One of the main arguments against currencies based on scarce resources, such as gold, silver, or Bitcoin, is the belief that it is more efficient to use something easier to produce, like paper, as currency. Fiat currency proponents suggest that a centralized agency can prevent counterfeiting. However, while these arguments hold some merit against gold, Bitcoin mining serves more than just minting or gold mining. It provides network security against counterfeiting, facilitates receipt functionality through a decentralized database, and offers a means for people to enter the Bitcoin community.
Bitcoin mining involves solving complex computational problems to create new blocks, requiring significant computational power. Some question why block creation couldn't be as simple as signing all transactions, with all 21 million coins created from the start. However, there are two reasons why this approach isn't adopted.
The first reason is monetary distribution. If the initial coins were distributed by the currency creator, it would raise concerns about trust and favoritism. To ensure fairness, coins must be distributed to the people. However, determining who these people are poses challenges. Distributing coins to random Bitcoin addresses would result in miners generating trillions of addresses. If random IPs were chosen, it could lead to a surge in botnets and exhaust IPv4 address space.
The second reason involves preventing multiple identity spoofing or Sybil attacks. This issue is not unique to Bitcoin but is a challenge faced by the Internet as a whole. Existing solutions, such as domain name registration and account creation, rely on human proof-of-work or captcha. Cryptographic proof-of-work, despite its inefficiency, offers a practical means to address this problem while maintaining Internet anonymity.
Many question the electricity consumption of Bitcoin mining. Currently, the network's total hashrate is approximately 10 trillion hashes per second. Assuming an average efficiency of 2 Mhash/J for the entire network, it consumes around 1.4 kilowatt hours per second. However, it is essential to consider the long-term perspective. Over time, the mining reward will decrease, and transaction costs will become the primary incentive for miners.
In the long term, the size of the network is driven by the price of Bitcoin and the block creation reward. The efficiency of the hardware is not a significant factor. Even if hardware becomes more efficient, the network will expand until the costs align with the gains. However, improvements like using mining electricity to heat homes can decentralize mining and increase network security.
When considering the scenario of Bitcoin dominating the world's monetary system, assuming the equivalent price of $3.95 million USD per BTC and constant transaction fees, the network's cost would be limited to the transaction fees' real value. Comparatively, the US Mint spends $7 billion per year, and Bitcoin's potential to replace various private businesses justifies its value even with higher transaction fees.