With the petrodollar fading, bitcoin and renewable energy can integrate in an Internet of networks — a new, more resilient, functionally unified energy/monetary system.
What Is Energy?
Energy is everything and in everything. Nothing exists without energy, which is the first principle of all other first (second, really) principles.
So, what is energy? The best and simplest way to define energy is to describe it as work. And what is work? In physics, work means using a force to move something. And what is a force? It’s an action by an agent changing the position or the state of something.
Anything’s capacity to carry out work is energy. The same is true in all realms, such as chemistry: work means using heat, for instance, to change the molecular arrangement of something.
In brief, any process producing a change — in position, speed, chemical composition, temperature, etc. — is work. Any process requires energy. Anything is, it exists inasmuch as it has energy, inasmuch as it carries out some kind of work, no matter how small and over what span of time.
To be is to do something. It’s really a magical thinking non-starter to expect that anything can be or be obtained without some real work, some real expenditure of energy. There is no free lunch.
Energy Rules Money
In the monetary world, Modern Monetary Theory (MMT) and other chartalist approaches argue money’s value descends from the State by decree to pay taxes, allow credit and settle debts. MMTers argue high debt doesn’t matter as long as it’s repayable in nominal terms thanks to a country’s ability to create its own money — what’s colloquially referred to as “money printing”.
On the other hand, fiscally conservative, hard money proponents argue money derives from private commodities by their scarcity, intrinsic value and usefulness to streamline barter and make commerce easier. They argue high debt matters in the first place because it weighs on our capacity to fuel future growth, leading to the debasement of money through inflation, which is the main tool governments use to chip away at their debts. For hard money proponents there definitely is no free lunch.
But even MMTers arguing in favour of wide government spending untied to current revenues or existing debt recognize there is no free lunch. When MMT says the only limit to deficit spending and money creation is set by the real resources that can be deployed before hitting an inflation wall of high demand and low supply, it’s basically saying there is no free lunch.
Under either theory, sooner or later, our wealth and debt potentials are set by the amount of energy we are able to harness with the resources available over a set period of time — ultimately set for MMTers or set to begin with for hard-money proponents. The inflation wall is actually an energy wall, which MMTers tend to see as a ceiling that should cap our spending and hard money proponents as a floor on which additional spending decisions should be based.
Whatever theory one embraces, if we trace back their functioning to first principles, gold, bitcoin and fiat currencies all hinge their worth on the inescapable fact that sometime along their different value chains they must incorporate hard work, energy, in their existential profile. Despite representing radically different visions, all of them subscribe to the school of hard-energy knocks, all of them fall within the no-free-lunch camp. It’s just a matter of when we individually perceive that reality presents us with the bill.
The amount of energy directly or indirectly needed to create, extract or produce something always is and will always remain a good gauge for the value of that thing, i.e., energy rules.
Gold & Petrodollars
Direct energy-expenditures underpinning historical and emergent global reserve assets have changed from the high level of gold to the virtual, indirect level of oil and petrodollars to the high level again of bitcoin.
Gold is still a reserve asset owned by central banks, but its peg with currencies was stretched until it broke in 1971, after which currencies have not been redeemable in gold. For the first time ever, money was backed by nothing — uncharted territory and a scary proposition for most people. So, not too long after, the U.S. and Arab countries came up with a surrogate of hard work to act as a foundation for money — oil.
The ensuing petrodollar system was no small fit for the U.S. at a time when America consumed more oil than it produced and Arab nations had imposed an oil embargo to punish the West for its support of Israel in the Yom Kippur War. The immediate goal of the new petrodollar gamble architected by the U.S. was to “neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its newfound petrodollar wealth… Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world”, writes Andrea Wong on Bloomberg. “The basic framework was strikingly simple. The U.S. would buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plow billions of their petrodollar revenue back into Treasuries and finance America’s spending”.
But the petrodollar system, with crude oil as a surrogate reserve asset payable only in U.S. dollars at its base, has weakened considerably.
Its source of weakness is that in order for the dollar to be the currency of global trades and maintain its role as the world’s reserve currency, the U.S. needs to keep providing dollars to the rest of the world, and to do so the U.S. must run an almost perpetual trade deficit — importing foreign goods and services, exporting dollars in exchange to buy them. But when the global reserve currency is issued by a single country and the international monetary system requires it to run increasing trade deficits, sooner or later the solvency of the issuer is going to be called into question and create a problem for the whole system, as per the Triffin dilemma.
For half a century, the U.S. central bank — the Federal Reserve — has been at the heart of this system, the dollar has remained the world’s reserve currency, U.S. Treasuries have played the global role of risk-free reserve asset and a majority of international trade has been denominated in dollars, starting from basic commodities. The global reserve status of dollars and Treasuries has fueled a constant demand for them, propping up their value, even in the face of an ever-growing U.S. national debt and trade deficit, which would have normally caused any other currency to lose value.
But the GDP of the United States has now fallen to 20–25% of the world’s GDP from 35–40% fifty years ago, making it increasingly difficult for the U.S. to provide enough dollars to the world with its shrinking slice of the economic pie.
Commercial banks of course also play a key role in money creation, by turning bank deposits into loans that become effectively new money in the hands of borrowers. This process inside the U.S. is reflected in the U.S. GDP numbers. But there are also commercial banks outside the U.S., or foreign branches of American banks, that also multiply new dollar-deposits into new dollar-loans and new money. At an aggregate level, (petro)dollars created by commercial banks outside the U.S. form the so-called eurodollar system. Based on these deposits and their interest rates, markets have sprung up along the way trading futures and other financial instruments.
The eurodollar system is called that way because its very first seed was planted in Europe after World War II, when the United States helped reconstruct a devastated continent with the Marshall Plan. But as a system, starting in the 1950s it has applied to dollar deposits around the world. The eurodollar system exists outside the U.S. legal system, so it’s not subjected to Federal Reserve oversight and other American laws and regulations. It’s an opaque system. Nobody really knows how big it is, but it’s likely huge, probably three times the size of the U.S. economy, at least.
So, eurodollars could have partially helped quench the world’s thirst for dollars.
But there are a few issues with the eurodollar as well. This system is not just a bunch of foreign dollar deposits but a multifaceted financial market with a host of fractional instruments sitting on top of those deposits. These instruments need to make good on their underlying dollar guarantees at a moment’s notice if need be. So, the eurodollar system itself tends to be always short of dollars, as there is always just a fraction of the underlying collateral propping up these instruments.
Not only that, eurodollars have been progressively turning from an instrument the United States could use to extend their reach abroad into a tool other countries use to leverage the strength of the dollar against the economic and geostrategic interests of the U.S. itself. This is how founder of macro-research firm FFTT Luke Gromen describes the eurodollar system in the context of U.S.-China relations, during a recent interview on Real Vision.
The way the currency system now works, this post-’71 dollar system, because of how big China’s gotten, this system now amounts to the Chinese using the eurodollar system to borrow dollars, lend the dollars at a spread around the world to buy and control finite, hard assets, increasing their geopolitical power, increasing their economic clout. Yes, China is short dollars, but only to the extent that there is a spread on the loan. And they’re lending it against hard asset collateral. So if the weaker emerging markets they’re lending dollars to default because the dollar gets stronger, China ends up with the hard asset which is all they wanted anyway which further increases their clout. What’s more, and it’s crazy, is because there is this dogma around the eurodollar system that “the post-’71 dollar system must be defended at all costs” in certain circles… it must be defended at all costs, whenever the dollar squeeze gets too painful, because China is now so big, because emerging markets are now so big, the Fed comes in and effectively bails out China every time the dollar gets too strong.
