An intersection of Cryptocurrency and Alternative Energy
The traditional rebuttal presented against the Bitcoin Network accuses it of being a net-waste in terms of its energy use. We argue that not only is it a net boon, but that the future of renewable energy sources and energy arbitrage will decrease the consumption of non-renewable energy over time in Bitcoin. Of course, if you believe that Bitcoin has no value or potential, the logical conclusion is that it wastes energy. However, we believe that just as a car uses more energy than walking and a computer uses more energy than calculating by hand, Bitcoin’s energy consumption is justified. In this article, we present our findings in current renewable energy sources that are being used by Reusable Proof of Work miners around the world.
How Proof of Work Works and Why It Is Efficient
A part of this section follows the structure of educator and serial Bitcoin entrepreneur Dan Held’s “PoW is Efficient”
When thinking about the history of production, it is important to recognize the connection to energy. With no energy, nothing can be produced. In the early days of human beings, this production was fairly straightforward. Humans would use mechanical energy in the form of muscle contractions to move themselves towards prey and to hunt. To refuel this, they would consume chemical potential energy in the form of their product: the meat.
W=F * T
Without the energy source, we would not have been able to continue to hunt and to provide for ourselves quickly, we would run out of energy and die. This was the first major issue that needed to be overcome: energy efficiency. We needed our energy source to be more energy efficient. The first solution? Fire. By harnessing the chemical energy stored in wood, we could heat our bodies with external sources and cook our food to become easier to eat hence using less energy to both chew and heat ourselves.
As time progressed, more and more inventions were created. Each invention made our lives easier and increased the amount of energy we used. Technology has made our energy do more work.
The Bitcoin Network is a technology that lets the digital world transmute real world value into a digital representation — — since money has no real value and it only represents things that are worth something, there must be a tradeoff.
With reusable Proof of Work (PoW), we can connect real world value in the form of electrical energy to the digital world. The fact that PoW is “costly” is a feature, not a bug.
In response, miners go to where the energy is the cheapest in order to maximize profit margins. Usually, the price of energy increases with a higher demand. However in the case of energy producers in secluded rural areas, this demand is lacking. So, Bitcoin miners set up their rigs near these energy producers to buy up otherwise wasted energy.
“Bitcoin’s PoW is the buyer of last resort for all electricity, creating a floor that incentivizes the building of new energy producing plants around disparate energy sources that would have otherwise been left untapped.”
Nic Carter explains this phenomenon of energy arbitrage pretty well:
“This global energy net liberates stranded assets and makes new ones viable. Imagine a 3D topographic map of the world with cheap energy hotspots being lower and expensive energy being higher. I imagine Bitcoin mining being akin to a glass of water poured over the surface, settling in the nooks and crannies, and smoothing it out.”
If people find that the electricity being bought up by these miners is worth paying for, it has not been wasted.
Is the trustless settlement of $1.34T between counterparties annually with the added benefit of cheaper energy for all, worth the $4.5B in current mining costs? I think the answer is a resounding yes. Just as a car uses more energy than walking and a computer more energy than pen and paper, Bitcoin is utilizing energy efficiency to create the most impressive asset of all time.
Over history, the more that was produced, the wealthier everyone became. Doing real work creates wealth that, in a fair system, can be spread across an entire population. Work requires energy and, with an efficient system, the more energy, the more work. The idea that everyone can be rich is in fact a reality so long as everyone produces goods and services efficiently and the rules are fair.
Bitcoin As A Network
Proof of Work mining utilizes Bitcoin’s strong network to confirm blocks. A network, in this sense, is a collection of computers that interact with each other through the internet, sharing files and encrypted messages. Each computer can better be described as a node and together, all 13,120 of them create and verify transactions. There are three main types of nodes on Bitcoin: full nodes, light nodes, and mining nodes.
Full Nodes relay and create transactions between nodes and act almost like a checkpoint from node to node. Imagine a game of pass where every person was spaced out evenly in a line. In order for someone on one end to give the ball to someone on the other end, they need to walk towards each other (or in this system, create a channel between them) but that’s costly. So instead, you simply pass the ball down the line until it reaches the target. Full nodes are called full nodes because they also store the entire ledger of the Bitcoin blockchain.
