Why Cryptocurrency Costs a lot of Energy

You’ve heard it; I’ve heard it; even your grandma knows it: Bitcoin consumes a lot of energy. Currently, more than the entire country of Argentina. It’s gotten so bad that China has banned mining and the EU plans to follow suit. But what even is mining?

It’s a little complicated but I’ll break it all down now.

What is mining?

First, it’s an awful word to describe the process but we’re stuck with it. Mining is spending energy as a form of insurance to signify to other nodes (computers running the blockchain program) that you’re proposing a valid block.

That probably doesn’t make any sense to you so allow me to briefly explain how a blockchain works.

A blockchain is a permissionless, decentralized P2P ledger.

This basically means a blockchain is a digital ledger for storing information, e.g., financial transactions, that anyone, anywhere, can access and even edit.

When a node compiles transactions to form a block, we need to verify that the block is legit, so the new block is sent to other nodes on the network for verification. If it’s valid, the other nodes accept it; if it’s not, they reject it.

The problem with this setup is not inherently obvious. It takes some prior knowledge of computer networks so let me break it down.

Why do We Mine?

Blockchains are governed by two rules:

• A new block is only valid when 51% of the blockchain accepts it. (Blocks are rejected when they contain unauthorized transactions.)
• The longest valid blockchain tells the truth, i.e., the chain containing the most valid blocks is the true chain.

Because of the way blockchains work, anyone can propose a block.

It’s true that no bad blocks will be accepted but let’s say I buy a PS5 and my transaction is added to the blockchain. The seller gets his money, and I get my PS 5.

Then, out of nowhere, I propose a new, longer blockchain where I remove my transaction from the block.

The individual blocks in the new chain are 100% valid and it’ll be difficult to tell that I’ve censored a transaction. So my new blockchain, which is technically valid, will be accepted. Which means I get my money and the PS 5. This is called a double spend.

Mining (Proof-of-Work) was created to solve this problem.

How Mining works

Imagine being put in a giant maze alongside other people; none of you have a map but there’s a big prize for the first person to get out. What do you do?

The answer is to try every possible route as fast as possible until you get out.

That’s mining.

To add a block, nodes have to solve a “mathematical puzzle.”

The catch is that there are no formulas, hints or methods to solve it, so nodes guess and guess until one finds the correct answer. The miner gets a reward.

Naturally, node operators want to guess as fast as possible. This led to the creation of special computers that exist solely for the purpose of mining. And instead of using just one, why not a thousand or a million?

It’s the combination of millions of these “supercomputers” called ASICs (Application-Specific Integrated Circuits) trying to solve the puzzle that gobbles up all that energy.

The point is that because of this energy cost, it’s almost impossible to create a longer blockchain faster than the network of honest nodes. You’d need to have more computers than them. It also means that for every rejected block you propose, you lose money in the form of the energy costs required to solve the puzzle.

The combination of these two things makes it a bad idea to even try to double-spend but it comes at the cost of ridiculous amounts of energy.

Is there another way?

Yes, there is; there has been since 2011 but the first cryptocurrency to use it (Peercoin) went live in 2012. I’m talking about Proof-of-Stake.

In Proof-of-Stake, instead of spending energy as insurance, nodes are required to stake money. If they behave badly, they lose money. This completely eliminates the energy costs associated with mining.

If you want to learn more about Proof-of-Stake, you can find that here.

In conclusion, mining is what consumes all that energy and it is a creative and revolutionary solution to the double-spend problem of decentralized P2P networks. But it’s largely unnecessary in today’s world because proof-of-stake is just better.

P.S: If you’ve been following me for a while, you know I already wrote about mining but that article was very technical and a lot more complex than the average investor wants to know. If you’re interested in getting a little deeper into the technical details, you can find the article here.

P.P.S: Shout out to Dmitry Demidko for making the cover photo, he’s available for hire as a photographer here.