For many years, Bitcoin has been accused for being a very dirty player by environmentalists when it comes to its electricity consumption. The entire Bitcoin network is estimated to consume as much as the entire country of Switzerland consume per year, and the rapid emergence of Bitcoin and other cryptocurrencies has taken many in the energy sector by surprise. Because energy infrastructure is expensive and hard to build, questions regarding the energy consumption that the Bitcoin network uses are many and urgent due to analyzing the cost and environmental effects of the electricity system. In this article, I will touch upon some numbers and give my thoughts to this subject.
Nikolaj Rosenthal – CEO of Evonax.com
While no one can argue that Bitcoin mining consumes a lot of electricity given that thousands of very powerful computers run all the time, the correct way to look at this problem is not about the total consumption (in numbers) that the Bitcoin network use, but to compare the efficiency relative to alternative solutions we know from traditional centralized systems like VISA or Mastercard. And why is that? Well, let me elaborate on this.
Being in the crypto space for many years, I have seen this subject over and over and the one that seems to be the most popular is Bitcoin Vs. VISA transactions. Let me remind you that Bitcoin is so much more than just a payment system, but for the sake of the argument, lets stick with this comparison. Through my years in the space, I have read numerous articles stating that Bitcoin is a very inefficient system and a Ponzi scheme that is polluting the world. Digiconomist.net released such article a little while back comparing Bitcoin to VISA and in my view, this comparison is so flawed, it is like comparing apples to oranges. Besides the fact that Bitcoin is much more than a piece of a payment network like VISA, which I mentioned above, Bitcoin is a full currency system. VISA itself is only a tiny fraction of such currency system which requires the banking system for its payment system to work, so in order to compare those two, you need to actually include some of those costs embedded to make a meaningful comparison and give the audience a clear picture of the current status. Therefore, let us take a look at how VISA actually works.
How VISA works?
I am confident that everyone is familiar with VISA, hence no introduction is needed, but how it actually works and who else is involved is a more complex scenario. Therefore, let us dive into the dynamics of how a VISA transaction works when you swipe your card (or use your phone these days). First, the data in your VISA card is sent to a front-end processor that handles payment information on behalf of the merchant you used to pay and the bank where the merchant’s sales receipts are deposited. The bank where the merchant sales receipts are deposited is referred to as the acquiring bank. The front-end processors forward the information in the credit card to the relevant card association (in this case VISA but could be MasterCard etc.) which then figures out which bank your card came from, the issuing bank. Then your payment information will be sent to a payment processor representing the issuing bank to validate that the information is correct, and you have a credit or balance. Finally, it is time for the transaction to flow back from the bank to the processor, then to the credit card association, then to the front-end processor, then to the merchant and finally to the acquiring bank for the transaction to actually occur. By now, your credit card information has crossed several databases and servers out of which VISA is just one piece in the entire eco-system or transaction chain.
So, with my explanation above, I hope to achieve clarity about the VISA network and to say that just comparing VISA transaction costs with Bitcoins costs is not a fair measurement, as we need to include the entire banking system's electricity consumption since the foundation for VISA lies within the banking system. VISA is only a small piece of a transaction, while Bitcoin is the entire infrastructure needed to run a currency and payment system.
How much electricity does the banking system consume?
Oh well, it is almost impossible to give a clear answer to this question, however it is quite important to make a proper try since the devil lies within here. So, let us try to estimate how much electricity the traditional banking system consumes. Bear in mind that my estimates will be rough calculations that attempt to provide an overview to emphazise the argument.
First of all, let us look at how many banks are out there. A quick research does not provide me with any clear numbers of how many banks are out there, but I get different estimates ranging between 14,600 to 25,000 or even more than 60,000 quasi bank associations that are almost as rigorously regulated as banks. For the purpose of this calculation I will use 30,000 as the number.
Secondly, we need to roughly estimate how much electricity banks consume. For the purpose of this comparison I will only include some elements of the banking system: Server costs, branches costs and ATM costs. This should be efficient enough to make my points clear even though we know that there are much more to it, for example banks and its employees who consume a lot more electricity from other sources.
The next estimate we need to add is how many servers each bank is using to run their infrastructure. If we use a very conservative number of an average of 100 servers per bank and a server consumes 400Wh on an average basis, this means that banks consume in total 800Mwh. Bear in mind that this number most likely should be higher, since banks need servers not just for the banking infrastructure but basically all banking operations like ERPs, CRMs, accounting systems, websites etc.
Let us add the electricity consumption of the branches to the calculation. According to the World Bank there are 12.5 branches per 100,000 adults in the world, and if we estimate the world population is 7.6 billion people and 70 percent are adults, this gives us a total of 665,000 branches.
Looking at the consumption per branch is a bit more complex, as there are several factors to take into consideration like the size of the branch or amount of employees as well as inventories consuming electricity such as lights, computers, heating system etc. Furthermore, they are not open 24/7, so after a digging into and reading a couple of articles, I will use a very conservative number of 10kwh per branch assuming an average branch has 10 light bulbs, two air-conditioning units that are only in use 20% of the time and 12 computers running an average of 12 hours a day for 20 days a month throughout the year.
Thirdly and finally, we need to include the ATM network into this calculation that the majority of banks use. According to the ATM industry association there are more than 3 million ATM's worldwide, but I will use this as the total number for the calculation. For small ATM machines, the average daily power consumption comes around 5.52kwh.
So, all in all, total consumption for banks during a year, only on those three elements I included, is around 26Twh on servers, 58Twh on branches and 13Twh on ATM's and a total of close to a 100 Twh a year.
According to the article that Digiconomist made, Bitcoins annual Twh consumption is somewhere between 47.74 and 75.15 Twh, so we will use the medium which is 61,5 Twh, and thereby it means it is around 40 percent more efficient than a very conservative calculation of the cost of a global banking system. I am well aware that the banking system handles more than just payments and currencies and that is why I chose only to factor three elements in to the calculation even though there are many more factors to consider, but the difference here is quite significant, and I do not think it makes that big of a difference to the general picture. However, let us say it actually does make a big difference, these numbers will stay the same, but I believe Bitcoin will become more efficient down the road due to several factors that will separate those two industries even more.
Firstly, miners who validate the Bitcoin blockchain constantly move to the latest gear on the market, ASIC miners keep improving and the cost per Th becomes much more efficient. It is easy to compare the efficiency of miners from 2016 and 2017 and until now and see the difference. Secondly, the Bitcoin network itself is upgrading constantly to improve its efficiency. SegWit and lightning network are just two examples of such improvements, and I believe more will come. All these improvements will make Bitcoin more efficient with reduced fees and the electricity consumption per transaction must become lower than it is today. Lastly, we have not even considered Ethereum as a solution to all the things that Bitcoin does not offer that the banking system offers, but with the nearly move to ETH 2.0 and PoS, it will make the cryptocurrency industry look like a little sheep in comparison to the banking industry. So please stop the hypocrisy, environmentalists.
Sincerely, Nikolaj Rosenthal – CEO of evonax.com