The ledger is a 400GB file that includes the list of all previous transactions that have ever happened. That way, if a malicious actor were to try to fake a transaction, a full node could simply look it up. Full nodes also have the responsibility of propagating the ledger to other nodes to make sure it matches up with what the mining nodes report and all of the other full nodes. If it does not, then the node is no longer trusted.
As for light nodes, they are very similar. They can relay and create transactions, but they store a much more compressed version of the ledger than a full node. That way, light nodes can still operate and be trusted by the network, but they simply don’t need to store the 200GB ledger. With that being said, light nodes do not have the same level of importance as full nodes. You can’t run a network with only light nodes.
Also, it’s important to note that without a connection to a node, you cannot make a transaction on the Bitcoin network. By sending transactions through companies like Coinbase, FTX, or even Trezor, you are trusting that they will create a transaction in the Bitcoin network using their node under your name.
Blockchain and Mining Algorithms
The Bitcoin blockchain is set up as an ordered back-linked list of transactions. Each new block added to the blockchain refers back to the previous block. The visualization of blocks stacked on top of each other results in the use of terms such as “height” to refer to the number of blocks since the first block, otherwise known as the genesis block.
The first thing we need to talk about when discussing PoW mining for blockchains are hashing algorithms or, more specifically, the SHA-256 hashing algorithm.
SHA-256 is used in security protocols such as SSL, TLS, SSH, and Bitcoin. The result of applying the SHA-256 algorithm to data is a 256 bit string of 1’s and 0’s.
Any length string can be converted down to the 256 bits and if that original string is changed whatsoever, the result changes drastically. It’s also important to note that the result, or the hash, is completely unpredictable and cannot be reversed without pure guess and check: SHA-256 is a one way algorithm.
The nonce is a random number that when hashed and put into hexadecimal, has a certain amount of leading zeros:
In the example above, the nonce has 17 leading zeros. For a miner to “win” a block, they must guess and hash trillions of numbers until they get one with the same amount or less leading zeros as the nonce. It is pure guess and check.
This is where most of the energy comes from in Proof of Work mining. Miners will set up energy demanding rigs with as much hashing power as possible which usually entails an arsenal of GPUs or ASICs (application specific integrated circuits) which are built specifically to provide as many hashes per second as possible.
Once a miner has guessed and published the nonce, it is very easy for the rest of the network to verify that it is the correct number. All they need to do is run the reported number through SHA-256.
They fill out the block with whatever transactions from the sort of “Bitcoin waiting room” called the mempool they want (which usually includes all of the transactions that offer the greatest fees) and then they allocate the coinbase transaction to their address. The coinbase transaction is the first transaction in each block which gives the block reward to the miner. You can check out an example here.
The block reward, which is currently 6.25 BTC, is added to the sum of the fees of the transaction and then sent to the miner. The coinbase transaction doesn’t actually get sent to the miner until 100 blocks, or 17 hours, later. It is also cut in half every year and will be zero by the year 2140.
Each block in the blockchain follows this set structure that allows it to connect to the block before it and the one after it.
It’s pretty straightforward: the block size states the size of the block, the transaction counter tells how many transactions there are in the block, and the transactions are then listed. Full nodes download all of these and the block header while light nodes only download the block headers.
With that being said, block headers are a bit more complex than just an identifying string. Here’s how it’s set up:
The block header is then hashed to create the “Previous Block Hash” for the next block. The Merkle Root is the simplified version of the transactions list shown in the structure of the blocks.
Essentially, each of the transactions are paired up and hashed together, then the hashes of the pairs and paired and hashed and so on until you have a single hash. This allows light nodes to store a version of the transactions without taking up too much disc space.
Difficulty and Attacks
The target difficulty is what regulates Bitcoin’s block production time. Currently, one block on the Bitcoin blockchain is produced, or mined, every 10 minutes. With that being said, this is a highly calculated metric and the fact that it stays relatively constant is impressive.
