What is bitcoin based on ? :

Bitcoin is often said to be "not based on anything" and to result in irrational energy consumption. The reality far removed from this caricature.

The first underlying of bitcoin is the unsurpassed security offered by its protocol. Thanks to the decentralization of the register and the mechanism of the proof of work, a transaction, once validated in a block, is practically impossible to falsify. With the successive registration of the following blocks, this difficulty increases exponentially. After a few hours, the energy required would be hundreds of millions of dollars. As time goes by, the information entered in this transaction acquires a tamper-proof character that makes bitcoin the first virtually unalterable digital asset, and its blockchain the first unmodifiable database. For this reason, it has been compared to the largest and oldest monuments of civilization such as the pyramids of Egypt1. This inalterability has a value in itself; it represents a real service. It is on this value, on this service, that the bitcoin is seated.

To understand the value of this network we can try to imagine how much it would cost to recreate a global payment network ex nihilo with exactly the same performance as Bitcoin, especially in terms of security and resistance to censorship. This would represent, for the community that would like to carry out this project, a phenomenal sum, practically impossible to evaluate. Probably several billion dollars, even hundreds of billions of dollars, if we refer to the total valuation of Bitcoin currently. Moreover no company or consortium has attempted this performance.

The fact that a currency can be the underlying of a computer network is of course an unprecedented situation. After millennia during which the currency was seated on material goods, then about fifty years during which it rested only on a vague confidence in the economy of the States and especially on the capacity of these last ones to impose their currency by the force (see below) a new form of currency has for underlying a service provided by a computer protocol. It is the declination, in the field of money, the progressive digitization of all economic activities summarized by the famous formula of Marc Andreesen, "software is eating the world".

What is used to produce this underlying asset is the high total computing power devoted by the miners to the Bitcoin network, which is perfectly quantifiable. It is measured by the hash rate (number of hash calculations per time period). The higher it is, the harder it is to falsify a transaction, and therefore the more secure the network is, the more value bitcoin has for its users. One could very well imagine another blockchain offering the same level of security as Bitcoin, for the same volume of transactions, but with a different protocol, which would require less computing power. But for the moment it does not exist. The market value of bitcoin depends in part on this hash rate. In the case of hard fork (as, more generally, facing any competitor may attract mining companies), one of the main challenges for the Bitcoin network is to prevent too many miners put their computing power in the service of new channel.

Moreover, what is described as "speculation" around bitcoin indirectly contributes to strengthening computing power and network security: the increase in the price of bitcoin attracts new miners, which leads to an increase in the difficulty of mining2, so the security of the network and therefore the public interest in bitcoin. Beyond speculation, there is a feature often ignored bitcoin: the rise in its value has an effect radically different from that observed for other types of currencies.

The additional efforts devoted to production in response to the price increase do not lead to a stabilization of the latter (as is the case for metallic or fiat currencies) but to a reinforcement of the security of the network, and therefore an increase in its demand and, all other things being equal, of its course3.

This underlying quantifiable in computing power is an indirect determinant of the market value of bitcoin. What counts more directly is the subjective evaluation, by the users of bitcoin, of the security thus offered on this network. If, for them, the ability to use this global trust protocol that has never been hacked has a high value, it will contribute, along with other parameters (ease of use, speed, transaction costs, etc.). to increase the demand and price of bitcoin.

Just as the non-monetary use of gold is jewelery and some industrial components, in the case of bitcoin, we can conclude that its non-monetary use is a right of access to the international value transfer system. the most secure and censorship-resistant ever.

It is customary to evaluate the power of an institution (company or state) by its production but also by the level of resources it is capable of devoting to its security: financial, human, military or energy resources. For Bitcoin, its high level of security obtained by the high energy expenditure is systematically described as a disadvantage, a mismanage, an original tare, while it is in fact the proof of the importance of this system.

The high energy consumption of bitcoin is a serious issue. But it is rarely treated seriously in the media. It often comes down to a prosecution case, with old data, inaccurate, sometimes unverified, based on dubious assumptions, not always explicit, and without any consideration of either the costs of the conventional system or the arguments of the "Defense" of the Bitcoin system.

A Credit Suisse report in January 2018 also acknowledged that apocalyptic forecasts of the future evolution of Bitcoin's energy consumption, often quoted without any critical distance, were largely unfounded.

Whatever the way it is measured, this consumption is currently very high. If it were to increase with the development of Bitcoin, this could pose a real problem that would require solutions that do not exist yet. But, without pretending to be exhaustive on such a complex subject, the following elements should also be taken into account.