The eurodollar geostrategic crutch has turned into a club used to hit U.S. interests. The eurodollar money flow that might have quenched the world’s thirst for the global reserve currency has been poured and diluted into so many glasses that many people are thirstier than ever.
Something Had to Give
As the Financial Times titled a few years ago: Petrodollars are eurodollars, and eurodollar base money is shrinking. Any which way one pulls it, the euro-petrodollar blanket comes out short. And yet, the petrodollar has hold on to its value, nonetheless.
But in a traditional, neoclassical economy that at its most basic level is made of units of capital and units of labour, something had to give. So, if the dollar doesn’t give and the value of Treasuries doesn’t give, i.e., if the units of capital don’t devalue, the only things that are left to devalue, painfully and over time, are the units of labour and their remuneration — blue collar workers, the middle class shrunk and saw their real wages go down while the manufacturing base of the U.S. moved rivet-by-rivet to cheaper foreign countries.
As then Minister of Finance and future President of France, Valéry Giscard d’Estaing, noted in 1965, the power to simply “print” new dollars to finance its spending habits, the dollar standard and by extension the petrodollar system bestowed upon the United States and its currency an “exorbitant privilege” over other countries and currencies — but it’s also been an exorbitant weight, as many have pointed out in the meantime.
The other half of the petrodollar system, i.e., oil is also experiencing a secular weakening as a source of energy. Global oil demand shrunk last year because of the pandemic, and demand growth this year will only go back to 2015-levels, falling again to 2011-levels by 2025, according to the International Energy Agency, while the U.S. Energy Information Administration sees domestic crude production plateauing around 2030 and starting to decline thereafter.
Solar and wind power are now cheaper than fossil fuels in many parts of the world, and in the wake of climate change governments, corporations and individuals have embarked upon an irreversible decarbonization journey. Crude will progressively lose its centrality both as an economic input and a surrogate reserve asset.
Times Rules Money
After gold, eurodollars and petrodollars came bitcoin, the new kid on the monetary block, with its own value proposition. Bitcoin’s gradual emergence cemented the existence and mutual reinforcement of several features, whose interplay in a real market environment has made bitcoin intrinsically valuable for bitcoiners, and increasingly newcomers to the space. Its features are a very robust network, protected by a deep energy-moat, animated by an unprecedented assemblage of technologies, imbued by a social contract, turbo-charged with mutually beneficial economic incentives, layered into an elegant set of scaling rules, wrapped into a seductive mythology, baked slowly over 12 years, still running on its creator’s mother yeast, and kept alive by a growing multitude of people.
As far as the test of time, for whatever it’s worth, let the record show that while Bitcoin was created only 12 years ago, these 12 Bitcoin-years are the equivalent of about 64 years in regular trading days for a legacy stock or commodity market, as Bitcoin trades 24/7, 365 days a year vs 6.5 hours a day over roughly 253 days each year for a traditional market. And even counting in after-hours trading, 12 Bitcoin years are the equivalent of about 26 years of trading in legacy markets.
And let the record show that the petrodollar, turning 50 this year, is not that much older than Bitcoin in terms of trading time, as foreign currency markets are open only 24/5 and even counting in all holydays, the petrodollar is not even 22 years old in Bitcoin-years — less than ten years older than bitcoin, yet already showing deep signs of fraying.
As macroeconomic investor Lyn Alden says, the petrodollar system was “a clever way to make a global fiat currency system work decently enough. We think of this as normal now, but this five-decade period of global fiat currency is unusual and unique in the historical sense”, i.e., time rules, and time will tell.
Wanna Bet? No? OK
“The U.S. Federal Reserve now owns more Treasuries than all foreign central banks combined”, Alden notes. Major central banks around the world have almost stopped buying new issuances, concerned with the ballooning U.S. debt. The FED acts as the lender of last resort, effectively monetizing most of the American debt. “That’s not exactly how the ‘global reserve’ currency is supposed to work. It’s like a restaurant chef eating her own cooking more than her customers do”.
According to renowned investor Ray Dalio and macroeconomy researcher Luke Gromen, sovereign debt indigestions similar to the one the U.S. is experiencing, historically, have always had only a handful of outcomes, from depressions to inflating debt away to hyperinflation to debt write-offs — all more or less painful for many people, even if there are always losers and winners, also in the worst of times.
Nobody really knows how slow the fraying of the petrodollar system might be, when it will cease to function, or if it could regenerate itself, digesting its debt burden in a more or less orderly way instead of collapsing into a coma.
As many other countries are also heavily indebted and economically weak, the dollar is still seen by many as the cleanest of the dirty shirts. Fraying scenarios vary from a spectacular rise in the dollar, sucking in all other currencies as for investor Brent Johnson’s “milkshake theory” (before a general collapse and a reset across the monetary board), to paths leading straight to an unwinding of the petrodollar system.
Of course, the dollar losing in full or even in part its global reserve currency status would open for the whole world a Pandora’s box full of cans of worms of geostrategic consequences, difficult to predict and control. The point is, as Alden puts it, that “there is a natural economic entropy to global reserve currency status, because inherent flaws in the system continue to compound until they reach a breaking point”.
I would not want to bet this time will be different, shorting history’s lessons. I think it’s wiser taking stock of where we are at and looking at possible, sounder alternatives in both the energy and the monetary world.
Hence my interest in renewable energy and bitcoin, which also come with their own sets of challenges, based on their particular features and stages of development.
The Problem with Renewables
Fossil energy is on a path of secular decline, regardless of spikes in demand that will occur in the near to medium future. That’s not because we are reaching a peak in fossil fuel production, but because we are facing peak demand. The widening reach of solar, wind and storage capacity in the present and other clean technologies may relieve us of the need for most fossil fuels in the not so distant future, also for hard-to-decarbonize sectors. Norwegian electrolyser manufacturer Nel set a target for producing green hydrogen at 1.5 dollars per kilogram by 2025 — a price that would beat traditional fossil-fuel-based alternatives. The low-carbon hydrogen market will double nine times by 2050, according to research firm Wood Mackenzie — that growth will mostly be at the expenses of fossil fuels.
As mentioned, renewables are already cheaper than fossil fuels in several parts of the world, and getting cheaper. Paradoxically, though, the increasing affordability of renewable energy can be a double-edged sword.
Energy markets have been traditionally based on the cost of fuel. But if the marginal cost of solar and wind energy is zero or close to zero, as the “fuel” is free, then the price of energy in a market dominated by wind and solar will tend to fall toward zero — at least under the current market structure. The problem is, nobody would invest if their return on investment were zero or negative. This problem will arise well before we get to 100% renewable energy generation. It’s actually already started, for instance in European countries like Germany, where renewables already cover about 40% of power demand.
Spot solar and wind energy prices in Germany and other European short-term markets have already started turning negative with a certain regularity, forcing distributors to hedge their exposure to price volatility — another financial cost for them. Excess of renewable energy supply in certain moments and certain areas have also forced grid operators to curtail wind and solar energy.
“In China, for example, the national average for wind curtailment was around 7% in 2018, with much higher levels in certain provinces. In the Canadian province of Ontario about one quarter of variable renewable generation in 2017 had to be curtailed, along with cuts in nuclear and hydropower output. This was in a jurisdiction where wholesale market prices were zero or negative almost one-third of that year”, according to Peter Fraser, Head of Gas, Coal and Power Markets Division at the International Energy Agency (IEA).
