Bitcoin and Energy Consumption

In the last few months I feel like that there is no shortage of news and interest in cryptocurrencies.  Despite this news avalanche on virtual currencies, a very unique take on Bitcoin appeared in the New York Times highlighting the extreme amount of energy that it takes to mine a single bitcoin.  Several analysts in the article stated that ” … the computer power needed to create each digital token consumes at least as much electricity as the average American household burns through in two years … “.  That is a shocking amount of energy!

The average US home uses approximately 10,766 kilowatt-hours (kWh) per year at a cost of $2155.  This puts the electricity cost of 12.5 bitcoins at $4310.  Is that the true value of the currency? Or do we need to add the cost of computing equipment and labor of the programmer?  Ultimately, I think there is very little intrinsic value in bitcoin besides these real costs – there is limited consumer faith and no government backing so I find it hard to conceive the true value.  Is there anything I can buy on day-to-day basis with bitcoin?  The Economist does a BigMac index across currencies and countries – if it were possible to buy a BigMac with bitcoin, would it be the same price across all countries?  There are many valuation problems with this and any other cryptocurrency; especially since these currencies are not readily used as legitimate payment options.

I am also fascinated by the bitcoin mining process and that the mining problem algorithm is designed to increase in difficulty so that it will take generally around 5 minutes to mine a block of bitcoin(12.5 bitcoins).  This unfortunately means that as the problems get more difficult more computing power will be needed to brute force solve the mining problem(which is apparently the only way to solve the problems!) and with more computing demand there will be an increase in energy consumption.

Winning a bitcoin block is simply accomplished by solving the mining problem first.  I was thinking of ways to encourage using less energy and thought about rewarding miners by granting the bitcoin by leveraging this ratio:

time to mine/energy consumed

You would have to limit the number of participants considered for winning the bitcoin block and also have to come up with a scheme to ensure that everyone was reporting energy consumption accurately and truthfully.  For example, only the first 100 solvers are considered and they must submit energy consumption logs from approved auditing software.

Not a perfect solution, but I think options need to be considered to reduce the energy impact of future technologies.

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