First of all, contrary to an all too common belief, Bitcoin bit rate is not an increasing function of computing power. This means that the various technical efforts underway to improve the number of transactions per second, for example the Lightning Network, will not in themselves lead to an increase in electricity consumption. The latter depends on other parameters, such as the course of the bitcoin, the number of minors, the type of machines they use, etc.

High consumption is essential for network security. This is a price to pay for an objectively important service: an ultra-secure, global, decentralized, censorship-resistant exchange network. The question of whether this service is "worth" this environmental cost is skewed by the fact that currently few people understand the technological and societal progress that Bitcoin represents. All their attention is therefore focused on what is perceived as a disadvantage. This situation will undoubtedly evolve: as in any other industry, it will gradually be understood that the production of a universally desired service is not done without cost.

In the case of bitcoin, a significant cost is necessary because the unsurpassed security of the network is based on the extreme asymmetry between the cost of transaction validation (almost zero4) and the cost of registering a transaction in the blockchain (which requires mining and proof of work). It is also interesting to note that this asymmetry is the opposite of that prevailing in conventional payment systems, where the cost of validation is high (because it is centralized) and that of the registration in the register is negligible (because it is automated).

For Bitcoin, this energy cost is not hidden. It is assumed, it is even what the main system quality is based on. Electricity is, in a way, its raw material. It is quite different in sectors such as the banking industry, whose energy cost is considerable but never evaluated, recognized or published.

It would be interesting to calculate the energy cost of the banking sector: money changers, transport of funds, construction and maintenance of buildings (bank branches, skyscrapers), costs associated with the millions of employees in this sector (transport to get to their work, heating, air conditioning, etc.). Admittedly, this sector manages a much higher volume of activity than cryptocurrencies, but the scalability of these is possible without increasing their energy cost.

As for other cryptocurrencies, some claim to do without the proof of work and the resulting energy consumption. But they must also assume a compromise in which the level of security is also reduced. The future will tell if they can scale with this reduced level.

Finally, the miners are not philanthropic organizations or public administrations: they are commercial enterprises in competition, which must reduce their costs as much as possible while ensuring their production and maximizing their profit. They have an objective interest in maximizing their energy efficiency.

But that's exactly what they do, and that in two ways. On the one hand, they are looking for equipment that consumes less energy. A specific industry is being created to meet this demand. On the other hand, they are looking for electricity where it is the most abundant and least expensive, that is to say where it is not the subject of a competing demand.

This is the reason why many mining companies are located in areas without local distribution networks and are increasingly using renewable energies. Some believe that this industry could encourage the green industry by making profitable energy sources that were not before. In Canada, Hydro-Quebec, in order to maintain its underutilized hydropower production and threatened by the development of private self-production, wants to attract energy-intensive businesses, including cryptocurrency miners.

Moreover, the figures of the evolution of the world consumption of energy show that the consumption of electricity of the bitcoin did not add to the habitual consumption: it thus was fueled mainly of an energy which would have been lost without this use. Bitcoin did not "steal" energy from countries, businesses and individuals.

1-"The pyramids stand today as a testament to the proof of work of the Egyptian civilization (...) Bitcoin is the first digital monument of proof of work of planetary dimension". In ANTONOPOULOS, Andreas, The Internet of Money, volume two, Merkle Bloom, 2017 (page 29).
2-This difficulty is automatically adjusted every 2016 blocks, or about two weeks to maintain the stable pace of block validation and thus the issuance of new bitcoins.
3-In the case of a metal currency, any increase in the value of the precious metal encourages more resources to extract more. This increases production and gradually leads to a stabilization and a decline in the price. For current national currencies, an increase in the price often encourages the States to conduct a monetary policy to control this rise, in particular to not serve the national exports (which is done to the detriment of the holders of this currency). For Bitcoin, things are different. An increase in the price leads, as for gold, to an increase in the means devoted to produce it: the mining becomes more profitable so the miners will increase their means to undermine more, and new companies will enter this market. But this development of mining will not create more bitcoins since the rate of production is fixed in the founding algorithm: it will, however, lead to an improvement in network security, through the adjustment of the difficulty of mining mentioned above. above. This mechanism therefore represents a virtuous circle that can not be found in any other type of currency: the more the bitcoin appreciates, the more the security of its network increases, and the more this currency becomes attractive to a growing public, which increases its demand .
4-This is a few seconds of simple and automatic verification performed by the thousands of nodes in the network.