Recurrent zero or negative prices for electricity are of course a problem for energy producers, which don’t make enough money.
“As for falling spot prices, low-cost resources such as wind and solar power tend to have the greatest impact on those short-term markets”, Tom Edwards, senior modeler at Cornwall Insight, said to Green Tech Media (GTM). Renewables’ zero-bound prices risk eroding the revenue base of their producers.
Furthermore, distributed renewables require vast upgrades of the electric grid. This has to be turned into a two-way superhighway instead of a one-way road, functioning in a much more flexible way, balancing and adjusting to thousands of small producers pouring energy into it. “Transmission and distribution costs are skyrocketing”, said Hugh Sharman, Denmark-based principal at energy consulting firm Incoteco, to GTM. “The generators or the distribution and transmission people are going to have to cough up.”
Finally, even when renewable energy spot prices are zero or negative, wholesale and retail prices remain relatively high, due to the present tariff and tax arrangements in many jurisdictions.
So, we have a situation where the supply side of electric renewables is facing higher costs and lower revenues, while the demand side is not yet reaping the economic benefits of zero-cost renewables.
The Problem for Bitcoin
In a world where the cost of energy tends to zero, the energy moat traditionally protecting bitcoin becomes shallower in terms of running energy costs, as, at least in principle, boundless amounts of free solar and wind energy could be harnessed by a bad actor to try and attack the bitcoin network at near zero cost. Network security becomes then based mainly or only on the capital costs for mining chips, cooling equipment, maintenance and a few other key hardware and software components, which will increasingly need to be covered by transaction fees only, as the rewards fall and then stop.
One question is how the double prospect of roughly zero-bound energy prices and zero-bound miner rewards will interact. Will they double down in weakening bitcoin in both its energy armour and its miner guard? Or, on the contrary, will these two trends counteract each other, with the zero-bound price of energy compensating and balancing out zero-bound rewards? As energy bills are the main operating cost for miners, vanishingly smaller energy costs could arguably increase miners’ profits and offset disappearing rewards, at least in part.
One traditional solution could be the consolidation of miners: larger mining operators and pools with greater economies of scale and contractual power vs mining chip manufacturers. Both in the bitcoin and renewable energy worlds as everywhere else, the tendency by some operators to specialize and scale up to ever larger industrial or utility levels is always a powerful dynamic.
Recent history shows that it would be hard and mostly futile for large miners or miner pools to try and impose a new consensus rule or a reorganization of the blocks in the blockchain. Even amassing a 51% majority of the hashpower (the computational capacity of mining equipment) is no guarantee that a bad actor could consistently and repeatedly double spend. Miners can easily switch pool to defang the attacker, all non-mining node operators and other users can easily choose not to follow whatever new rule or reorganization a large miner, miner pools or bad actor might attempt. It would be a serious blow for bitcoin, but not a mortal one. Bad actors would soon see their goose stop laying any bitcoin egg.
Game theory dooms to failure many possible 51% attack scenarios. But just as a mental exercise, what would happen if, beside large miners and miner pools, we also saw the development of large, non-mining, node operators, trying to aggregate block validation under one real or virtual roof? Would this centralize control of the bitcoin network too much in the hands of too few subjects?
I don’t know if or to what extent this would be likely or possible; it might be a baseless concern, but I think the best way to prevent any dangerous monopoly or oligopoly of many trust-dependent functions is to widen and strengthen the distributed nature of those functions. Whether it’s mining blocks, validating transactions or something else, as wide a distribution of such functions as possible is what bitcoin creator Satoshi Nakamoto had in mind.
The Internet of Energy
Conceptually, the distributed nature of renewable energy is very consistent with the distributed nature of the bitcoin ecosystem. Neither bitcoin nor solar and wind energy are tied to and controlled by any “issuer”. A multitude of independent nodes generating value and mutual trust through mining and the verification of blockchain transactions are the monetary equivalent of a multitude of solar and other renewable energy plants generating and absorbing electricity for themselves and the mutually beneficial balancing of the energy system.
There can be a natural convergence between the two.
Based on the long-term trends of decarbonization of power generation and zero-bound power prices, one thing I’m interested in is how much of that energy will come from on-the-grid or off-the-grid renewable sources. I will argue that retaining a widespread on-grid capacity will be important going forward for both the energy and monetary systems writ large.
On the demand side, bitcoin mining already relies on renewable energy for about 29% of its total work, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI) of the Cambridge Centre for Alternative Finance. It’s hard to know what percentage of the hashrate powered by renewable energy comes from on-the-grid or off-the-grid installations. On-the-grid setups often use overcapacity that would be otherwise curtailed, and as part of the grid they are functional to the type of system I will discuss in the next section. Off-the-grid setups sometimes use stranded resources that would otherwise be wasted in remote locations. This type of setup is more “selfish” and as such less compatible with the energy/monetary system I’m exploring, in the sense that it’s functional to the bitcoin network, but less so or not at all to the energy network.
The appeal of using the cheapest possible, off-the-grid stranded resources is undeniable. Yet, it might be unrealistic to expect that, over the next 30 to 50 years, mining will concentrate only near stranded energy sources or that whole communities will create new cities around stranded sources in remote locations, as Stone Ridge Funds’ CEO Ross Stevens has envisioned.
I’m somewhat skeptical about the idea that the availability of cheap energy in a remote location on its own will be enough to spark the development of whole communities around bitcoin mining. Historically, the availability of cheap energy is a necessary but insufficient condition for settlements to develop. Communities and cities traditionally grow and thrive when they are also set at a natural transportation crossroad, be it a navigable river, a sheltered bay with easy inland access, a convergence of husbandry paths or other settings and conditions facilitating commerce, spurring productive work, import replacement, diversification of activities and so on. There is usually a reason why stranded resources have remained stranded even if they are cheap, and that’s exactly because they are cut off in too many ways from other networks. Bitcoin mining might not be enough to cover all non-energy costs associated with remote locations and connect all the dots, even in a digital era. But there is another reason.
With prices of renewable energy trending lower and lower, moving containerfuls of mining rigs to remote energy sources might not be particularly cost-effective anymore. Comparing the extra development, logistical, communication and servicing costs with the convenience of powering rigs with increasingly cheap energy in already populated and serviced areas might decrease the appeal of stranded sources. Net of environmental upheavals and migrations determined by climate change, moving mining rigs and people to remote locations to exploit stranded resources might well still make sense decades from now, but Bitcoin should probably still envision a situation where a sizable portion of mining is done near power grids in or near traditional locations. The energy could come from the grid or through power purchase agreements directly from energy producers, who by the very nature of their business will want to be hooked up to the grid.
Miners could of course buy or set up their renewable energy plants. Zero-marginal costs for solar and wind power can help miners offset decreasing bitcoin rewards and better prepare them for when block fees will be the only or the main source of revenue.
As far as the supply side, Jonas Corné, CEO and founder of asset management software developer Greenbyte, thinks that today’s electricity markets need a fundamental change.
“I don’t think energy markets function as markets”, he said to Green Tech Media, particularly for an energy system bent on decarbonization. “I realize companies owning assets need to make money. I just don’t think they’re going to be making money off selling electrons. I think it’s going to be from selling more specific services that will be needed to support the grid.”
