Crypto-Currencies: Running Up the Power Bill

Generating your favorite crypto-currency could require energy equivalent to the total power needs of Nigeria, Austria, or Switzerland.

Though a grandiose-sounding metaphor, there is little argument that the excessive power drain comes from the fundamental design of blockchain crypto-currencies, in essence designed to supplant the confidence and central oversight of traditional (fiat) currencies. The energy need stems from the requirement of crypto-currencies to manage the volume of currency in circulation without independent oversight, all the while maintaining a shield that prevents peripheral manipulation.

Building with Energy

The build of crypto-currencies is through the “mining” process, essentially requiring specially-designed software programs. The miners themselves are voluntary participants who, using their own computers, collect and crunch the necessary data to make new Bitcoins.

The first step in the mining process is to collect the data on the most recent new Bitcoin transactions, which is then sent to all other participating computers. A miner must then happen upon the designated random set of characters and numbers that is the “signature” for that Bitcoin. The signature, in turn, must be identified by generating a mind-boggling number of attempts – an intentionally time- and power-draining process.

Once that computer (identified within the crypto-currency system as a “node”) identifies the required signature, it transmits the transaction information (a block) to the rest of the network. The other computers in the network then validate that block of transactions by using its signature and linking it to the signature of the preceding block – hence, blockchain technology. The “owner” of the computer that generated the block has thus provided a service: the generator responsible for updating the system’s transaction records is rewarded financially for the computational work.

“It is a process that makes Bitcoin extremely energy-hungry by design,” says Alex de VriesOpens a new window , a blockchain specialist at PwC. “The currency requires a huge amount of hash calculations for its ultimate goal of processing financial transactions without intermediaries (peer-to-peer).”

Hungry for Power

The amount of power worldwide required to run these systems, known as a “proof of work” process, is roughly 2.55 gigawatts, according to de Vries, with the potential to climb as high as 7.7 gigawatts in the coming years. Part of the design of mining ensures that the more participants involved in identifying a signature, the more difficult and time-consuming the process is designed to be. Initially intended to ensure new currency cannot be issued too quickly, it also guarantees that the immediate demand for power for mining will grow, especially if miners (who receive Bitcoins in remuneration) don’t abandon the cause.

The challenge for this technology is binary: The tremendous energy burden required for generation is also the system’s safeguard. Cryptocurrency was designed to require heavy computing to ensure that new blocks cannot be added without significant effort, and must also be verified by a network of other computers as insurance against malicious hackers or fraudsters.

“What brings cryptocurrencies like Bitcoin and Ethereum to life is the way all the computers in their networks agree, over and over, that what a blockchain says is true,” saysOpens a new window Mike Orcutt in Technology Review. “To do this, they use an algorithm called a consensus mechanism.”

New Validation

Ethereum and other crypto-currencies are, meanwhile, exploring alternative ways to guarantee the validity of additional blocks, like requiring financial deposits rather than complex computations (and a huge energy bill) to ensure that a new addition is valid. By this new approach, called “proof of stake,” participants gain chances to generate new blocks by staking currently owned crypto-currencies.

This approach has none of the power demands of the proof-of-work. Critics point out that its shortcomings undermine its value as a currency as it tends to steer current holders into hoarding currency in order to generate more, rather than applying it for use in transactions.

The other reason the energy consumption might not be as troubling as it seems, at least in the case of Bitcoin, is that the currency is designed to have a maximum of 21 million, so that the currency does not lose value the way that fiat currencies, such as US dollars, tend to do.

“To some extent, Bitcoin’s high energy use is a problem that will resolve itself over time,” says Timothy Lee of ArsTechnicaOpens a new window , noting that the rewards for mining are designed to reduce 50% every four years, thus dropping the incentives for mining until the maximum amount is reached.