YesNo, electricity is the largest variable cost to miners, who can profit as long as that cost is smaller than the value of the bitcoins they mint as reward for maintaining the ledger. Research approach The key question to answer is: RQ1: Is the bitcoin is a financially sustainable, long-term peer-to-peer paying service? The way of estimating is an important contribution of this paper. Soluna will use the money it makes from mining to further develop the wind farm, says CEO John Belizaire, who adds that it will also be able to make money selling power to the Moroccan grid. That would be quite bad.
Figure 5 shows the comparison between cost- and energy-efficient (en.) hardware in 2012. It can be seen that this results in a positive net cash flow, but due to necessary new investments, the total net cash flow drops with each innovation. Quantifying value flows To assess the sustainability of the network, the money flows have to be quantified for actors for which we cannot safely assume a positive net cash flow. This way, the miner will get a partial reward more quickly than when the miner would have mined on his own. Value creation in the bitcoin ecosystem To understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams bitcoin's growing energy problem pdf in the bitcoin network. 7 Daily kWh usage of bitcoin network Figure 8 gives a graphical representation of our estimates of when certain hardware was in use. To answer the question of long-term sustainability, we quantify the most important revenue streams in the bitcoin network. Sieve, as used in Hyperledger (Cachin 2016 ; Cachin. Figure 9 shows the scenario with an energy price.06/kWh still leads to a negative cumulative cash flow. Then, for each subsequent day we can infer the hardware purchases using the increase in hash rate and available hardware on that day.
Apart from their revenues (mined coins and transaction, we need to know their expenses. Table 2 gives the daily expenses for electricity per GH/s for a particular type of hardware, as well as the total electricity expenses for the period the specific hardware was in production. Once hardware has been purchased, it becomes a sunk cost and only the marginal costs need to be covered. In other words, the income for transaction clearing is neglectable compared to mining. Also, the model leaves out the full nodes that ensure the integrity and safety of the bitcoin network. Table 4 Miner Profits per machine Table 5 maps the miners cash flows to the e 3 value model as introduced in Fig. Founder of bitcoin consultancy firm. You are generating numbers the whole time and the machines youre using for that use electricity. The company anticipates that it can profitably mine in almost any foreseeable cryptocurrency price environment, according to a white paper (PDF). Each block is like a new page of a ledger containing the most recent transactions. Finally, a more efficient consensus mechanism could be used, including proof-of-stake (consensus should only be reached by parties who own the most bitcoins, since they have the most interests in trust in the currency (Narayanan 2016 Byzantine fault tolerance (a. This answers research question 2: on the long term, miners can not be sustainable. Therefore, speculating on the increase of the bitcoin exchange rate is very risky, and therefore not reliable enough to justify long-term economic sustainability.
Its been estimated that the network uses nearly as much electricity as all of Ireland, raising alarms about its carbon footprint. Then, we have that N_itleftbeginarraycc0 mathrmif HashRate_itimes P_t MC HashRate_i mathrmif ii_tast N_i,t-1 mathrmotherwise, endarrayright. With these trust-based systems, the intermediary checks if the sender of the payment can afford the payment, preventing them from spending the same amount of money twice (also called the double spending problem). This price, as well as the percentage increase/decrease in the exchange rate is given below. By reverse-engineering the type and number of computers that have been mining bitcoin, we found a negative net cash flow for most of the measurement period. Third, miners often participate in a pool (flow 4). Furthermore, a key notion in e 3 value is the idea of economic reciprocity: actors exchange only something of economic value if they get something in return of higher value. The estimates in Table 6 should be interpreted with care. The payback time is calculated by taking the upfront investment in mining hardware divided by the average revenue per day (as a result of coins mined plus transaction fees minus energy costs of the preceding 30 days) resulting from that hardware.
This data was cross-referenced with discussions on the public forum bitcointalk. At a decrease in the hash rate, we assume bitcoin's growing energy problem pdf that new machines are throttled back or old machines are turned off. Sign up here its free! And while he does have confidence in his estimates, the problem with this method is that these manufacturers are extremely secretive. ( 2012 ) mention several types of attacks like attempts at history-revision and the theft of bitcoins. At a first increase in the hash rate, the number of machines increases to reach the total hash rate. Note that, because the hardware is tailored to bitcoin mining, we consider the residual value of hardware zero as it cannot be used economically for other tasks. One example is the Proof-of-elapsed-time (PoET) mechanism such as implemented in Hyperledger. Have already started to put restrictions around Bitcoin mining.
