Can Bitcoin become the leading payment method? Can it replace VISA and MasterCard from their market-leading positions? As the enormous Bitcoin electricity use shows, there is a long way to go for that!
Emerged from libertarian ideas in the wake of the 2008 financial crisis, Bitcoin has put power in the hands of people. No government or central bank can shut it down, moreover, Bitcoin transactions can go on without any intervention from banks.
While the enthusiasm over Bitcoin is truly global, the crypto market is volatile. The price of Bitcoin scaled record high in 2017, only to experience a significant downturn in 2018. Some experts believe it will rise again. You still aren’t buying your morning cuppa with it, though!
Bitcoin and cryptocurrencies aren’t yet mainstream like VISA and MasterCard. There are several reasons for it. Cryptocurrency enthusiasts often consider these digital tokens as investment instruments, and not exactly as mediums for payment.
Most famous cryptocurrencies like Bitcoin and Ether face scalability issues. Their transaction throughput remains much lower than mainstream electronic payment methods. I will talk about a different reason though, one that results in significant negative media attention.
Bitcoin uses a transaction validation process named “Mining”. This uses a consensus algorithm called “Proof of Work” (POW). “Miners”, i.e., nodes on the Bitcoin network participate in the transaction validation process and solve a mathematical puzzle.
It’s an asymmetric puzzle. It requires a significant effort to solve, however, verification is very easy. Solving it doesn’t involve skill. All miners try out one number after another at a high-speed, therefore, only brute computing power is required.
The miner who solves the puzzle creates new block and gets rewarded with digital currency. The other miners were also trying to solve the same puzzle. However, when someone solves it, they just abandon their effort and concentrate on mining the next block. In effect, the computing power the other miners expend has no value.
The large Bitcoin network has many miners running this process, for long periods of time. This involves powerful hardware. Miners spend a lot of electrical energy and run up a considerable energy bill.
The Bitcoin community adjusts the complexity of the puzzle every two weeks. They keep making it harder so that the block-generation time remains 10 minutes. This ensures that the Bitcoin electricity use will increase.
At the time of writing this article, the Bitcoin network spends more energy than Iraq and many other countries, as Digiconomist reports! There are several different estimation methodologies, therefore, other reports put the numbers differently. An example is this report, which estimates that Bitcoin consumes more electricity than 159 countries!
The estimation methods may vary, however, more and more observers are commenting on it. Many believe that the Bitcoin electricity use at this scale has a serious environmental impact. Some estimate that it will increase global warming.
Powers that be are waking up to the Bitcoin electricity use. For e.g., Norway has stopped subsidizing the Bitcoin mining companies in the country. When you compare the Bitcoin electricity use with that of VISA, the stark difference stands out!
Can Bitcoin and other cryptocurrencies using the POW mining transition to more sustainable methods? There may be various ways to reduce energy demand. Efficient, purpose-built hardware for crypto mining could be one option. Intel is already working on efficient hardware solutions.
Another option is to use a different consensus algorithm. “Proof of Stake” (PoS) algorithm requires dedicated transaction validators, who stake their own digital currencies for transaction validation. There is no energy-hungry crypto mining, unlike POW.
Ethereum also uses crypto mining and POW algorithm. However, they are working on a transition to their proposed “Casper” protocol, which will use PoS. Ethereum has shown considerable seriousness about it, for e.g., they are actively collaborating with development partners on this project.
The Bitcoin community is fully decentralized. This is unlike Ethereum, where the Ethereum Foundation actively oversees key developments around the platform. At the time of writing, it isn’t clear whether Bitcoin will transition to PoS.
Will the Bitcoin community find a solution to the pressing question of the high Bitcoin electricity use? That will help in turning around the negative media perceptions, and mainstreaming of Bitcoin. Watch this space for future developments around this.