Such “more specific services” could include in-house bitcoin mining within a new market environment where all energy-only markets will have to turn into energy-service markets — not based on the scarcity of the fuel in a centralized model, but on the abundance of the fuel and the need to optimize the balance among many nodes in a decentralized model. By mining bitcoin, renewable energy producers and distributors can provide grid balancing and other useful, ancillary electric services while also sustaining the profits that zero-bound prices of renewables make difficult to generate.
Demand and supply response can be two key services mining can offer to help meet the highs and lows of power demand during the day. Whether it’s already existing miners or in-house mining that utilities will set up, they could easily ramp up or turn down their hashpower in real time. Energy distributors could provide in-house demand response services. Mining operations could create an alternative source of revenue, especially when bitcoin prices go through a bear phase or fees will be the main source of revenue.
If the price per kilowatt-hour (kWh) paid by utilities to miners to provide response services is higher than the average value of mined bitcoin per kWh, it could be advantageous for miners to turn their machines down or even off for a short time, in order to make the energy they would have used available for the grid. On the other hand, when too much renewable energy is produced at night, for instance, by wind turbines, or in the middle of the day by solar plants during the weekend, miners can help absorb it, helping utilities counteract negative electricity prices. Based on their 24/7 schedule and their ability to power down their capacity at a moment’s notice, large mining activities are ideal response partners for utilities.
Just as it makes sense for miners to have their own on-the-grid renewable power plants, so does for utilities to create their own mining capacity.
“Miners can be shut down at an extremely granular rate. If only 40% of a miner’s demand needs to be curtailed for 2 hours, then a farm can shut down exactly 40% of their machines for exactly 2 hours”, says Max Webster of early stage investment house Versionone. Miners can thus provide a much more flexible demand response service than many traditional industrial operators. “Imagine trying to shut down an entire factory for exactly 2 hours” or large data centers used by cloud operators like AWS.
The value of the bitcoin network derives from being a secure “Internet of money”. This is something built into bitcoin’s DNA — even if its distributed nature is still evolving. Energy has had a much longer and more tortuous journey, going from primitive and fragmented energy generation solutions to complex and centralized systems in the past, to highly complex and distributed systems now and going forward. That means that now, with cost-effective and highly scalable renewable energy, the electric grid is evolving to become much more similar to a data-type of network, a bitcoin-type of network — an “Internet of Energy”.
As the price of renewable energy trends toward zero and more and more people generate their own electricity, the value of the energy network is evolving to consist of something different from the past. The value and function of a much more distributed system don’t lie on the simple one-way generation and delivery of electricity, but in the multi-directional generation, storage, sale and supply of power and power services, such as demand-response. Bitcoin mining can be among the services the new power system provides, through virtual power plants, physical power plants, renewable energy communities, traditional utilities, storage facilities, electric vehicle-to-grid setups and other configurations.
“More flexibility” is the key to preventing negative power prices, a study by Fraunhofer ISI and other research institutes for Germany’s Ministry of Economic Affairs and Energy says. The supply side (solar and wind plants providing balancing power; non-fluctuating renewables like biogas and hydro-power, more flexible conventional power ramping until it can be substituted by green hydrogen plants) and the demand side (large industrial power users; power to heat options; increasingly storage and eventually bitcoin miners) can all help the energy system adjust to renewable electricity generation.
In this scenario, renewable energy producers, utilities and grid operators are incentivized to form new relationships, as utilities who can also offer power services along public grids will have a big advantage in an energy-service market over utilities and renewable energy producers that only generate power without offering value-added services.
Renewable energy operators could compensate zero-bound energy prices not only by mining bitcoin, but also providing more specialized energy services for industrial and commercial clients. These are services that are not well developed today, but that could be important for larger industrial and commercial clients.
One such underdeveloped service has to do with ensuring the quality of power, for instance. Unbeknown to many, electricity can be of very good quality, very bad quality, and all shades in between. To visualize its qualitative dimension, it helps to think of electricity a bit like water. Water can be drinkable or polluted and all grades in between. And just as drinking water has its own well-defined molecular and chemical profile, so does good quality electricity, with its own well-defined electrical profile, outside of which it can cause blackouts, service interruptions and economically harm those who use it.
And this is no small amount of damage. According to a 2018 study focused on manufacturing, poor power quality caused 25 billion euros in costs in the European Union alone in one year, or 4% of the annual turnover of the companies considered. Energy quality is especially important in continuous-cycle manufacturing processes or that require high levels of precision, such as electronics and mechanics for example. And it could be just as important for miners themselves, whose time is quite literally money.
In short, there can be plenty of new business renewable energy players can drum up to fuel revenues even in a zero-price power environment, generating profits that can in part be used to upgrade the grid to the much more flexible, multidirectional standards required by distributed renewables.
The Internet of Networks
As renewable resources are organizing around an Internet of energy model, I would argue that miners and miner pools could further integrate around an “Internet of mining” model, that is even more distributed and virtually based than it is now.
While renewable energies — especially solar and wind — are already extremely scalable and economically viable, both at very large and very small scales, bitcoin mining has developed into a large-scale only activity, for the most part, after starting as a small-scale only experiment. For the convergence of decentralized money and decentralized energy I am exploring, i.e., for bitcoin to better link up with renewable energy and be as true as possible to its distributed nature, it makes sense to have many mining setups of all sizes.
Of course that is what mining pools are for, and they already exists and work very well. But what I’m talking about maybe goes a step further from present-day mining pools, and it has to do with a wider adoption of mining at a small scale, with thousands, millions or billions of “personal ASICs” around the world — ASICs being “Application-Specific Integrated Circuit” devices, used to mine bitcoin.
Present-day large mining farms with thousands of ASIC rigs are the logistical equivalent of mainframe computers in the 1960s and 1970s. We need to get to a point where we transition from mainframe computers to personal computers, i.e., from industrial scale ASIC farms to viable, personal ASICs, with as many of the present-day complexities abstracted away. If and when this happens, mining nodes could be more widely distributed, so that even large industrial miners as a group might come to represent a minority of hashpower. Every validating node could also be a mining node, integrating individuals’ power over these two key links of the bitcoin value chain. Such double nodes could easily join mining pools, and share profits the same way mining pools already do.
At the level of the individual, this would be akin to the first personal computers, or the first iPhone, which digitally integrated different functions inside one “simple” device. Present-day mining pools are akin to the first cell-phones, integrating a few functions while remaining bulky and heavy.
Within the bitcoin world, many functions have already been simplified, as it’s now much easier to interact with bitcoin than in the past. But the mining part of the bitcoin world might need to go through an “iPhone moment” of its own. While an individual could already buy a single ASIC machine and try to set it up at home, it wouldn’t be as easy or viable as with a smart-phone. We need a Steve Jobs or a Bill Gates for open-source mining chips to go from a “mainframe ASIC” setup to “personal ASICs”.
We’d perceive and use a personal mining device the same way we look at new-generation solar inverters, and vice versa we could look at solar inverters as a type of “mining” device. “Sun miners” the size of a 5-gallon or 20-liter jug, getting smaller, convert solar energy into electric energy, interfacing with their solar ecosystem and home domotic system, powering and managing loads, exchanging data and services with the grid.
Conceptually, miners and solar inverters have key affinities. Their main function is to turn energy into other types of usable, dependable and spendable work, by powering loads inside homes or businesses, providing network services to a grid ecosystem or minting new coins in a new monetary ecosystem. In principle, mining devices and solar devices could converge or interface in a much closer setup.
