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Energy Money
From: Magic Internet Money
E-Money: Fully Charged
“As a rule, there is nothing that offends us more than a new kind of money.” - Robert Lynd, The Pleasures of Ignorance
Money is an instrument. It is the embodiment of value that takes the form of an agreeable medium in order to quantify the productive use of time, skill, and energy. Almost anything can be money, but not everything should be. In a perfect world, the correlation between the value of our productivity and money would be evident and commensurate.
This idealistic notion led 19th century luminaries, like inventor Thomas Edison, futurist Buckminister Fuller, and industrialist Henry Ford, to endorse the idea of money created from energy. They believed energy – the driving force of all life – to be a suitable basis for money because it is objectively measurable, widely producible, and inherently valuable. However, due to the constraints of efficiently sending and storing energy, this idea was never realized.
A century later, cypherpunks, like David Chaum, Adam Back, Wei-Dei, and Nick Szabo, launched their own digital currencies, trying to solve lofty monetary issues relating to privacy and trust using cryptography and computer networks. Though their experiments did not succeed in their own rights, they laid the foundation for a successor.
Bitcoin is considered a remarkable achievement because it is the realization of many classic and modern ideals for money. By converting chaotic energy into an orderly monetary system, it accurately compensates costly effort with value, and through proof-of-work, it methodically documents irrefutable evidence of its own authenticity. In this sense, Bitcoin is like catching lightning in a bottle, since it forges and secures trustworthy money from energy.
Carefully re-read Berger's one-sentence description of money as an instrument: it is the embodiment of value that takes the form of an agreeable medium in order to quantify the productive use of time, skill, and energy. When we freely trade with such sound money, value accrues to those who combine skill with time and effort, thereby creating things that others want but could not or would not create for themselves as readily. As the list of 19th Century thinkers suggests, it has been obvious for over a hundred years, at least, that money ought to somehow encompass the value of energy.
Whether our more distant ancestors knew it or not, this same link between money and energy caused them to converge upon gold as money. The process of smashing through rocks until you find the special rock that is shiny, heavy, rare, durable, and valuable takes work. Basic work. Work that pretty much anyone can do to some degree. No special talents make certain people exceedingly good, though physical stature and strength might help.
We were bound to get better and more efficient at this work over time. Stronger chisels. Dynamite. Mechanized drills (note that all of these efficiency gains require energy inputs, too; inventive humans have a way of combining energy inputs that makes them multiplicative rather than additive). Be that as it may, it takes a certain amount of work to find gold and extract it from the ground. And for all that work, our state of the art technology and methods enable us to increase the supply of gold by a few percent per year. How much work did it take for the Central Bank to increase the money supply by 30% last year? You just needed a baker's dozen of politically appointed bankers to get on a conference call and agree.
Measured in terms of how well a monetary good encompasses the value of energy, bitcoin is second to none. So much press ink is dedicated to the "problem" of bitcoin's energy consumption that the reader will need little convincing: the process of earning bitcoin - commonly referred to as mining - and thereby securing the network is quite power-intensive. Some very conservative back of the envelope math implies that the bitcoin network currently requires about 35% more* power than all of the power plants in the state of Maine put together could provide. The network's power consumption is probably going to double over the next couple of years, and this is a good thing.
Inventive humans working to mine bitcoin will seek out the cheapest sources of power production available wherever they happen to be in the world. This will drive down the cost of producing electricity (to everyone's benefit). More importantly, it gives us a money, bitcoin, that is the embodiment of the value of electricity or the transmissible energy that supercharges human effort. Bitcoin is the energy money that humans have been seeking since we began to trade with each other.
*The current network hash rate as of the time of writing is just over 200,000,000,000,000,000,000 (2x10^20) hashes per second. Conservatively (and unrealistically) assuming that all of this hash is emanating from the most energy efficient mining servers available, which generate around 100,000,000,000,000 (1x10^14) hashes per second while drawing ~3,200 watts, the entire network requires 2mm of these computers and 6.4 gigawatts of power. Per wikipedia, Maine had peak seasonal power capacity of 4.76 gigawatts across all of its power generating sites.
For your listening pleasure
This conversation with Jack Mallers, founder and CEO of Strike, recently came up on our radar. In it, Mallers shares his vision of how the bitcoin protocol is akin to the internet protocol. He thinks that we're in the earliest stages of financial services businesses being "de-materialized" by a superior digital version of what these analog-native businesses were built to do. To paraphrase, the Internet was better at being a newspaper than any and all newspapers, it was better at radio than any and all radio stations, and it was better at television than any and all TV networks. Bitcoin is better at security than a safe deposit box, it is better at payments than Visa, and it is better at international transfers than Western Union. In this version of the future financial services businesses will be unable to rest on the laurels of incumbency in the legacy system and will instead have to compete for users on the basis of offering a superior experience.
Was last month the end of global US Dollar hegemony?
A recent piece in the Wall Street Journal entitled "If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock" stated that actions taken by G7 nations at the end of February to freeze the reserves of Russia's Central Bank might have "shown that currency reserves accumulated by central banks can be taken away... this may reshape geopolitics, economic management and even the international role of the U.S. dollar." If paywalls aren't your thing, this post by Arthur Hayes goes deep and is worth your time.
It didn't take long for bitcoin to find its way into this global geopolitical narrative, as it was widely reported that a Russian parliamentarian suggested the shunned nation would consider accepting it for sales of its natural resources.