The mainstream media falsely portrays bitcoin mining as a waste. Nothing could be further from the truth. Bitcoin mining provides an economic proposition for otherwise useless, excess energy. Bitcoin will propel humanity to abundance.
To discuss bitcoin mining, one must first understand how it works: Proof-of-Work and the difficulty adjustment.
How Bitcoin Mining Works
Bitcoin is a new type of money that uses a Proof-of-Work consensus mechanism to secure the network (SHA-256). The “work” is the calculation that must be performed to solve the puzzle. Miners use computers specially designed for bitcoin mining (ASIC) to compete against each other in a race to guess an extremely large number. Every 10 minutes on average, according to a Poisson distribution, the miner who guesses a successful number first gets to add a new block to the Bitcoin blockchain, earning the block reward. The block reward consists of the deflationary block grant, which is halved every four years or so, and transaction fees paid by users to incentivize their transactions to be added to the next block.
Proof of work is based on asymmetry. It is prohibitively expensive and difficult to generate the proof while it remains extremely cheap and easy to verify the proof. Miners must expend a lot of energy to have any chance of solving the puzzle before an even faster competitor does. As of June 10, 2022, this cost comes to around $22,000 per BTC for miners in North America. At the same time, it is practically free to verify that a block is valid, so that all other network participants (full nodes) can quickly accept or reject a block proposed by a miner.
By itself, proof of work will not be sufficient to secure the Bitcoin network. Miners would quickly adapt by specializing in solving this one type of puzzle, improving the efficiency of their miners (CPUs → GPUs → ASICs), increasing the number of miners and thus increasing the overall hash rate by leaps and bounds . This rush of competition would result in increasingly shorter intervals between successive blocks, with bitcoin being issued at a rate far greater than the original supply schedule required.
Satoshi Nakamoto solved this problem by implementing the difficulty adjustment, a remarkable example of algorithmic homeostasis. In the long term, the difficulty adjustment ensures that new blocks are found on average every 10 minutes, and adjusts itself every time 2016 additional blocks (two weeks) have passed. This clever Easter egg is a nod to reversing the effects of Executive Order 6102.
When blocks are mined too quickly (less than 10 minutes between blocks on average), which can often be the case due to increasing hashrate coming online, the puzzle becomes more difficult at the two-week checkpoint to slow down mining. On the other hand, when blocks are mined too slowly (more than 10 minutes between blocks on average), the puzzle becomes easier to accelerate mining back to the targeted equilibrium rate of 2,016 blocks per fortnight. At this rate, the designated halvings occur every 210,000 blocks approximately four years apart.
In the long run, this homeostatic feedback loop that determines mining difficulty generally balances out any deviation from the planned rate of 2016 new blocks per fortnight. But when rapid increases in overall hash rate are more common than decreases in mining difficulty, this cumulative small imbalance caused by Bitcoin’s exponential increase in mining power has led to block reward halvings occurring a few months earlier than expected. In practice, when the hashrate is increasing rapidly, the upward difficulty adjustment every two weeks is nearly enough to counteract this trend of blocks arriving earlier than planned. This is ultimately why the first multiple Bitcoin halvings (November 28, 2012; July 9, 2016; and May 12, 2020) have been roughly three years and three seasons apart.
This elegant, self-correcting system ensures that the bitcoin supply schedule initially set by Satoshi Nakamoto is followed, ultimately enforcing the 21 million limit with approximately four-year block reward halvings.
Bitcoin’s energy use
Bitcoin provides a unique valuable product to humanity. It’s the best money around. Bitcoin offers a deflationary store of value, light-speed medium of exchange and precise unit of account for the global economy. Bitcoin, when used with best security practices, protects an individual’s purchasing power and property rights from seizure, debasement, inflation, counterfeiting, or other political abuse.
Historically, gold provided similar benefits to humanity. For generations, people have debated the benefits and costs of the gold standard.
Bitcoin miners are able to convert watts of electrical power anywhere on the planet into money (BTC). This is thought-provoking and will radically change the energy markets.
Bitcoin is an energy buyer of last resort. It is the only use case that will buy energy anywhere in the world, at any time, for any interval. Due to the competitive bitcoin mining market, miners thrive only by using cheap power that has no other buyers ready and willing to bid a higher price for it. Using excessively expensive power that is also highly sought after by others or extracting at a loss is self-defeating. This market system creates new opportunities, such as using wasted flared gas for Bitcoin mining to reduce CO2 emissions.
Bitcoin miners use energy that would otherwise be wasted or unprofitable to use. Large energy sources, such as Hydro-Québec in Canada, often have excess generation capacity that could not be used before Bitcoin. Now, thanks to bitcoin mining, these clean power resources have a direct way to monetize their excess power capacity. This lowers production costs for all electricity consumers as companies are able to make the same or higher profits by supplying more watts to consumers for the same or lower cost.
Wasting electricity at all increases costs for everyone by lowering the demand curve below available supply. To get the same return, producers must raise prices to compensate for the resources wasted in developing sources of excess power capacity that do not always manage to find a buyer.
For example, let’s imagine that there is a rural hydroelectric plant that has a permanently available 5,000 megawatts. The operators of the facility want to achieve a profitable return on operations, as it costs a lot of money to build and maintain the facility. Consumers in the rural town are price inelastic, as they have no alternative sources of electrical power and have to resort to manual labor when the electricity is not sufficient. Currently, the city uses only 3,000 MW of the 5,000 MW available. A bitcoin miner steps in and buys the remaining 2,000 MW. The inhabitants of the countryside are no longer on the hook and are thus freed from having to subsidize surplus power that they do not even use. Now the rural hydroelectric power plant is able to lower the consumer prices of electric power while making the same profit. A win-win for everyone.
Bitcoin mining today is profitable with low cost energy on many national power grids. In the future, bitcoin mining will only be profitable in the margins where the net energy cost is close to zero or even negative: for example, using the waste heat for a boiler or food production.
Bitcoin miners stabilize the grid. Bitcoin miners are very cost sensitive. If they want to continue to operate profitably, they must not compete with consumers and businesses for high-cost electric power in areas where it is most scarce and highly valued by existing market players. They will shut down during high stress events rather than continue to mine. As flexible buyers of power only when it is economical to do so, bitcoin miners are able to shut down quickly in response to upward swings in grid demand. This is in contrast to other large power users such as aluminum smelting, which take 4–5 hours of uninterrupted power to shut down.
Recently, Texas’ electric grid operator, ERCOT, asked Texans to conserve electricity due to ongoing heat waves. Texas bitcoin miners responded by shutting down over 1,000 megawatts of bitcoin mining load, allowing over 1% of total network capacity to be pushed back onto the grid.
Bitcoin miners are encouraging further investment in affordable, stable baseload power. Energy use is directly correlated with human flourishing and empowerment. Bitcoin miners are fast-growing energy users seeking low-cost electrical power globally. Bitcoin miners are directly responsible for bringing online new solar, wind and hydropower plants around the world.
Bitcoin mining is good for the planet. It lowers energy costs for everyone, increases energy market efficiency, stabilizes grids, and encourages humanity to rapidly scale energy production to abundance.
**The author generated this image with OpenAI’s DALL-E. Upon generation, the author reviewed and published the image and takes ultimate responsibility for the content of this image.
This is a guest post by Interstellar Bitcoin. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.