Modern solar inverters already are probably the “smartest” domestic device people can have in their homes. In a very short time, solar inverters will have computational capabilities not far off from computers’, allowing them to interact with a blockchain on the crypto side and with energy aggregators, virtual power plants, electric vehicles, renewable energy communities and producers on the energy side — processing both energy and monetary transactions among the participants in the network. An electronic device like this could be fairly easily integrated with a bitcoin miner, directing energy to it when available.
As bitcoin mining company Braiins and cleantech adoption expert Magdalena Gronowska have noted, recycled heat from ASIC chips is already being used to climatize homes or for commercial and industrial processes. In some cases, the ASICs themselves are being integrated inside thermal devices used to heat water or air for home, commercial or industrial uses. Mining chips, like all microchips, generate heat. By placing them inside these devices, ASICs transfer their heat to the water or the air, reducing the amount of electricity or gas needed in the thermal process.
In this type of home or personal setup, mining would not be necessarily done to maximize profits, although personal miners would certainly receive a portion of the profits generated by their work, but to ensure the resiliency, stability and distributed nature of both the bitcoin and electricity networks, which could gradually fuse into one network. The setup in hot water devices would also help reduce thermal energy costs, providing another avenue to balancing the electric grid, when electricity is used for heating.
I’m somewhat skeptical of the idea that with free solar energy and storage easily available many homeowners and companies will choose to completely break free from the grid in the same way many people cut the cord from cable operators when online streaming came along. This analogy actually points to the opposite conclusion: many people cut their ties with one-way, monopolistic cable operators to join a multi-directional network where one can be both a viewer, thanks to the netflixes of this world, and a creator, thanks to services such as YouTube, Vimeo, etc.. The strength of the Internet of energy and the Internet of money lies in being an active part of the network, not in closing oneself in a small walled garden, and the grid, one way or another, will probably remain a basic infrastructure of the energy and bitcoin network.
Is it possible that in the distant future bitcoin mining would revert back from a limited number of large-scale only businesses to a wide presence of small-scale, “home” miners? Depending on the diffusion of personal miners and market conditions in the energy/monetary world, if large miners are not able to immediately profit from fee-only (or fee-preponderant) block creation and power services, mining could evolve into a smaller-scale, “non-profit” activity. In this far-off scenario, the economic incentive would not be profit but wealth preservation and the smooth running of the bitcoin base-layer network, with professional miners possibly migrating to higher-layer networks, offering new, specialized services, or simply disappearing if their size turned from a competitive advantage into a disadvantage.
Either way, bitcoin rests on its own base-layer: the energy network — public or private, large or small, off or on the grid. Bitcoin can evolve downward to integrate the power system and upward to integrate the money system, forming together a new Internet of networks. If network effects are exponential in any one sector, what effects could integrating two different networks have? It remains to be seen, but it’s an intriguing prospect.
Holding the Right Mirror Up
Just as power utilities in the Internet of energy will have to provide more flexibility and value-added services to their constituency, so mining pools will have to provide more flexibility and value-added services to their miners, diversifying their own revenue streams through things other than managing the pool itself.
“The trend that we believe will define the next 10 years of bitcoin mining is the commodification of hashrate. Put simply, enterprise mining operators want to reduce risk and get stable, predictable cash flow just like traditional businesses”, writes Daniel Frumkin in Bitcoin Magazine. The only way to counteract the commodification of hashrate is offering new, value-added services. For instance, Braiins, the company operating the Slush Pool mining pool since 2013, has integrated with Braiins OS+, an ASIC optimization firmware helping miners boost the performance of their hardware, according to Bitcoin Magazine.
The mining industry might mirror the power sector in other ways. For instance, just as utilities and renewable energy producers had to deal with the volatility of sources like solar and wind energy — being progressively resolved through storage and a flexible network — miners must deal with the volatility of bitcoin’s price and the difficulty adjustment in finding a valid block. Both types of volatility, at least in the short to medium term, call for a management of risk that so far has largely escaped the mining sector.
“Similar to how capital markets developed for traditional commodities producers, it’s a natural next step for bitcoin mining to have its own auxiliary instruments to help miners better manage risks”, says Leo Zhang, founder of Anicca Research and an industry leader of hashpower financialization, to Bitcoin Magazine. Among such risk management tools, there could be the creation of a hashrate exchange where buyers could purchase hashrate from miners and miners hedge difficulty adjustment volatility by trading derivatives on the future value of hashrate. There could also be both shorter-term and longer-term markets, with spot prices, wholesale prices and so on.
This starts to resemble a lot present-day energy markets and markets for other commodities.
The energy markets are more developed and used to managing risk than the bitcoin mining sector, which could be both an advantage and a disadvantage for the energy world; an advantage because there already is a highly developed system in place to accommodate many market conditions, and a disadvantage because the emergence of a new renewable energy, zero-marginal cost, distributed paradigm will require an old regulatory dog to learn new energy policy tricks. But if it’s true that money and energy might converge into an unprecedented, integrated market and policy framework, mining might want to look carefully at the energy markets’ growing pains. What’s happening in the renewable energy world of management, finance and regulations could provide useful insights for miners, if they want to make sure their choices are compatible with the emerging regime — no hard forks recommended in an integrated energy-money system.
Quality Over Quantity
Regulations of energy markets will be just as important as monetary/financial regulations for the future of bitcoin, as the regulatory framework of the new Internet of energy will have an oversized impact on the functioning of the Internet of money.
In order to make increasingly cheap renewable energy equally viable both on the supply and the demand side, there will have to be changes in the taxation of electricity, the design of electricity tariffs and other regulatory and policy matters.
Electricity taxes still respond to the logic of reducing consumption by energy-importing countries or by environmentally conscious jurisdictions, from a time when most electricity was expensive and produced with fossil fuels. Now the situation is reversing, with electricity trending to zero prices and being produced with clean, renewable sources. This nascent market environment needs new regulations and a new fiscal approach, encouraging users’ responses based on the real-time demand and price of power, with most other costs not necessarily recovered on a per kWh basis.
Competition will push producers to treat energy not only in quantitative terms — with pricing by the pound, i.e., kWh — but also in qualitative terms, offering added value to customers with ad hoc solutions tied to the peculiarities of their machines and appliances, especially for industrial uses, ensuring a more seamless and balanced interaction between public grids and private loads.
It might still be necessary to have some kind of basic feed-in-tariff rewarding producers, especially if they don’t take up mining. Or some fixed charges for all, to upgrade the network, extract the value of the network services from customers who don’t produce energy, and alleviate concerns that prosumers would not contribute enough to the costs of using a network they still need. Such tariffs would have to be constructed carefully, in order to balance the interests of all users, as the IEA says, especially low-income families and those installing solar PV systems on their rooftops.
In a recent paper, market researcher Cornwall Insight concluded that energy-only markets might need to move to what’s called an “energy floor price model,” which guarantees a minimum price for each megawatt-hour produced via competitive tenders. This could boost investor confidence, retain the dispatch efficiency of today’s markets and be “relatively easy to implement in comparison to other solutions,” according to GTM.
“We, therefore, need a new market design… which can incentivise the low-marginal cost and low carbon generation needed to meet a net zero market and give investors confidence returns won’t be eroded”, says Cornwall Insight’s Tom Edwards.
