The miners in the Bitcoin network use the Proof-of-Work protocol. This protocol determines, every 10 minutes, which miner gets the right to write the next block of the blockchain. The winning miner earns the bitcoin transaction fees and the reward of 6.25 newly minted bitcoin. Currently, the fee-to-reward ratio, i.e. the ratio between bitcoin fees vs newly minted bitcoin earned by a miner, is around 3%, down from 5% in 2018 and 16% in 2017. The decline is more pronounced given that the reward of the newly created Bitcoins halves every 210,000 blocks.1

The Proof-of-Work protocol selects the miner who first solves a difficult mathematical problem, which can only be solved by repeatedly guessing and testing whether different numbers satisfy a particular maths equation. The more calculations a miner can perform per second (also called the hash rate), the sooner they can find an acceptable solution, and the higher the probability that they will be the first to broadcast this solution. Because a new block needs to be created on average every 10 minutes, the difficulty of the maths problem is periodically adjusted, so that the total hash rate of the network is enough for the miners to solve it within that timeframe. This means that the total hash rate is a measure of how many miners are competing within the network, as well as the electricity required to solve the problem.

There is an intricate relationship between the total hash rate, the cost of electricity and computers, and the price of bitcoin. An increase in the marginal cost of electricity and computers disincentivises miners to keep maintaining the network, unless the price of bitcoin increases accordingly. If the price of bitcoin increases, more miners enter the network. The increased competition drives up the total hash rate and the total amount of money spent on electricity and computers. However, a high hash rate, and accordingly a high price for Bitcoin, means that it is very difficult to attack the network and falsify the transactions, for example using the 51% attack.2

How much electricity is required to run the entire Bitcoin network? The December 2019 update of the “The Bitcoin Mining Network” estimates the total electricity draw of the entire Bitcoin mining industry in November 2019 to be around 6.7 gigawatt (GW), a 43% increase from June 2019.3 On an annualised basis, this works out to 61 terrawatt-hours (TWh). To put this into perspective, the figure is around 7% of the electricity consumed by the aluminium smelting industry.

Is this electricity “wasted”? Analogously, is the cost of running the Bitcoin network too high? The argument goes that, since the outcome of Proof-of-Work is “just” to randomly pick one miner who will write the new block, nothing tangible is produced and therefore this activity is wasteful. However, this argument misses the point that it is the value of the network, through the price of Bitcoin, that drives the cost through the competition of the miners, and not the other way around. Moreover, we know that randomly picking the winner would lead to a Sybil attack and a collapse of the network, hence Proof-of-Work also produces a stable and secure decentralised network, which has never been compromised in the case of Bitcoin. On the other hand, there are other algorithms, such as Proof-of-Stake, which aim to provide the same level of stability and security, without using any electricity. However, Proof-of-Stake has not been as thoroughly tested as Proof-of-Work yet.