- Digital Currencies
Revisiting Proof of Work around the Anniversary of Crypto Christmas
Around December 2017, bitcoin was the headline on every website and expectations were sky high. This guy was expecting prices would rise to $145,000 per bitcoin, and he wasn’t alone. The actual trajectory was a steep slope downward through most of 2018.
There was a lot of concern that rising prices and growing electricity demand from digital currency mining would create serious problems for utilities and system operators as the market grew. I wrote back in July that the scale of the problem was overblown. What actually happened as the value of digital currencies fell?
Bitcoin Miners Made a Killing in 2017
To understand the effects that the meteoric growth and subsequent evaporation in bitcoin value had on the digital currency mining (DCM) industry, it’s helpful to understand the basics of DCM (check out my blog series for a deeper dive).
DCM miners commit computing power in a race to be the first to solve a difficult guess-and-check problem. The successful miner earns the right to publish a block of transactions to the bitcoin blockchain and receives 12.5 bitcoins. A new block becomes available every 10 minutes. This race, called Proof of Work (PoW), is extraordinarily energy intensive.
Bitcoin Mining Farm
With bitcoin prices near $20,000 in December 2017, a mining company earned $250,000 for every block it mined. DCM companies invested some of that money into new hardware to increase their computational capacity to improve their chances of success. They also had to pay for the electricity that powered their farms. As operations grew, so did electricity demand.
Crypto Market Crashes Hit Miners in the Pocketbook
The crypto market took a nosedive in 2018. In January 2017, Bitcoin was worth $20,000—it is hovering around $3,500 at the time of this writing. This means miners’ revenue potential has fallen from $250,000 every 10 minutes to only $43,500, a drop of more than 82%.
Switching to other PoW-based cryptocurrencies didn’t help much, either. Overall, the digital currency market capitalization tends to rise and fall with Bitcoin, and it dropped from $750 billion to $110 billion over the same period.
Reduced revenue will force miners to cut their operational costs. Despite the 2017 windfall, soon miners will scale down operations to stay profitable. This means fewer mining machines, and by extension, lower electricity consumption.
Difficulty Drops as Miners Leave the Network
Bitcoin and Ethereum are open-source protocols, so anyone can see what happens in the network. As DCM companies increase their computing power to compete in PoW, the difficulty of the math increases to compensate (this ensures a new block is published roughly every 10 minutes). Difficulty peaked in October 2018 and is now dropping, implying that computing power is reducing.
Bitcoin Equation Difficulty
Reduced Difficulty Means Reduced Electricity Consumption
As DCM companies scale down their operations, PoW electricity consumption decreases.
The above chart shows the estimated annual electricity consumption of the bitcoin network. Consumption closely matches the pattern in difficulty from the previous picture, peaking around October 2018 and dropping since. We expect these declines to continue into 2019 as mining operations reach a new equilibrium.
The ultimate question for utilities is where—or if—these values will stabilize. For now, an energy apocalypse driven by digital currencies isn’t in the cards.