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BitCitAdmin in Bitcoin Bitcoin Wallets Blog

Bitcoin Lightning is 96 million times more energy efficient than classical payments.

  • on October 26, 2022
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ABSTRACT

Bitcoin is a cryptographic peer-to-peer electronic token that is most well known as a version of money that allows online payments to be sent directly from one party to another without the need for a trusted third party. Many recent studies evaluate and have been critical of Bitcoin’s energy usage by Proof of Work (PoW) consensus and mining. This criticism has taken place without comparing the energy usage to our current payment systems.

Based on data available we can find the computations needed to compare the current energy usage of bitcoin against the energy usage of the current payment systems we use today.

We can show Bitcoin consumes at least 25 times less energy and can run today with 60 times less energy than current payment systems. On a per transaction and total payment volume, Bitcoin produces equal energy efficiency rates or better.

If we then compare Bitcoin Lightning a layer 2 solution for Bitcoin to the current banking system, Bitcoin’s efficiency is exponentially scalable and efficient, proving to be 1,000,000 times more energy efficient than traditional payment rails on a per transaction basis.  

INTRODUCTION

Bitcoin is designed and built to function as a world global currency and online payment system. This is declared in the first sentence of the Bitcoin white paper: “Bitcoin: A Peer-to-Peer Electronic Cash System.”

Many of Bitcoins detractors criticize Bitcoin for its Proof of Work consensus mechanism accusing it of massive power usage and environmentally damaging. The central bank of Netherlands DNB compared its energy consumption to a country like the Netherlands in the De Nederlandsche Bank paper “The carbon footprint of bitcoin.” Most central banks do not recognize Bitcoin as legal tender but they do recognize the capabilities of the distributed ledger technology (blockchain) in payments, banking, and finance.

The DNB paper did not compare Bitcoin’s PoW energy efficiency with the current payments systems. Therefore it is important to correctly compare Bitcoin functions and energy use with counterparts in the current payments systems.

The weaknesses in the previous studies are as follows:

Use of inaccurate numbers or incomplete methodologies: The Cambridge Bitcoin Electricity Consumption Index (CBECI) lacks the comparison of bitcoin energy usage to the traditional banking and payment systems.

Often partial or anti-bitcoin position: The central bank paper by the DNB “The carbon footprint of bitcoin,” compares Bitcoin energy consumption to the debit card payments and fails to mention that card payments are only an intermediary step of a transaction, this step provides an authorisation for a transaction and later requires inter-bank clearing and settlement before it is finalized. A bitcoin transaction is a final settlement and covers all transaction clearing in one step. This makes their energy comparison incomplete.

For a correct conclusion it is imperative to compare Bitcoin energy consumption to all the parts of the traditional banking system.

We would need to compare bitcoins energy use against:

  • Printing and minting of cash
  • ATM’s
  • Cash in transit
  • Cash at POS
  • Card Payment Systems
  • Banks and Banking Offices
  • Banking Commute
  • Banking IT
  • Inter Banking

My goal is to answer the question of Bitcoin’s efficiency when compared directly to the current payment systems.

RESULTS FOR CLASSICAL PAYMENTS

The evaluation of the energy consumption for complete payment and settlement in our current monetary and payment systems is over 2 quadrillion TWh/yr. Energy(Current System) ≈ 2,252.75 TWh/yr

ENERGY OF BITCOIN

The best and most scientifically precise method to calculation bitcoins energy use is to look at bitcoin miner nodes and hardware units and then based on the required computing power (PoW difficulty) we can precisely estimate the kWh used by each mining unit available on the Blockchain. Today 100% of mining units are a special hardware model called ASIC (Application-Specific Integrated Circuit).

This energy usage can be calculated quite well by looking at the current hash rate and types of miners used today.

At a single transaction level, Bitcoin today is 50% to 300% more energy efficient than the classical system. The range depends on the number of transactions per block.

BITCOIN LIGHTNING

Let us consider the Bitcoin Lightning network compared to traditional payments. The Lightning Network has an important capability to scale the transaction volume exponentially without growing in a proportional rate to the energy input. This provides immense transaction scaling with minimal additional power usage.

CONCLUSION

Today when we transfer 1 dollar from a payer to a payee, there is no direct real transfer of value done between the two. This is due to the fragmented nature of our current banking systems. Once the money transfer takes place between two individuals several banking institutions will settle those transactions using their internal systems.

The payee does receive the money but will never have a direct claim on it. It is an amount that they are lending to the bank, equivalent to a promise: “I owe you” (IOU). The bank owes this amount of money at the central bank. This is an important difference between Bitcoin and the classical money system. A Bitcoin transaction between a payer and a payee is a direct transfer of the asset: bitcoin functioning as cryptocurrency without the need of any trusted third party.

This is why comparing Bitcoin to our current electronic money and payment systems is not comparing 100% similar systems.

In this paper I compare their common promise only from an energy efficiency point of view, ignoring all additional features of both. For instance, Bitcoin is also a programmable form of money with less complexity.

Globally, results prove that Bitcoin uses less energy than our current banking systems even without the inclusion of Lightning and Instant Payments to the benchmark

Today at a single transaction level Bitcoin Proof of Work is in average 0.7 to 3 times more energy efficient than our current payment systems.

When Bitcoin Lightning and Instant Payments are included in the benchmark, we find that a Bitcoin Lightning transaction is in average 345,000 times faster than classical system and 14 times faster than an instant payment

In conclusion, Lightning at a single transaction level allows Bitcoin to become 96 million times more energy efficient than a classical payment and 400,000 more energy efficient than an instant payment.

REFERENCES

De Nederlandsche Bank paper “The carbon footprint of bitcoin”
https://www.dnb.nl/en/publications/research-publications/analysis/the-carbon-footprint-of-bitcoin/

Cambridge Bitcoin Electricity Consumption Index (CBECI)
https://ccaf.io/cbeci/index

Bitcoin White Paper
https://bitcoin.org/bitcoin.pdf

DNB “The carbon footprint of bitcoin
https://www.dnb.nl/media/1ftd2xjl/the-carbon-footprint-of-bitcoin.pdf

Institut Sapiens recommended in its publication “Bitcoin, totem & tabou”
https://www.institutsapiens.fr/wp-content/uploads/2021/02/institut-sapiens-rapport-02-20.pdf

The Energy Consumption of Blockchain Technology: Beyond Myth
https://link.springer.com/article/10.1007/s12599-020-00656-x

ECB Banknotes and coins circulation
https://www.ecb.europa.eu/stats/policy_and_exchange_rates/banknotes+coins/circulation/html/index.en.html

Central Bank of India – Bank Notes
https://www.rbi.org.in/scripts/ic_banknotes.aspx

Federal Reserve – Currency in Circulation
https://www.rbi.org.in/scripts/ic_banknotes.aspx

Giesecke+Devrient GmbH
https://www.gi-de.com/en/spotlight/payment/how-long-does-paper-money-last#c88

Bitcoin: Cryptopayments Energy Efficiency
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4125499