The total amount of hash power from all of the miners around the world is constantly fluctuating, but so is the difficulty. The difficulty essentially dictates how hard it is, or how many guesses it takes, to get the correct nonce.
The Bitcoin network updates its difficulty around once every two weeks in order to balance out the ratio between it and the total hash power to output a 10 minute block.
The less total hash power across the network, the more prone it is to something called a fifty one percent attack.
This attack happens when one mining node controls the majority of the hash rate. When this happens, that node has the ability to change transactions or claim entire blocks that have already been mined. Once they change a transaction in a previous block, the block header changes. So, in order for them to make the malicious block accepted across the network, they have to re-mine all of the blocks up to the honest chain. With the majority of the hash power, they can outpace the mining rate of the honest nodes and ultimately publish a faulty ledger.
However, the global hashrate is sitting at around…
150,000,000,000,000,000,000 hashes per second
…which, to achieve the majority of, would take trillions of dollars of hardware to mimic.
Proof of Stake
Let’s imagine a PoW system in which I am the only miner. In this system, only 1 block is mined every hour and in return I am given a 1 COIN reward. Given I put in $10 worth of energy into mining that block, I would then sell the COIN for anything above $10 for profit.
$ X of energy expended = I demand more than $ X from the market.
However, once more miners are introduced, there is competition. A barrage of 1-upping (energy cost) occurs until it is no longer profitable to use more energy. This then drives up the energy cost hence the price.
Whether it’s one miner or one million, a resource (in this case energy) is essentially being traded for the COIN. This, in turn, gives the COIN a value which is equal to or greater than the cost of the resources expended to mine it.
In the Proof of stake (PoS) consensus algorithm, these resources are non-existent. And, if nothing is being traded for the cryptocurrency in these systems, then they are not worth anything.
Money is only as valuable as what it can be traded for — there is no way around this. If the block reward is $1000, the miners are going to find any way they can to spend up to <$1000 to get a better chance (or bigger chunk) of the reward. For example, a grinding attack is one of many PoS attacks that allows miners to get around the entropy of PoS block rewards.
The attacker has a small amount of stake that they compare to the history of the blockchain to find a block where their stake would have won. They then modify the next block’s header until their stake wins once again.
To find the correct header, they use the brute force of randomization. They then are stuck competing with other attackers which creates a scenario similar to that of the nonce in PoW. This uses a lot of energy. And this energy usage is no different to PoW’s.
The price of a cryptocurrency is a great indicator of the amount of energy being used to add blocks. Just because it is not being shown on the blockchain, doesn’t mean it’s not being used.
Bitcoin and PoW are transparent about their energy use. Although PoS may seem like the better option because it saves energy, the use of energy (or some other resource) is necessary in a consensus algorithm that includes rewards.
Current Mining Hardware
Current mining hardware is utilized to output the maximum amount of hashes for the amount of energy used. Because of this, miners have evolved over the years to create better and more efficient hardware.
In Bitcoin’s early days, when the difficulty was still relatively low, blocks could be mined on any laptop using its processor. In today’s climate, a CPU producing 20MHz would take more than 250,000 years to find a block.
And as the industry progressed and the network demanded more hashpower, miners competed to find the block with GPUs. In late 2014, miners across the world were mass buying GPUs of any kind from any retailer they could get their hands on. GPUs, although not SHA-256 specific, are incredibly good at processing a large amount of guesses per second.
GPUs can be overclocked to the miner’s wishes, can run parallel with APUs, and can be combined together on only one CPU. Also, their high parallelism and throughput made them the perfect candidates for a new era of mining.
Eventually, GPU mining became less profitable, so miners started to buy programmable circuits in the form of FPGAs to better deploy hashing algorithms in their rigs.
GPU shortages caught the attention of many in the gaming industry and caused a negative stigma to be around the term “Bitcoin miner”. However, amidst the 2017 bull run, GPU Bitcoin mining became less profitable. At the same time, alt-coins had risen to popularity. With their low difficulty level and high “hype” potential, miners began using GPU and FPGA rigs to mine PoW alt-coins which they would then convert to Bitcoin or United States dollars.
