Many people criticize Bitcoin for its electricity consumption, which is often compared to that of entire countries. It is true that the blockchain technology based on proof of work, which is used by Bitcoin consumes a lot of energy. But there is a preliminary step, which few people talk about, and which Bitcoin’s critics tend to avoid or simplify.
This preliminary step is to ask the question: if Bitcoin were to be adopted on a large scale, what place would it take, and what services would become obsolete as a result of this adoption?
Bitcoin, that electronic cash
Let’s go back to sources. In the abstract of the white paper at the origin of Bitcoin, Satoshi Nakamoto defines it as follows:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
Then in conclusion:
We have proposed a system for electronic transactions without relying on trust.
Or, as stated more explicitly in the introduction :
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
Created in the 2000s, Bitcoin is therefore proposed as a solution for Internet payments, which were growing rapidly at that time. Let’s insist a little on its characteristics:
- it is a means of electronic payment
- payments are made from person to person, without going through a financial institution (trust in these institutions is replaced by cryptographic proof)
- Another interesting property that results from this is that anyone can create a Bitcoin wallet, which plays the same role as a current account in the real world.
So, if tomorrow Bitcoin were to become widespread — let’s say it is capable of doing so, and the number of transactions is not a limit — it would be used for all payments on the Internet, and by extension, for all electronic payments in everyday life, i.e. credit card payments and transfers. It would thus play the role that money plays in electronic payments, with the possibility of creating an electronic bank account, via the bitcoin wallet. But how to clearly delimit this perimeter?
In order to delimit this perimeter, it is necessary to compare what is comparable. The currencies present in the different countries of the world give us a good element of comparison.
The quantity of money in a country or an economic zone constitutes the money supply, and economists divide this money supply into aggregates, aggregates that delimit the different attributions of this money.
To be more concrete, in the case of the euro zone, the money supply is as follows:
The purpose here is not to provide a detailed explanation of the currency, but simply to provide a comparison.
The most common form of money is M1; it includes bills and coins in circulation — cash — and current accounts — sight deposits.
The monetary base, on the other hand, refers to money that was created directly by the central bank. The management of money is central bank main mission.
Next comes the money supply M2; this is the addition of term deposits or notice deposits, which we know more simply as savings accounts.
Finally M3 adds instruments that are negotiable on the money markets, but which will not interest us in this article.
What does this have to do with Bitcoin, you may ask?
Well, as we have seen in the previous paragraph, Bitcoin is a digital currency that allows payments to be made from person to person. Bitcoins are generated by the Bitcoin algorithm for the miners, which are the computers that make up its network, and which must be paid for their work.
The Bitcoin network thus allows 3 functions:
- the creation of money,
- person-to-person payment,
- and setting up portfolios (or wallets) that are the equivalent of bank accounts.
In the functioning of the money that we use every day, these 3 functions are ensured by the central bank for the creation of money, by the commercial banks for the creation of current accounts, and finally by the banking network for payments between people.
In order to make the comparison between the official system and the Bitcoin ecosystem comparable, we remove bills and coins from the perimeter, because the Bitcoin network does not allow the edition of bills or coins on a large scale, even if there are initiatives here and there.
We therefore arrive at the following diagram, which allows us to compare the current perimeters of the money supply with that of Bitcoin
If Bitcoin were to be used on a large scale, and assuming that it is technically possible, it could replace the role played by the central bank in the creation of money, the commercial banks in maintaining current accounts, and the banking network in person-to-person payments. This is still a colossal prospect!
The Bitcoin network is therefore comparable to the monetary aggregate M1 + the monetary base — coins and banknotes.
Of course, this comparison remains crude, and the roles of the different actors are not so simple to define. But this comparison then provides a basis for work, especially when it comes to calculating Bitcoin’s energy consumption, for example. For we can then refer to the equivalent that performs the same function for the official currency.
Keep this comparison in mind, it will be useful in future articles on the energy consumption of bitcoin.