You’ve heard Bitcoin uses lots of energy. This is true.
You may have heard it wastes energy or does something useless with it. That is false.
Here’s how Bitcoin uses energy and why it uses it:
Why Does Bitcoin Use Energy?
Bitcoin uses energy to ensure that every copy of the record of who owns which bitcoins is identical. Making actual copies of that record, known as the blockchain, uses hardly any energy at all. What does take energy is ensuring that nobody can erase any previous entries and that only one new set of entries can be added every ten minutes on average.
Let’s consider an example. If you own some bitcoin, someone had to send it to you. That transaction was recorded in the blockchain, which, as I’ve said, is the record of where bitcoins are. If someone could go back and erase that record then you wouldn’t have that bitcoin anymore. So the first part of the answer to the question “Why does Bitcoin use energy?” is “To prevent anyone from erasing any of its records.”
How Does Bitcoin Use Energy?
Bitcoin needs to create a digital record that can’t be changed. This is done by literally baking energy into each record so that erasing that record would require using more energy than all the energy which comes after the record is created.
Let me simplify with an example. If I sent you some bitcoin a year ago, the only way to erase that transaction (thus taking your money away) would be to try to re-write Bitcoin’s history since then. That would require using more energy than Bitcoin used over the entire year since that transaction was first recorded. That would take so long that by the time it was done, there would likely be another year or more of records to try to catch up with. It would also be incredibly expensive because energy costs money. And it might be even physically impossible given how much energy that would require. It’s simply too difficult a task to accomplish.
So bitcoin uses energy to build an essentially un-editable record of all the bitcoins in existence and who owns them. (Sidenote: A fancy word for un-editable is immalleable.)
Bitcoin is for Anyone and Everyone
Anyone in the world can make a copy of this record, keep it up to date, and ensure is completely accurate and not tampered. Bitcoin relies only on well-tested mathematical functions that let anyone prove with very little time and very little energy exactly how much energy went into creating each individual part (a block) of the entire record (again, the blockchain). This way anyone can see for themselves that the record they hold is the true one. It also makes it hard to stop Bitcoin, because tens of thousands of people all over the world operate it.
Why Do People Put Energy Into Bitcoin?
Bitcoins are very scarce. There will only ever be 21 million (but each can be divided into one-hundred million parts). People choose to use costly energy because it’s how they get to own the newly created, scarce bitcoins.
Simply put, Bitcoin pays people in bitcoin to put energy into Bitcoin. That may sound a little circular so let me expand it out. Bitcoin pays people with SCARCE money for them to do work that SECURES that money for the benefit of everyone who uses that SCARCE AND SECURE money. That actually sounds like a very fair system. (If you’re concerned about the environmental externality of this, please read this article.)
Conclusion — Bitcoin Uses Energy to Be the Most Secure Money in History
In summary, because every watt of energy that Bitcoin consumes is used to prevent any altering of its records, Bitcoin is the most secure method of storing money that has ever existed. You can hopefully see that this energy is not wasted, but is put to good use — securing the scarcest, most valuable money humanity has ever seen.
Want more? This entire series (plus a 26th bonus article) is available as a pdf or kindle ebook at https://swanbitcoin.com/whybitcoin.
This is article ten of my Why Bitcoin series.