At this time (and up until now), Bitcoins were mined mostly using application specific integrated circuits, or ASICs. These “server-esque”, special purpose computers are manufactured specifically for Bitcoin mining.
They are designed to be run constantly throughout their lifetime and usually require a high level of expertise to manage and tons of cooling. To achieve this, massive mining centers are set up with sometimes up to thousands of ASICs in locations with low electricity cost, high network bandwidth, and a cool climate.
The Canadian energy grid relies on both renewable and non-renewable energy sources. Hydro, wind, solar, and biomass accounted for more than 80% of Canada’s total electricity generation.
The effort is both private and public, with governmental subsidies in place as well as multiple companies working to provide cheaper electricity to the nation.
One of the largest issues Canada faces is connecting a large grid together, as a large grid can support the electrification of every part of the country, rather than having provinces or cities take the task for their respective communities. A plan to combine wind, hydro, and solar to create a reliable grid is in the works from a governmental program. Companies, however, are both working on a general solution for the grid and for specialized, targeted solutions regarding energy distribution and use.
Bitfarms is a Canadian company based in Quebec focused on mining Bitcoin with a completely renewable, hydropower grid. 82 Megawatts of Power are used to produce 1.6 exahashes every second, or 1.6 quintillion hashes/second, but their current energy portfolio is 159.5 Megawatts.
23 thousand miners have been used to mine Bitcoin at a cost of around $9,000 per BTC, compared to the current price going for around $63,000. The environment is passively cooled, and 96% of all energy goes directly into generating revenue, compared to the average 83% for data centers.
Hut 8 Mining is a market alternative to a Bitcoin wallet, as it is a publicly traded Bitcoin mining company. If the value of Bitcoin goes up, then the company increases in value, which means the stock increases in value.
There is an abundance of natural gas as well as wind and other green energy sources that are used in two mining centers in Alberta, Canada. In total, there’s a 109 MW capacity amongst the two centers, with a hashrate of 1.37 exahashes. There is an additional hash rate of 1.3 exahashes, bringing the total production to around 2.7 exahashes, which equates to around 20–25 Bitcoins per day.
In Q4 of 2020, the CBECI reported that around 71% of PoW mining took place in China, the majority of which coming from four standout states: Xinjiang, Sichuan, Inner Mongolia, and Yunnan. Collectively, these states produced 63% of the global Bitcoin hashrate during Q4 of 2020.
Although the energy grids differ from place to place, these provinces can generally be grouped into two categories: coal powered with large contributions from wind and solar, or heavily hydro powered.
Although Xinjiang and Inner Mongolia are heavily coal powered, their grids are made up of 35 and 30 percent wind/solar according to Bloomberg. Despite the abundance of coal power in the two provinces, PoW miners prefer to use the cheaper, cleaner renewable sources.
By contrast, the United States grid was only 20% renewable (inclusive of hydro) in 2020 according to the Energy Information Administration. Given the recent move of Chinese miners due to the Chinese mining ban, a lot of new demand will come to the United States where the grid is a lot more punishing to the environment.
If Bitcoin were mined exclusively in Xinjiang and Inner Mongolia, it would still be more renewable than if it was mined with the average energy mix of the U.S. However, that’s not to say that the United States grid is inherently worse.
The reason for the low cost in renewable energies is the low population density near the energy producers. The four provinces mentioned above only collectively house 12.7% of the Chinese population but they have mass quantities of energy resources.
The supply far outpaces the demand and as a result, energy is sometimes wasted or unused. The issue is that these energy producers don’t have the ability to redirect their energy production to more densely populated areas. Bitcoin and other proof of work miners move in and buy up the unused renewable sources for cheap in a win win scenario.
In 2016, China used 40.7 TWh worth of wind and 11.5 TWh of solar power alone. Yunnan alone used 31.4 TWh worth of hydro power. China as a whole used 100 TWh on average worth of hydro, solar, and wind energy in 2016 and 2017.
All capturable electricity comes in through the movement of a turbine in a generator, but the difference comes in how the turbine is pushed. In the case of fossil fuels like oil and coal, the fuels are put in a furnace that boils water to produce steam, pushing a turbine.
