- so if people say that more transactions will amortize these costs - they also need to take into account that the costs will also grow.

This is not true. The amount of electricity needed to create a block that handles 1 or thousends of transactions does not change.

but the cost per transaction changes.

cost of electricity/# of transactions

eletricity changes very slowly, but transactions changes a lot. although you can average it out.

[BubbleBoy]

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

[ctoon6]

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

its not "useless" work, although i myself would prefer a method where gpu mining would be worthless. overall it would cost less and still maintain a similar level of security (although "supercomputers" would be a threat)

[hugolp]

This is in contrast with a purely fiat system where maintaining the system costs next to nothing. The economic soundness of such a system is an entirely different topic, and it's quite similar to the old debate of gold vs. fiat. Gold too commands resource expenditures for it to be extracted out of the ground, only to be stored after purification in another hole in the ground.

Arent you a bit biased? What is the cost for the government to impose and mantain a monpolly on money? You can not count the cost of printing a piece of paper and saying that is all the cost involved in fiat money.

The trend of banishing alternate forms of currency is rather modern, under the pretence of fighting money laundry. It was entirely possible say, in 1930 US to pay with gold directly (and many contracts were legally redeemable in dollars or gold), yet per Gresham's law nobody used gold.

Gresham law has nothing to do in this case. Gresham law only applies when there is a fixed artificial rate between two currencies, which is not the case here. Alternative currencies disappear because the government makes it very difficult for them to opperate.

You still have not addressed your mistake regarding the cost of a fiat currency.

Also I'm seriously considering a distributed currency where the proceeds of seigniorage go to charity instead of proof of useless work. "Proof of work" vs. fiat is therefore a false dichotomy.

Its not useless, it goes to secure the network. How will you create a distributed currency without securing it somehow?

[BubbleBoy]

Gresham law applies to the 1930 situation I was mentioning: the fixed exchange rate drove the gold dollar out of circulation without any need for making it illegal. The government therefore incurred no cost on maintaining a monopoly on money - it didn't have one (technically, it allowed a single competitor, gold). Pray tell, what is the real cost of issuing fiat ?

The hideous blockchain construction servers two competing purposes: Byzantine fault tolerance for the coin database ("security"), and proof of work as a way to limit coin creation rate and distribute seigniorage. The miners don't care about the security of the network, they mine for seigniorage. Therefore if fault tolerance would be achievable in some other fashion, it would allow directing the seigniorage revenue to other purposes then burning electricity. It's a distinct issue of how to distribute the newly minted coins.