Earlier this year, it was reported that a Russian businessman, Aleksey Kolesnik, had bought two electric power stations solely to meet the electricity requirements for Bitcoin data mining ventures. Similarly, there are stories of Bitcoin miners migrating to towns in Alberta, Oregon, and Iceland, where cheap electricity awaits cryptocurrency entrepreneurs.

One of the lesser known facets of cryptocurrencies like Bitcoin is the high energy requirements of the mining process. These requirements are causing the gold rush-like movements to areas with cheap electricity.

This electricity need is a result of data mining. To understand cryptocurrency data mining, let’s recap how Bitcoin is generated.

In the modern economy, transactions between entities are validated by third parties in whom we have collectively put our trust. For example, when we pay for products with credit cards, we allow our banks to act as the middleman between us and the merchant. Third parties — from individual accountants, notaries, banks, to entire governments of nations — facilitate and approve transactions to ensure fairness and prevent fraud.

The cryptocurrencies, which began with Bitcoin, were innovative in that they eliminated these middlemen by using Blockchain and the proof-of-work (PoW) model, which ensure unparalleled reliability in the absence of bureaucracy.

A blockchain, as its name suggests, consists of a chain of ‘blocks,’ with each block containing three kinds of information: transaction data, an identifier called hash, and the hash of a previous block to which it is linked. The blockchain acts as a history of all transactions relating to the relevant Bitcoin. It accounts for every Bitcoin in circulation and is available to any user.

Once a transaction is made, it needs to be validated so as to prevent fraudulent activity — in essence, a block needs to be added to the chain. This is where the mining comes in. Miners looking for Bitcoin provide computing power to verify the transaction and compile it into the blockchain. They compete with each other to solve a unique and complex mathematical problem associated with the transaction. Solving the mathematical puzzle is what constitutes blockchains’ PoW.

“You can think of them as mathematical puzzles where, actually, every 10 minutes, there is a new puzzle… and whoever has the resource to find a solution can go and then use that solution to basically certify the last 10 minutes worth of transactions,” said Yuri Takhteyev, a status-only professor at the Faculty of Information, describing the mining process.

As a solution is found for a puzzle, it is communicated across the network and all other miners stop work on that block — which is then added to the blockchain — and move on to the next one.

The mining process thus has two purposes: to confirm transactions by devoting computational work for each block and to release new bitcoins into the system by awarding them to the Bitcoin miner who performed the work. “The important part about it is that it is basically something that you could only solve by trial and error,” explained Takhteyev.

Here lies the problem in the effectiveness of the model. The prize for this effort, currently at 12.5 bitcoins, can mean a windfall of tens of thousands of dollars depending on the value of the extremely volatile currency. Wastefully, the inherent competition in the PoW model where the miners work to find the last link of the single blockchain puzzle only awards a prize to the miner who resolves the puzzle, while a great amount of energy is used by other users in hopes of drawing the right combination.

Like gold in the ground, Bitcoin is a finite resource estimated to total 21 million in number, and despite its already high value, its value is expected to appreciate over time. That is why, even with this systemic inefficiency, data mining centres or ‘farms,’ sometimes each operating thousands of mining machines, have sprung up. To offset operational costs, such ventures seek cheap forms of electricity, sometimes in the form of non-renewable sources.

The Digiconomist website, through its Bitcoin Energy Consumption Index, estimates that Bitcoin ventures consume electricity at an annual rate of 58.7 Terawatt hours. This is greater than the electricity needed to power the entire countries of Greece or Algeria for the same amount of time. Only 43 countries have a higher annual energy consumption than Bitcoin mining.

To combat the inefficiency of the PoW model, it has been rumoured that Ethereum, the second largest cryptocurrency, is planning to phase out their PoW model to a Proof of Stake model. The Proof of Stake model follows a deterministic path where the creator of a new block in the chain is chosen based upon selectable criteria, such as their share in a currency, and takes a transaction fee. This reduces the competition, and thus inefficiencies in data mining.

Each Bitcoin transaction is estimated to release over 444 kilograms of carbon dioxide into the atmosphere. “In the days when we’re all worried about global warming, you are just going and burning energy for nothing,” said Takhteyev.

Thus, with its great demand for resources, for Takhteyev and perhaps many others, this move away from the Bitcoin model marks a step in the right direction.

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