As climate stabilization becomes a top priority for the world and zero-marginal cost renewable electricity continues to grow, policies may need to switch their emphasis from power conservation to much more flexible price-signals, to supply and demand incentives that encourage the creation of value-added power services and carbon conservation — leaving carbon in the ground and disincentivizing fossil fuels.
Reserve Assets and Energy Debt
The shifting focus from electricity conservation in a time of scarce, dirty energy to carbon conservation in a time of clean, renewable energy abundance leads me to think that “energy debt” might not be a particularly useful conceptual tool in deciphering the pros and cons of different reserve assets, especially in an Internet of networks. In this context, energy debt refers to the amount of energy different reserve assets need on an ongoing basis to be viable.
The idea of “energy debt” as a yardstick of wealth soundness and resiliency has been used by Luke Gromen to describe the different energy-implications of oil, gold and bitcoin (BTC) as reserve assets in the eyes of “the biggest of the big money”. These implications — Gromen explains — “are based on an anonymous monetary theorist who went by the handle ‘Another’ [who] shed some light into how truly BIG money thinks about gold, across generations”:
Truly big money looks at physical gold VERY differently than western paper traders: Oil wealth gets burnt up as it is used, leaving only sovereign paper promises, which have always defaulted through history (in either real terms or outright.) For purposes of our discussion here, BTC is today superior to gold in many respects, as highlighted by a number of BTC maximalists. However, “Another” hinted to us how old money, big money, oil money, thinks about money, and in one key respect, BTC remains inferior to gold in one key respect: BTC requires an energy debt — it must have continuous energy inputs, which at some point far in the future hints at a negative yield on BTC once “block rewards” vanish, potentially requiring miners to pay ever-growing electricity bills solely out of fees, and passing those fees onto BTC holders. — Luke Gromen
Gromen’s intent in bringing up energy debt is not to denigrate bitcoin, as he recognizes that “in many aspects, BTC is indeed superior to gold”, but simply to say that it’s unlikely bitcoin “will completely replace gold” as the reserve asset.
While I think it’s entirely possible that gold will retain a role as a reserve asset, I don’t think this will necessarily have much to do with its supposed lack of energy debt. As mentioned at the beginning, anything, any process needs energy. There is no free lunch, not even for gold, not even after it’s been mined and molten into bars.
Gold frontloads much of its energy debt. To produce new gold alone, the gold mining industry uses anywhere between 1.7 and 3.3 times more energy per year than bitcoin’s yearly energy requirement for all coins ever created, based on my own estimates on data published by the Cambridge Center for Alternative Finance and Bitcoin Magazine. And it’s only in an idealized world that gold is energy debt-free once it has been mined and molten. Gold still needs steel vaults to store it, thick, brick-and-mortar buildings to host it, 24/7 security, personnel and vehicles to transport it, specialized equipment and staff to verify its purity, administrators to manage it and so on — each with its ongoing energy debt.
Is anything really ever free of debt and fully paid in energy terms? The laws of thermodynamics say no.
I don’t have access to the few life-cycle assessments that have been done for gold, but it’s hard to ignore the high energy debt gold accumulates at birth before it arrives inside a vault. It’s possible that gold requires less energy than bitcoin once it’s been extracted and made into bars, even if Proof-of-Work and bitcoin are generally more energy efficient than gold and other assets or industries, as Kraken’s Director of Business Development Dan Held and I have also argued. But the key thing is that in a world where renewable energy is virtually unlimited and usable at zero marginal cost, the idea of energy-debt becomes somewhat mute. A more relevant difference is the extent to which bitcoin and gold can contribute to the soundness and resilience of the monetary system, especially if this takes the shape of an Internet of networks.
Through mining and offering power services in an Internet of networks, bitcoin has the chance to directly contribute to and become organically entrenched in both the monetary and energy systems. Gold, on the other hand, being a separate entity from the energy system, in order to be mined and be a viable reserve asset will always need to piggyback on the energy that bitcoin can help manage and balance. The only non-passive, direct role gold has in strengthening the energy system is through its usage in electronic circuits. Not an insignificant role, but not a primary one either and replaceable at least in part.
In terms of the resiliency of the reserve asset, whereas one new ounce of gold or one new transaction in gold do nothing to make the whole gold system more secure, every new bitcoin and bitcoin transaction makes the whole blockchain system exactly that: more secure, resilient, censorship resistant, etc..
And as far as having to pay in the future “ever-growing electricity bills solely out of fees, and passing those fees onto BTC holders”, in an Internet of networks this concern could be greatly diminished, or absent.
In the context of decarbonization, it’s important to underline that not all forms of energy are equal: fossil fuels produce harmful emissions, renewable energy for the most part don’t. The difference is crucial in terms of fostering not just a sound monetary system but also a sound natural environment.
As I have argued in a previous article, using fossil fuels to mine bitcoin is a contradiction in terms, disregarding some of the first principles at the core of bitcoin. I recognize the crucial role oil and other fossil fuels have played in history, but decreasing costs of renewables are outcompeting traditional forms of energy. The world’s awareness of fossil fuels’ harmful effects for health, climate and the environment has also reached a level that is not possible to disregard anymore.
Should sound money mined with fossil fuels help debase nature? What are fossil fuels if not an outdated tool tampering with the world’s thermostat and affecting our long-term resiliency? Do climate and the environment themselves not represent an organic blockchain, recording and embodying every molecular “transaction” and process that our planet has ever seen? Isn’t there a direct interdependency, nearing an equivalency maybe, between the organic blockchain of nature and the monetary blockchain of bitcoin?
But there is this concept in the bitcoin space, popularized by thoughtful people like Castle Island Ventures’ partner Nic Carter and Dan Held, that the world is peppered with underutilized, wasted, stranded energy resources, all fair game to power bitcoin mining:
“Imagine a 3D topographic map of the world with cheap energy hotspots being lower and expensive energy being higher. I imagine Bitcoin mining being akin to a glass of water poured over the surface, settling in the nooks and crannies, and smoothing it out.” — Nic Carter
Attached to this view, there is usually another one, presented as if it’s a natural consequence of the previous one, in terms of the role Proof-of-Work (PoW — bitcoin’s consensus building mechanism) plays.
Bitcoin’s PoW is the buyer of last resort for all electricity, creating a floor that incentivizes the building of new energy producing plants around disparate energy sources that would have otherwise been left untapped. — Dan Held
But, if not all energy sources are equal, not all forms of underutilized or stranded energy are equal either. There are dirty stranded energies and clean stranded energies. There is sound money and unsound money. There is bitcoin and there are shitcoins. Mining with curtailed renewable resources is vastly more preferable than mining with stranded natural gas, for instance.
Natural gas is usually mixed with crude oil under the earth’s crust. So, when extracting oil, natural gas also comes up to the surface. This type of oil-associated gas is also referred to as “stranded natural gas”; it normally remains unusable for either physical or economic reasons, due to the remote location of the oil field, for example, or to unfavorable market conditions.
Since for all intents and purposes this gas is unusable, oil & gas companies either vent it, namely, simply release it into the atmosphere when it comes out at the well, or they flare it, burning it and releasing CO2 instead of methane.
