Is Bitcoin Better For The Planet Than The Current Monetary System? | The Market

Bitcoin is far less energy hungry than the traditional payment system, claims a report by Valuechain. The problem is that it lacks independence and a basis for comparison.

German version

“The classic money and payment system uses 56 times more energy than Bitcoin,” says a recent report by Valuechain, a consulting firm for payments. The author, IT engineer Michel Khazzaka, proposes a new method to estimate Bitcoin’s proof-of-work energy consumption. He claims his method is more accurate than the usual Cambridge Bitcoin Electricity Consumption Index (CBECI) estimates and calculates that Bitcoin consumes around 89 TWh/year (terawatt hours per year), almost 50% less than the Cambridge estimate. In comparison, according to his calculations, the classic money and payment system requires 4981 TWh/year.

The report has high hopes for the Lightning Network, the second layer of the Bitcoin blockchain that will enable off-blockchain transactions that don’t consume energy. “Combined, Bitcoin and the Lightning Network are even 194 million times more energy-efficient than a classic payment system,” writes the author.

He said in an interview with Cointelegraph: “Bitcoin Lightning and Bitcoin in general are great and very efficient technological solutions that deserve to be adopted on a large scale. This invention is brilliant enough, efficient enough, and powerful enough to be embraced by the masses.”

One-sided assumptions?

Despite the marketing-sounding language, the report presents itself as serious academic research, with detailed calculations based on nearly four years of research.

Admittedly, the report is worth considering and offers transparent step-by-step calculations. The problem, however, is that we believe the key assumptions are biased in Bitcoin’s favor and the research is not entirely independent.

First, the author, Michel Khazzaka, is a cryptographer and blockchain consultant. He is certainly a competent expert in the field, but he is clearly interested in defending the bitcoin industry and cannot be considered independent. He’s not the first to defend Bitcoin’s poor environmental record out of self-interest. Bitcoin is one of the 30 largest electricity consumers worldwide and, according to Cambridge data, consumes more energy than the Netherlands or Pakistan.

Even a crypto community insider, Cardano co-founder Charles Hoskinson, was quoted as saying, “Bitcoin’s energy consumption has more than quadrupled since its last peak in 2017, and it’s only going to get worse because energy -Inefficiency is built into Bitcoin’s DNA. The CO2-Bitcoin’s footprint will deteriorate exponentially because the more its price increases, the more competition there is for the currency and the more energy it consumes.” In response to this type of criticism, Bitcoin industry players have countered that Bitcoin is more environmentally friendly than gold and uses less energy than the traditional banking system.

What is compared?

The main question now is what are we comparing? Bitcoin is a relatively young system built on cutting-edge technology, and the report compares it to a much older, fragmented, traditional monetary system that, while electronic, was built decades ago. Added to this is the problem of comparing Bitcoin’s current block capacity, which has not yet reached its full potential and has not yet been embraced by the masses, with the much greater capacity of the monetary system, which has grown to its current size over decades to reach.

So there’s a problem with age comparability: we’re not comparing two systems that are the same age. Due to its longer lifespan, the current money and payments system is at least 5775 times larger than Bitcoin in terms of payment volume, as Khazzaka himself concedes. Putting the energy consumption per year in relation to the number of transactions, at a utilization of 24%, Bitcoin consumes 89 TWh/year to process 136 million transactions per year (tx/year); at full capacity it would be 544 million tx/year.

In comparison, the classic money and payment system consumes 4981 TWh/year to process 3200 billion tx/year. So how can you say that Bitcoin uses 56 times less energy when the output in the form of transactions is so wildly different? How much would bitcoin consume to process 3200 billion tx/year? Infinitely more, although the Lightning Network will bring much greater efficiency.

Summary table from the Khazzaka report:

Source: «Bitcoin: Crypto-payments Energy Efficiency», Michel Khazzaka, SSRN

The author acknowledges that the classic system is optimized for large volumes, but he believes that this older system had more than enough time to optimize its energy consumption and it didn’t. That is certainly true.

However, his main argument is that Bitcoin is superior in terms of scalability, while it is less convincing in terms of energy consumption: «We can observe that the classical system is over-optimized to consume less energy per transaction, by trillions of transactions per year at a relatively slow pace of between 2 and 7 days. This over-optimization and specialization results in it being fragmented, fragile and less able to meet today’s instant payment needs. Bitcoin, on the other hand, has a higher performance ratio and is able to scale very efficiently with the Lightning Network.”

Asymmetric calculations

If you take a closer look at the comparison, it doesn’t seem entirely fair. Although Khazzaka claims his report is “biased in favor of the banking system,” his calculations appear to be asymmetrical and in favor of Bitcoin. He compares the total energy consumption of the global money and payment system with the energy consumption of Bitcoin. To do this, he extends the scope of analysis for the classical system to all its aspects, including: banknotes and coins, cash management in ATMs, card payments, point-of-sale payments, banking and interbank energy consumption, cash transportation and physical banking infrastructure.

On the other hand, he limits the scope of analysis for Bitcoin to mining and transactions (i.e. all the hardware used for mining and processing and calculating the precise energy consumption of the blockchain proof-of-work) and claims that these are equivalent. He doesn’t include the manufacturing of mining units, claiming that this is tantamount to manufacturing ATMs. What about the consumption of the huge crypto exchange infrastructure? This is not mentioned in the research paper.

Why is Bitcoin not compared to the dollar payment system?

Also, comparing just Bitcoin and not the rest of the crypto universe (which accounts for 60% of the total crypto market cap) to the whole of the global financial industry and payment system is questionable. As the dominant cryptocurrency, why shouldn’t bitcoin be equated with the dollar’s payment system? In short, the comparison seems to favor bitcoin.

Perhaps even more compelling is the notion that things will become much more energy efficient with the Bitcoin Lightning Network, the additional Bitcoin blockchain layer that “has an important ability to increase transaction throughput exponentially without a proportionate increase in energy expenditure.”

Also compelling is the idea that traditional payments should adopt the blockchain if reliable calculations show that cryptography will advantageously replace older, cumulatively more polluting technologies. However, this has yet to be proven. What would the environmental footprint of a world made up of 100% Bitcoin or cryptocurrencies compare to the current traditional system? That too has yet to be discovered.

Myret Zaki

Myret Zaki started as an analyst in a private bank in Geneva in 1997, where she learned the basics of company analysis.  In 2001, she moved to the daily newspaper

Myret Zaki started as an analyst in a private bank in Geneva in 1997, where she learned the basics of company analysis. In 2001, she moved to the daily newspaper “Le Temps”, where she headed the finance department for nine years. When the financial crisis broke out in 2008, she wrote the investigative book “UBS on the edge of the abyss”, for which she received the Swiss journalist prize. In 2010 she switched to «Bilan»; from 2014 to 2019 Zaki was editor-in-chief of the magazine. Between 2010 and 2016, she wrote three more bestsellers about bank secrecy, the end of dollar reserve status and the rise of shadow banking. Zaki holds a BA in Political Science from the American University in Cairo and an MBA from the Business School of Lausanne. Today she is Head of the Faculty of Communication at the School of Journalism and Media in Lausanne.

#Bitcoin #Planet #Current #Monetary #System #Market

Leave a Comment

Your email address will not be published.