With the assumption of positive marginal revenues, we also can calculate when new hardware is added or retired. GH/s is the performance rate for hardware, measuring the speed of solving the cryptographic puzzles that come with the bitcoin technology. I have found lots of articles talking about how bitcoin works, and quite a few that analyze the growing industry around. I think everyone agrees on bitcoin's growing energy problem pdf the minimum energy consumption. Bitcoin Energy Consumption Index anchored in peer-reviewed academic literature. 3 ) Exchange fees: we assume an average.5 as they can range from.2 to 5 per transaction (Perez 2015 ). 5 Payback time for most energy-efficient (en.) and cost-efficient hardware. As of today, this has become a reality with the publication of a new paper in the latest issue. Vulnerabilities Many authors have analyzed the possibilities to attack the bitcoin network.
(A recent estimate (PDF) suggests that the Bitcoin network uses at least.55 gigawatts.) Development of bitcoin's growing energy problem pdf the site began nine years ago, but progress stalled under its previous owners. This requires performing a complex calculation many times repeatedly in an attempt to guess a unique number that cryptographically links the new block to the previous one. The height of the box for a specific kind of hardware indicates the energy expense per GH/s for that hardware. The bitcoins can be obtained by purchasing them, generating them by acting as a miner, earning them in exchange for an activity of service, receiving them as a form of payment or receiving them as a donation/gift (Plassaras 2013 ; European Central Bank 2015 ). Relatively little though speaks to the potential political implications of Bitcoin's growing electricity consumption. Conclusion This paper analyzed the long term financial sustainability of proof-of-work mining for the bitcoin network. Furthermore, to understand the bitcoin ecosystem, we develop an e 3 value business model describing the most important value streams in the bitcoin network based on the body of literature about the bitcoin available. For quantification, we rely on publicly available information about bitcoin trade volume, mining revenues, electricity prices, etc. They are crucial for the correct functioning of the blockchain system, as they have approve the blocks with transactions. The rest of the paper proceeds as follows: In Section 2 we review the bitcoin system to capture the ecosystem of the bitcoin.
To obtain feedback in order to validate. The pools do not handle the mining of the block itself, but provide a block reward sharing service, so they are a service that concerns only the miners and not the bitcoin owners. Storing bitcoins at centralized exchanges, poses the funds at considerable risk as a number of exchanges defaulted due to cyber-attacks, insolvency or outright fraud (Moore and Christin 2013 ). We now turn to the data that is fed into Eqs. We assume that the losses and profits average over time, and result in a modest net positive cash flow. A network-takeover attack scenario, which boils down to taking over the mining function by controlling over 50 of the mining power is a possibility (Davey Felten, 2013). Structured Finance Banker at ING Bank. Unfortunately, none of these possibilities are very realistic. The expected number of bitcoins mined per day, as well as the transaction fees for a specific kind of hardware can be derived from the performance indicator (in GH/s) of that hardware. This holds for normal goods as well as for virtual goods and currencies as bitcoin. Value flow: electricity expenses Now that we know which specific kind of hardware is into operation during which specific period, we can also calculate the electricity consumption of that hardware, and related to that, the electricity expenses. 11 Cumulative net cash flow (in million USD).
As a unit of account, bitcoin is quite unstable. A single transaction uses as much electricity as an average household in the Netherlands uses in a month. If a miner solves the cryptographic puzzle, a bitcoin is created and assigned to the miner. 3 ) Electricity expenses: these directly relate to the installed hardware base. It seems to me that since block reward and mining industry gross margins are reasonably steady in the short term, that if Bitcoin were to (say) rise ten fold in price similar bitcoin's growing energy problem pdf to previous rises. ( 1 ) to ( 3 ) to determine purchases of new hardware. This provides insight into the actual profits on a daily basis and the sustainability of bitcoin mining. By mid-2014, the high revenues of 20re countered by high expenses, leading to a negative net cash flow from that moment. By the end of this year, he predicts the network could be using as much.7 gigawattsas much as Austria and half of a percent of the worlds total consumption. This has the disadvantage of placing the responsibility for safeguarding bitcoins on the owner, nor is any interest earned on the deposits. All of the interviewees agreed on the bridging role of banks and exchanges between bitcoin and fiat money. The combination of machines in operation on any given day is then simply equal to the number in operation on the previous day, minus machines that have become unprofitable, plus new machines of the type that have the lowest payback time.