Yes, CO2 is 25 to 86 times less powerful than methane in its climate-warming effects, according to MIT. And if instead of simply venting stranded gas into the atmosphere one uses it to power a bitcoin miner, the amount of CO2 released in the mining process is equivalent to the one released by flaring it, which is less polluting than its methane equivalent. But the fact that it’s better to divert natural gas from venting to an equivalent of flaring, i.e., to Bitcoin mining, should not obscure the fact that gas is not only still being used, but also promoted as a net positive. And yet, from a climate point of view, CO2 is still quite harmful. It’s not a net positive, as Carter says. It’s a lesser net negative, but it’s still a negative. Let’s be clear about this.
Mining with stranded gas is also a different form of “pumping and dumping”, where the two phases are reversed — the dumping comes first, the pumping comes second — and have two different actors. Are bitcoin miners using stranded gas not effectively pumping their returns by slashing expenses thanks to their chosen proximity to fossil fuel operators? Operators who are able to offer energy at zero cost after they themselves failed to pay their fair dues as they dumped most negative externalities on the community.
If energy is a key economic input and stranded gas is a form of cheap energy/capital, does not partnering with oil & gas operators create a form of seigniorage, an energy/financial Cantillon effect, whereby miners close to the source of capital reap an unfair advantage? On the other hand, isn’t renewable energy more consistent with bitcoin’s first principles? It’s much more widely distributed and available, offering more open access and resistance to censorship, not to mention being more climate friendly and environmentally sound than fossil sources.
Climate overheating has a key a point in common with the explosion of corporate debt over the last decade or so: central banks’ easy monetary policies and governments’ lax fiscal policies. It’s also thanks to very cheap and generous flows of credit that oil & gas (especially North American shale) have sucked up more debt than most other sectors and have been able to prop themselves up.
Bitcoin’s main essence and purpose is to be sound money, enshrining soundness and censorship-resistance in mathematics, the physics of energy and a pre-programmed limited issuance of only 21 million coins. By contrast, fiat money can be printed at will to fuel ever larger public and private debts; it can also be devalued at will to repay those same debts, at least in nominal terms.
From a bitcoin perspective, it’s paradoxical and contradictory that bitcoin miners, with their philosophical foundations steeped in sound money principles, should piggyback on the shoulders of those very same central banks that flooded the oil & gas space with easy money and unsustainable debt.
Scavenging depleting oil wells for stranded gas to fuel bitcoin mining represents a continuation of banks’ climate-blind, unsustainable policies with other means. It gives new life to zombie companies, rewards the poster children of irresponsible monetary strategies and perpetuates some of the worst climate effects instigated by unsound monetary policies.
A cost/benefit analysis of the contribution that mining with stranded natural gas offers to an Internet of networks would arguably indicate that costs outweigh the benefits. Direct climate costs and not contributing to the balancing and strengthening of the grid make this “selfish” setup of mining suboptimal. In an Internet of networks, the grid is not just an electricity infrastructure but a bitcoin infrastructure.
These are the reasons why providing oil & gas operators with a brand-new digital pipeline to monetize stranded natural gas into bitcoins makes little sense both from a climate point of view and from a bitcoin perspective. And that’s why the only plausible argument for using stranded natural gas for bitcoin mining is to pay for the closure of the same wells powering the mining, and for the environmental remediation of lands polluted by those wells, whose costs are still unfunded for the most part. As soon as bitcoin mining has produced enough profits to pay for wells’ closures and land remediation, it’s better to close stranded wells, remediate lands, and move those mining rigs to other stranded wells for a new round of closures.
Back to an Open Energy System
From the point of view of physics, humans have lived for most of their history in an open system, where most energy came from an external source — the sun. In other words, for a long time humans could have their energy cake and eat it too. Such external origin of energy is noteworthy because it means humans for the most part did not have to shoulder the consequences of entropy, i.e., all the degraded, disorganized, impractical by-products that inevitably come from using energy within a closed system. This process has been famously defined in the 2nd law of thermodynamics, which says that — in a closed system — entropy can only increase, as whatever amount of energy is present in the system can be transformed and used only at the price of creating a swelling lump of unintended and usually unpleasant consequences. In a closed system, we are forever condemned to counteract the burgeoning mess, trying to reorganize it in some kind of more or less unstable scaffolding, like a giant 3-D puzzle that perpetually falls apart even before we’ve pieced it together.
So, up until the industrial revolution, we more or less avoided entropy, which was a bit like doing a dine and dash, avoiding the waiter that doesn’t let us leave the restaurant until we’ve paid for lunch.
Starting with the first steam and internal combustion engines, from a physics point of view, we effectively locked ourselves into a closed system. Instead of using fresh energy, livestreamed entropy-free from an external source, i.e., the sun, we started relying on stored energy, fossilized over millions of years, releasing entropy from sources internal to our system, i.e., coal, oil and gas trapped inside the earth.
As I’ve said, fossil fuels have had a huge role in human development in the last few centuries, but that development has come with many harmful consequences for climate, the environment and our health. Now we have a chance to drastically reduce the many inefficiencies and sources of entropy along the whole fossil fuel value chain. We can shorten the energy supply chain, tapping directly an external and virtually unlimited source, to power an increasing number of our needs and wants with fresh, entropy-minimized energy from the sun and the wind.
As physicist and senior fellow at Los Alamos National Laboratory Geoffrey West reminds us, the earth receives from the sun more energy in one hour that the entire world uses in one year. One year of energy from the sun is about twice as much as has been and will ever be derived from all of the earth’s non-renewable sources of coal, oil, natural gas and uranium — combined.
Fossil fuels will be with us for a while longer, but why do we think we should keep scavenging, scraping the earth to find incredibly hard-to-get and poisonous breadcrumbs of energy, when we have an infinite, fresh, clean bounty delivered to us daily? Is it that hard to recognize that being able to go back to an open energy system is an incredible opportunity? That we cannot defy physics? That we have much to gain by starting to bake units of energy into our economic calculations as a matter of sound financial and environmental accounting? That energy and energy types are the independent variable that economic, social and environmental variables depend upon?
Nobody knows if and when bitcoin might become the dominant reserve asset or one of a few reserve assets. But, to the extent that bitcoin and renewable energy can gradually fuse into one neutral reserve ecosystem, with both bitcoin and renewables untied to any particular “issuer”, this twin monetary-energy system might provide the basis for a gradual switch from a debt-based to an equity-based monetary system — possibly simpler, more transparent and more stable. The following could be some of its traits:
· the currency doesn’t need to be pegged to a hard-to-find resource like gold to be sound, as the currency is intrinsically sound by virtue of its finiteness and its other attributes;
· the reserve asset can keep appreciating and retain its allure even if interest rates go down to zero, in the case of economic downturns or external shocks, as the asset’s value is tied to the theoretically unlimited productive potential of freely available, zero-marginal cost energy and network effects. This is unlike Treasuries, which have a hard time appreciating and retaining their appeal if interest rates fall to zero, since the reserve asset is disconnected from any intrinsic productive potential. As treasuries are a form of debt, if yields decrease to zero or go negative, their potential for further appreciation cannot be counted on.
· the reserve asset doesn’t need to be wrapped as a different package from the currency to offer a future yield, as with the dollar and Treasuries. The currency itself is the reserve asset, which doesn’t’ need to offer a yield as it’s nobody else’s liability. And if it does offer a yield, it’s because it’s more similar to equity capital, with no fear of dilution and optimally suited for investments, than debt capital that can be used for either unproductive consumption or investment;
· the economic incentives, social contract and network effects making the currency and the reserve asset valuable don’t need a separate governance structure as with fiat money, treasury departments and central banks, which remain politically exposed and malleable.
