The Bitcoin network is by far the biggest computer in the world. It is more powerful than the top 500 supercomputers in the world combined. Digiconomist has some interesting statistics on the amount of energy consumed by Bitcoin. At the time of writing, the Bitcoin network uses 1/2000th of all the electricity used in the world!
It is also one of the least efficient, least useful computers in the world. A single Bitcoin transaction consumes 97 kilowatt-hours of electricity. This is huge. For the energy-cost of one Bitcoin transaction, you could run a home air conditioning unit for 97 hours, make 396 slices of toast, or blend 4400 margaritas! If you’re the sort of person who turns off lights to conserve electricity (or you just don’t like the thought of missing out on those margaritas) Bitcoin transactions start to look like a waste of energy.
The network is already suffering from the effects of this inefficiency. Electricity isn’t free, and as energy consumption rises, transaction fees must rise too. Transaction fees used to be just a few cents, but so far in 2017, they have averaged around €0.60. This has consequences beyond that stinging sensation in your pocket; it puts Bitcoin out of the reach of a lot of microtransactions. No business that makes small transactions of €1 or so (think of music-streaming sites, for example) would consider a payment channel where each transaction costs €0.60.
Why does Bitcoin use so much electricity? While software developers normally try to write code that will get the job done efficiently, with as little computation as possible, Bitcoin’s designer, Satoshi Nakamoto, made the other choice: he created computational puzzles to deliberately make it harder to influence the network.
The computational puzzles are called proof-of-work. To make an addition to the blockchain, you must first solve mathematical puzzles that take a lot of computing power. To understand why this is necessary, we must first understand that the vision of Bitcoin is designed to work without a central authority, such as the central banks most currencies run on. Instead, Bitcoin is a sort of democracy. But there is a problem with voting on financial information: my bank doesn’t ask my opinion on what my balance should be!
Civil democracies have one vote tied to one man, but in cyberspace, one vote is tied to one digital identity, and one individual can have any number digital identities. I could create a million nodes and have them all vote in my favor. What happens when you allow an open online vote? An Irish rebel song gets voted the greatest song of all time, a whale gets named Mister Splashy Pants, and a £200 million research vessel becomes Boaty McBoatface.
This is where proof-of-work comes in. Simply put, proof-of-work makes it costly (in time, computer hardware, and electricity bills) to cast your vote. So, although I could create enough identities on the network to overwhelm the other votes, at the time of writing, I would need to shell out $847,838,602.35 on computer hardware!
To recap: Bitcoin uses more energy than most countries. This is because participants in the network have to spend money on electricity to solve puzzles, a design-choice made to discourage mischievous participants.
One proposed solution is the Lightning Network, which minimizes the number of transactions going through the blockchain itself by setting up contracts off-chain. People can either swap I.O.U.s directly, or via some path in the network, and when everything is finalized, a single transaction goes through the Bitcoin blockchain.
The energy problem absolutely has to be solved if Bitcoin is ever going to grow beyond its current level. Even with a tiny percentage of the population using it, the network is so congested that there is a demand for the Lightning Network, a technology specifically designed to minimize the number of Bitcoin transactions. If Bitcoin is ever going to be regularly used in ordinary, day-to-day affairs, something needs to change.
The most common proposal is to increase the size of each block from the current 1MB to 2MB or even 8MB. This would essentially double or octuple the amount of transactions that get processed for each mathematical puzzle the network solves.
Gridcoin is an alternative cryptocurrency with a different approach. Rather than eliminate or minimize the mathematical puzzles, it replaces them with useful computation. The proof-of-work to mine Gridcoin crunches data for projects like protein-folding, cosmological modelling, etc. I guess we might as well put all that energy to good use.