Natural gas power plants work through a combustion chamber and compressor, pushing the turbine to move. Alternative energy sources function similarly, but the capturing of the energy to push into a turbine differs, with solar, wind, hydro, geothermal, and flaring energy all as different sources.
Hydropower is one of the oldest sources of energy, dating back to the Ancient Greeks. Essentially, fast water flows through a turbine, which can be linked to a generator to create electricity. There are two main types of hydroelectric river power; a dam system, and a river barrage.
The Dam and Reservoir System
For this system to work, a dam must be built on top of a reservoir. This dam blocks the flow of water nearly everywhere, leaving a small intake for water to flow through.
The water then flows to a generator, pushing a turbine to create electricity. Once past the turbine, the water flows into a river.
This system supplies a constant supply of electricity, as it doesn’t require a rushing river to supply energy. For the system to work efficiently a reservoir is required to function, meaning that it’s not a scale efficient solution.
The River Barrage
A river barrage functions off of a river and not a reservoir, meaning that it can be placed at nearly any river. The water from the river flows into a turbine through a generator, creating electricity.
The main issue with the barrage system is that it is completely dependent on the flow of water and not on energy demand, meaning that additional systems to store energy are required to turn the system into a consistent energy source.
Hydropower is more than the two main sources of energy from rivers, however. Water can be utilized for energy through tides, rain, and even energy storage.
Tidal energy comes in the form of harnessing the oceanic tides, where kinetic energy from the tides are converted into electricity through a turbine. Both barrages and reservoirs have been built.
Since the ocean is in itself a large reservoir, it isn’t necessarily a scalable solution but it is a worldwide one. Tides aren’t just another way to implement barrages and dams, however.
A theoretical energy source can come in a massive, worldwide dam. A massive dam like structure would be implemented perpendicular to the coast along with a barrier parallel to the coast, creating a T like shape.
Tunnels are implemented within the dam, with a turbine linked to the flow of water. There’s no reservoir or stream that has to be built in place, as all that is needed is a coastline and shallow waters.
Natural Gas Flaring occurs when oil is extracted from the ground. Gas flares out as a byproduct of oil mining, and is either burned off or released into the atmosphere.
Releasing the natural gas into the atmosphere is deadly to the environment on both a macro and micro scale; Methane, the primary byproduct of natural gas, has a 34x greater potential for global warming than CO2, while on a micro scale flaring has chemicals that are toxic to babies, causing preterm birth and lowered weight.
If not handled properly, tragedies like the Bhopal Gas Tragedy are likely to occur. Burning the flared gas on the other hand releases CO2 instead of methane into the atmosphere, making it a better alternative. Electricity can also be captured from burning the byproducts.
A natural gas generator can be attached to the flare sites, which provides a use for the wasted gas and requires little transport of the fuel. A clean, supervised burn can both reduce the harm of the emissions.
Around 538 billion cubic feet of natural gas, or 1.2% of all natural gas mined in the US, was vented and flared in 2019. This could potentially create millions of dollars in electricity that can then be used for Bitcoin mining.
Wind power has been around since the 17th century, with windmills being used to push grain through a feeder. Currently, massive windmills push a turbine with the power of the wind.
Wind power is an energy source that can be scaled up and scaled down, with only a single turbine needed for microgeneration and large wind farms to power an entire grid. These wind turbines can be placed both onshore and offshore to capture winds across the world.
A traditional wind turbine captures rotational energy in wind and converts it into electrical energy. Both vertical and horizontal blades can be in place, with a vertical blade being able to capture wind in all directions but being much less effective compared to horizontal blades.
Horizontal blades can also be physically turned to capture the most energy possible. These turbines have to be incredibly efficient, as with a doubling of wind power the energy available becomes eight fold.
Constructing the core of a turbine is a fairly simple process; a large blade is attached to a low speed shaft which is connected to a gear box, which then is connected to a high speed shaft which then powers the generator.
