The role mining can play in enabling energy grids to provide greater utility at lower cost is completely misunderstood.
The mainstream media mistakenly portray bitcoin mining as wasteful. Nothing could be further from the truth. Bitcoin mining provides an economic bid for otherwise unusable, excess energy. Bitcoin will propel humanity to abundance.
To discuss bitcoin mining, one must first understand how it works: Proof-of-Work and the difficulty adjustment.
By itself, proof of work would not be sufficient to secure the Bitcoin network. Miners would quickly adapt by specializing in solving this one kind of puzzle, improving the efficiency of their miners (CPUs → GPUs → ASICs), increasing the number of miners and thus growing the overall hash rate by leaps and bounds. This competitive rush would result in ever briefer intervals between successive blocks, with bitcoin being issued at a rate far greater than was called for by the original supply schedule.
When blocks are being mined too quickly (less than 10 minutes between blocks on average), as can often be the case due to increasing hash rate coming online, the puzzle becomes harder at the two-week checkpoint so as to slow the rate of mining. On the other hand, when blocks are being mined too slowly (more than 10 minutes between blocks on average), the puzzle becomes easier so as to accelerate mining back to the targeted equilibrium rate of 2,016 blocks per fortnight. At this pace, the designated halvings every 210,000 blocks take place at approximately four-year intervals.
Over the long run, this homeostatic feedback loop determining mining difficulty generally balances out any deviations from the planned rate of 2,016 new blocks per fortnight. However, when rapid increases in the total hash rate are more common than declines in the mining difficulty, this cumulative slight imbalance caused by Bitcoin’s exponential increase in mining power has led to block reward halvings that occur a few months sooner than expected. In practice, when the hash rate rapidly increases, the upward difficulty adjustment every two weeks isn’t nearly enough to fully counteract this trend of blocks arriving sooner than planned. This is ultimately why the first several Bitcoin halvings (November 28, 2012; July 9, 2016; and May 12, 2020) have been about three years and three seasons apart.
Wasting any power at all increases costs for everyone by lowering the demand curve below the available supply. In order to get the same rate of return, producers must increase prices to compensate for the resources wasted in developing sources of excess power capacity that aren’t always able to find a buyer.
For example, let’s imagine there is a rural hydro plant that has a fixed 5,000 megawatts available. The operators of the facility want to achieve a profitable return on the operation, as it costs a lot of money to build and maintain the plant. The consumers in the rural town are price inelastic, as they have no alternative sources of electric power and must resort to manual labor whenever electricity does not suffice. Currently, the town only uses 3,000 MW out of the 5,000 MW available. A bitcoin miner comes in and purchases the remaining 2,000 MW. The rural residents are no longer on the hook and are thus freed from having to subsidize excess power that they don’t even use. Now, the rural hydro plant is able to lower consumer prices for electrical power while earning the same rate of profit. A win-win for everyone.
**The author generated this image with OpenAI’s DALL-E. Upon generation, the author reviewed and published the image and takes ultimate responsibility for the content of this image.
This is a guest post by Interstellar Bitcoin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.