Take for example the transaction volume of visa 14 alone, which is 141 billion transactions in 2016. Manager Pricing Business Intelligence at ING Bank During the interviews the following subjects were discussed: Details: The job bitcoin's growing energy problem pdf and organization of the interviewee. Source : authors calculations Value flow: other expenses In order to mine bitcoins, miners will also have expenses to (1) pools, where about two thirds of the miners 10 pay a fee of approximately. Byzantine fault tolerance) do not scale to millions of users. The retired bitcoin miner mentioned the centralization occurring with bitcoin mining as the initial investment is increasing continually. The total profits for miners who have used the Avalon 1 in the right time period have been almost 50 mln. Figure 1 shows the (projected) number of bitcoins that will go in circulation during the first ten years of the bitcoin network. For this purpose, we have also estimated the cumulative profit in scenarios where the energy price is reduced by 50.06/kWh or reduced by 75.03/kWh.
(value flow 3 of Fig. Moreover, a substantial raise of the transaction fees would change the business model of the bitcoin significantly: from neglectable transaction costs to high transaction costs. If honest miners control more computer power than dishonest miners (Nakamoto 2008 the bitcoin system as a whole is trustworthy. In the model this is represented by the bitcoin network actor, which reflects the total network of actors. Since the miners are crucial for the correct functioning of the bitcoin network, this endangers the sustainability of the bitcoin network itself (research question 1). For each date the most energy-efficient hardware (energy cost per GH/s) compared to the most cost-efficient hardware (amount of computing power per ). In both cases, we attribute the increase in computing power in the bitcoin network to new hardware. By the beginning of 2017, about 16 of the total 21 million bitcoins were mined. Currently, most national banks in the European Monetary Union follow the example of the ECB by issuing a warning about the risks of bitcoin, but there is no framework for regulation (European Central Bank 2015 ). Table 6 Required break-even price bitcoin for miners from 2012 to 2016 with hardware purchased since 2012 Discussion We examined the profitability of proof-of-work bitcoin mining over the period in the context of the bitcoins sustainability. Trading took off in 2011, when one bitcoin was worth about.05.
E3 value model: Discussion of the e3 value model. Moreover visa spent about 0,187 TWh to process their 141 billion transactions (1,3 Wh per transaction) whereas bitcoin, based on our estimation of the installed base, needed 3,39 TWh (41 KWh per transaction) for 83 million transactions. The bet is that the technology is in its early, early days and is poised, Belizaire says, to usher in a new internet, if you willone based on decentralized computing. (value flow 5 of Fig. Its figuring out when that incentive stops paying off that is at the heart of de Vriess estimation method. Project leader quality control financial products at AFM (Dutch financial authority). Organizational POV: The viewpoint of the organization on bitcoin. Retired bitcoin miner. We have considered the profitability of the miner, expressed by a sustainable net positive cash flow, as the key factor in judging bitcoin sustainability. In theory, though, it doesnt have to consume nearly as much fossil-fuel-based power as it does todayand a new renewable-energy company has an ambitious plan to prove. The user of the computer that wins is awarded.5 new coinsa process known as mining Bitcoin. We therefore develop a method to estimate this installed base.
Although this contradicts the design philosophy of the bitcoin somewhat,.e., to be independent of a central authority, it does point to a potential future for banks as providers of efficient consensus mechanisms for transactions of electronic money. Existing machines stay in operation as long as the marginal profit is positive,.e., as long as HashRate i P. Pools are an effective risk sharing mechanism and base their fees on insurance policies; hence we assume they are capable of generating a positive net cash flow. This is similar to the range of fees exchanges charge per transaction like.42 at m and.5. After drafting the value model the interviewees were contacted again for comments. In other words: after initial investment, the only incentive for miners to turn their hardware off is that the marginal expenses for mining (electricity) outweigh the marginal revenues. 10 Marginal daily expenses and revenues on a logarithmic scale. Table 2 Energy Expenses Figure 7 shows the rapidly increasing energy usage of the bitcoin network from 2014 to 2016. For each machine on the market, the payback time is computed using the 30-day moving average of the bitcoin price: PayBackTime_it HashRate_itimes FC_i (2) where MC is the daily marginal cost of running machine i,.e., the. 3 ) Pool fees: Fees to participate in a pool to spread the risk of mining is approximately 1 of the total coins mined. Source: authors calculations Figure 6 shows the estimated payback time for the full period and the revenue per GH/s from 2012 to 2016. It is not possible for a minority of miners to manipulate transactions, as the network as a whole will not accept payments that were not issued by the owner of the bitcoins.