· The hard-work foundations, i.e., the energy underpinnings of the monetary system, don’t need an external crutch, like oil with petrodollars, as renewable energy would be incorporated in the first place in bitcoin as an integral part of the money and it could be priced in that currency;
· The fixed monetary underpinnings of the renewable energy system don’t need to promote inflation and overconsumption to sustain economic growth, like dollars with oil and the “fiat economy”.
A Deflationary Match Made in Heaven
Bitcoin creator Satoshi Nakamoto foreshadowed that bitcoin would be deflationary if its demand were higher than its supply.
Deflation, described as a shrinking of the money supply, leading to a vicious circle of falling prices, lower economic growth and ever-increasing debts in real terms still resonates in the terrible stories from the Great Depression of the 1930s. That is the main reason why deflation instils fear even today.
Some, as economist and open banking specialist Ivo IJssennagger, argue that bitcoin is indeed deflationary as a currency, and that “the true value of bitcoin is not as a replacement of current fiat currencies, but as a hedge against hyperinflation, unfair capital controls, and general abuse of control over money, as well as a good alternative for safely storing and earning return on excess savings. And that is more than enough”.
Others, as Stanford Law student and bitcoin Twitter commentator Conner Brown, say bitcoin is not deflationary, but “disinflationary, culminating in a constant monetary base without changes to the supply”, and fostering a more stable monetary system. He also quotes a 2004-study from the National Bureau of Economic Research (NBER), aiming to establish if deflation is empirically linked to depressions. “No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link”, reads the study by Andrew Atkeson and Patrick Kehoe.
If energy rules, as it fundamentally does, one way we could try and make sense of the deflation debate is by taking energy’s cue as to the price-change dynamics any specific form of energy might incentivize.
Accepting Satoshi’s view that indeed, under certain circumstances, bitcoin will be deflationary, what I’m interested in exploring are protracted conditions of physiological deflation, where the limitedness of the money supply, the appreciation of the currency and so on are a feature, and not a bug of the system.
On one hand, monetary deflation indicates the amount of money is limited or shrinking; on the other hand, renewable energy price deflation points to a zero-bound price of energy, whose other side of the coin is the unlimited quantity of “work” that can be harnessed with it. So, what would happen if one juxtaposed a finite, deflationary monetary asset like bitcoin over an infinite, deflationary source of energy like solar and wind?
At the risk of oversimplifying a complex and yet unclear interplay, since both bitcoin and energy respond to fundamental physical and mathematical principles, even if I’m far from being a physicist, a mathematician or an economist, my working assumption is that the two deflationary terms of the equation would tend to cancel each other out. Going forward, a theoretically unlimited appreciation of the currency, with its physiological consequences of price decreases and falling nominal wages, could be accommodated and balanced out by a theoretically unlimited availability of zero-marginal cost energy, with its physiological consequences of allowing the harnessing of new resources and creating new jobs. The cancellation effect would probably not be absolute, and it would stay within a range, but directionally I assume it could hold, leading to increasing economic opportunities and purchasing power.
If the two deflations cancel each other out, what we would be left with in the equation is the ratio between the finite supply of bitcoin and the infinite supply of renewable energy — possibly balancing each other out into a new equilibrium. Can the generous endowment of renewable energy be the ideal counterpoint to the tightness of bitcoin? Can their interplay foster neither inflation nor deflation, but some kind of more stable “a-flationary” dynamic, some kind of much-narrower range of long-term inflation and deflation than in the past — “littleflation” perhaps? Even within a trend of long-term appreciation of bitcoin, can the prices of assets, goods and services fall without causing economic depressions? Can we have the benefits of falling prices without their drawbacks, thanks to the regenerating, balancing effects of renewable energies?
Deflation can be “the key to an abundant future”, Jeff Booth says in his book The Price of Tomorrow. I tend to agree, or at least I think it’s possible, thanks to the fast pace of technological development, which has a deflationary effect. But I think the journey from a debt-based, fiat monetary system to an equity-based Internet-of-networks system will be messy, fraught with unexpected problems and unintended consequences. Its positive outcome is not to be taken for granted. It will need a lot of work, flexibility and compassion.
My sense is that bitcoin and renewable energies could help foster a system that is more stable, with fewer booms and busts, in a more sustainable, high-investment/low-consumption kind of way, if the spread of an Internet of networks were gradual enough and geographically even enough. According to the NBER study, “most of the episodes… that have deflation and no depression occurred under a gold standard”, pointing to the role that hard-assets like bitcoin could play.
A Cautionary Note
One of the main changes implied in the possible switch from a debt-based, fiat monetary system to an equity-based Internet-of-networks system would be in the set of tools available to stimulate the economy back to life after external shocks like a pandemic or internal shocks like a debt crisis.
In a fiat system, those tools are money printing, low interest rates and fiscal stimulus in the form of tax cuts or public support to businesses and individuals, so that people start spending more, prices rise, businesses are incentivized to hire and invest, and the burden of past debts is eased by rising inflation. In an equity-based system, the chances of a debt crisis might be fewer, as overconsumption and debts in general should be more contained, but there can always be things like pandemics, earthquakes, volcanic eruptions, and so on. In these cases, there can be low interest rates and fiscal remedies also in an Internet of networks type of system. Abundant cheap energy would also help. The main difference would be that the other resources needed to kickstart the economy would come mainly from a redistribution of present and future wealth. This would probably take the form of taxes and tax exemptions, not money printing and inflation. The reserve currency might appreciate further — bitcoin has eight decimal spaces, allowing for a lot of flexibility in its appreciation.
Nobody likes taxes, but they are a more honest, direct and transparent way to share the pain and heal the most wounded than taxation by inflation or asset inflation, which hits the weakest people hardest. Structuring the tools of redistribution not as taxes but as rebates or dividends paid to the most in need might also help shape their perception and acceptance.
Dan Held reminds us it’s not the first time there is an attempt to put energy at the center of money.
In the early 20th century, industry leaders like Henry Ford and Thomas Edison were interested in replacing gold or the dollar with “the energy dollar” or “units of energy” (commodity/energy currency). The concept was popular due to its sound money characteristics, including: a well-defined unit of account, easy measurement/not easily counterfeited, divisibility into smaller units, and fungibility (that these units would be equivalent to any other unit). However, energy money was flawed — it could not be transmitted or stored easily. — Dan Held
Now many things have changed, and those flaws have been overcome. Thanks to the possible marriage of bitcoin and renewable energy, “energy money” is not only possible, but perhaps it’s the only viable outcome of the internal logics and value propositions bitcoin and sustainability put forward.
If energy fundamentally shapes the existential profile of money, locking in abundant clean energy with tight money, linking up the inner plumbing of the money and energy systems and bringing them into the open could help form a more reliable, sustainable, objective and transparent system — possibly fostering fairer social-economic systems and reducing the distance among competing conceptions of money.
I surely got some things wrong in my reading of the past, present and future. The path of money and energy will not be straight, but the convergence of decentralized money, decentralized energy, decarbonization, zero-bound prices of renewable energy and zero-bound bitcoin rewards could directionally reinforce each other toward a trajectory leading to something along the lines of an Internet of networks, further increasing network effects, which could be highly disruptive and which we need to prepare for.
I hope we can further explore and develop the world of bitcoin in close connection with the world of renewable energy.
This article has been integrated with a few paragraphs on the petrodollar, the eurodollar system and the possible thermal use of mining chips.