The blade is the mechanism where rotational energy is transferred into mechanical energy. They are traditionally made of steel with a fiberglass and carbon fiber cover, usually around 40–90 meters long. To capture the most energy possible, three blades are sectioned equally, with 120 degrees of separation between them.
The Shaft and Gearbox
As the blades rotate, a low speed shaft moves at the same rotational speed. The shaft is connected to a gearbox, which multiplies the speed with a series of gears that rotate at a speed inversely proportional to the size of the gears.
A variable speed generator converts the mechanical energy sent by the gearbox into direct current electrical energy, which is then fed through an inverter creating Alternating Current, which is then sent through power lines to be used by the consumers.
The Future of Wind Energy
Wind energy has a promising future. With the development of offshore wind, more energy can be captured with fewer environmental issues compared to onshore wind.
There will also be more microgeneration, as consistent energy transfer is hard to come by in rural areas. In terms of the actual technology itself, bladeless turbines can be the solution to countering the issues with blades in current creation.
Vortex Bladeless’s solution is to utilize a principle called Vortex Shredding. For the system to work, a cylinder is fixed vertically with an elastic rod, which then oscillates by wind to create the alternating current.
This solution requires an oscillating system and an alternator, but no blades, gears, or any rotating parts. One of the largest issues with offshore wind is the corrosion of the turbine, and this could be the solution. These cylinders also take up less space than a traditional turbine, meaning that more can be placed in the same area.
Over the past 125 years, solar energy has turned sun rays and their heat into electricity. Solar panels are made of silicon, where photons from the sun agitate it where a current is formed. The current is then sent to an inverter to turn from direct current (DC) to alternating current (AC), where we can start to use it.
Solar panels at this point in time are strong in certain areas, as they provide both an investment and a steady flow of current for those who choose to purchase them.
That said, they haven’t been greatly efficient. In many areas, solar cells seem to be a never ending investment due to cleaning and repair, with little energy output. In many cases, direct solar energy from family to family may not be the most efficient use of resources. To counter that, there are multiple other forms of solar energy that can be used.
Take, for example, solar fuels which are simply fuels that use the energy of sunlight directly, most typically being hydrogen, water, and carbon dioxide. The main advantage of these fuels is storage; storing a tangible fuel is a lot easier than storing current. These fuels can be distributed to a fuel cell in order to create electricity.
For a fuel cell to work, electrons from hydrogen in the fuel flow through the system, creating a current.
One of the most promising solutions for fuel is hydrogen, but to store and liquify it takes a lot of energy. Hydrogen peroxide could solve that. Storage can happen in any dark plastic barrel, and the fuel cell doesn’t need a membrane, lowering the cost and resources needed to produce a cell.
The production of hydrogen peroxide isn’t efficient right now, but that’s where solar energy comes in. A catalyst can be used with water and oxygen to utilize the sun’s energy and shine light on the combination, creating hydrogen peroxide.
Hydrogen itself can be created through water electrolysis, which is running electricity through water. This can then either be turned into hydrogen peroxide or even function as part of an engine to get hydrogen fuel.
Natural Photosynthesis turns CO2 and H2O into sugars, with the help of sunlight. This process can possibly be replicated, turning a greenhouse gas into a fuel. Plants utilize a chloroplast, which functions as a light absorber (turning light into energy) and a catalyst to break down CO2.
Currently, the main method of artificial photosynthesis is utilizing electrolysis on CO2 and H2O to get CO and Hydrogen, and then turned into an alcohol with the help of bacteria, creating a fuel.
These fuels have the potential to be very efficient, with a possible cost of $1 a gallon, creating a cheaper fuel than gasoline. This however is a very futuristic idea, and is not something the entire world can rely on right now.
Other alternative energy sources include geothermal energy, biofuels, nuclear energy, and piezoelectricity. El Salvador has taken this to the next level by harnessing the geothermal energy of a volcano; using it to mine Bitcoin.
The long lasting impacts of the Bitcoin network will help bring billions of people in the world to a better financial system.
The ins and outs of Bitcoin and other proof of work cryptocurrencies utilize alternative energy sources as miners are forced to get creative, and clean, with their electricity intake.