Thats the stuff we have to work with, he says. Without a trusted bank preventing users from spending the same money twice, another solution must be found. 2016 or approaches to filter diverging traffic (e.g. 2 Therefore, once we know which hardware is deployed during which period, we can estimate the total electricity power expenses over time, assuming that mining hardware is always. The hardware expenses are by far the biggest expense to bitcoin miners. Table 4 summarizes the expenses and revenues, and calculates per hardware the estimated generated net cash flow. Weve seen a lot of back-of-the-envelope calculations, but we need more scientific discussion on where this network is headed. If one or more actors fail to do so, the network collapses and is unsustainable. Second, the bitcoin price may increase substantially, which happened in 2018, which however outside our analysis period. The results are in Table. The e 3 value model describes the actors (enterprises and individuals) involved and the things (called value objects) they exchange with each other (Gordijn and Akkermans 2003 ). Such calculators compute payback times and profits for given investments in hardware and energy prices.
And I think thats something you really need to know if youre going to draft policy about it, he says. We utilize network theory on networked value constellations, and more specifically the e 3 value methodology (Gordijn and Akkermans 2003 ) to understand the ecosystem of enterprises and end-users. In return, the owners of the pools often ask for a fee. Miners compete to add sets of new transactions, called blocks, to the accounting ledger. During the use of the aforementioned exchange service). Four, the bitcoin is a currency that can be kept by the owner, but sometimes participants want to exchange the bitcoin for a regulated currency such as the Euro or the Dollar. Belizaire says it will also be possible to take this business model to other parts of the world, where Soluna can use it to develop similarly rich clean power resources. The performance of hardware, which can be used for mining, increases rapidly and becomes more dedicated; Therefore, hardware needs to be replaced (in the order of months, rather than years). The overall volatility of the bitcoin price makes it an unreliable unit of account. Solution to the double spending problem With fiat currencies, the double spending problem is solved as a third party like a bank can clear transactions or it can take the shape of physical cash. The sudden drops of profitability during periods like the fourth quarter of 2013 and the second quarter of 2016, suggest the predicted gradual linear and exponential profit declines of online mining calculators are an unreliable tool for net cash flow prediction. Proof-of-work is a computationally hard problem (a cryptographic puzzle) solved by a significant amount of distributed computing power directly relating to the signing, and therefore approving, of a transaction block, including all earlier approved blocks (hence the name blockchain).
2012 ; Forte. Table 4 also shows that in some time periods the investments in hardware have been very profitable, such as with the Avalon 1 in 2013. Miningthe algorithmic process by which the networks participants agree that new Bitcoin transactions are validis what makes the network so energy-intensive. In particular, we use data retrieved from fo, a website that provides daily aggregates of bitcoin creation, transaction volume, transaction fees and network hash rate. The index-number of the best machine at each time t is ( i_tast ). The bitcoin is an unregulated digital peer-to-peer currency with a finite supply of 21 million units that is not backed by debt obligations and governments (Grinberg 2012 ) and does not need third parties such as banks (Courtois and Bahack 2014 ). Bitcoin-NG (Eyal. Table 3 Other expenses Value transfers We now know all components of the miners expenses and revenues. The difference.24 GWh/day (February 10th 2017) (beci) 2016 and.8 GWh/day (December 31rd 2016) (us) can be explained, apart from the different dates, by the different models used to estimate the installed hardware base. The purpose of using the e 3 value method is twofold. Finding such a consensus mechanism is ongoing work, although important steps are taken. The beci uses a fairly straightforward model: it assumes that hardware remains in production by miners until it reaches its minimum sales price.
6 Since declines in the hash rate are rare and small (see Fig. For our calculations we assume an average electricity cost.12 per kWh, which is similar to the average cost in the United States. Thats a big reason why so many mining operations are based in China, where in some regions it is possible to purchase extremely cheap coal-fired poweras cheap.03 per kilowatt-hour. Value is created every time a new block is mined and one of the miners is rewarded with new bitcoins and transaction fees. Specifically, the installed mining hardware base is unknown over time but an important cost to actors. Our method of computing bitcoin investments and profits uses computations similar to those of bitcoin profitability calculators. First, the energy price could drop significantly world-wide, for example.03 USD/KWh. 4 (value flow 6 of Fig. In traditional currencies (such as the Euro the central banks play an important role in adding money to the system. This article has been updated to clarify the location of Soluna's wind power site. (value flow 7 of Fig.