“Humanity and the soil - they are the only real basis of money.”
Thomas Edison, 1921
“By convention the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block. This adds an incentive for nodes to support the network, and provides a way to initially distribute coins into circulation, since there is no central authority to issue them. The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”
Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto, first ever bitcoin miner, October 31, 2008
“Thinking about how to reduce CO2 emissions from a widespread Bitcoin implementation”
Hal Finney, second ever bitcoin miner, January 27, 2009
Energy Backed Money
Money, in general, is a tool for measuring the intersection of supply and demand in an economy. Commodity money is money whose usefulness as a measuring stick, i.e. monetary value, comes from the commodity of which it is made. In other words, the money is “backed” by the resource used to make it. Gold, as money, is effectively backed by the work done to mine new gold. Bitcoin, as money, is backed by the work done to mine new bitcoin. Work is equivalent to energy, so both gold, bitcoin, and effectively any other type of money are all energy backed money because they take work to produce. In practice, it makes sense for energy to be the monetary backing of an economy because it is the very foundation of the known universe. However, the form that energy takes to give it monetary value is what matters most, and not all money is created equal. Well designed money that effectively measures the intersection of supply and demand should possess most, if not all, of the following characteristics:
For example, consider gold or apples as money, which both take work to produce. Gold makes for very good money because it is durable, fungible, and scarce, whereas apples would not be good money because they possess none of those characteristics. Naturally, humans chose gold over apples, and are increasingly choosing bitcoin over alternative forms of money. The reason people are choosing bitcoin is because it possesses almost all of the necessary characteristics of useful money with its brilliantly engineered design. Paraphrasing professional bitcoiner Michael Saylor, "bitcoin is a perfectly engineered closed thermodynamic system". As we'll explain, this system is perfectly engineered because of the way it uses geographically decentralized surplus energy (and other important innovations) to impenetrably protect the very characteristics that make it valuable.
How Miners Use Energy To Back Bitcoin
Bitcoin mining works by adding blocks of transaction records to Bitcoin's public ledger of past transactions (the blockchain) for a reward of newly minted bitcoin (the block subsidy) and transaction fees (also paid in bitcoin). In order to perform this function, individual miners dedicate specialized computation (called hashrate) toward the proof-of-work algorithm (i.e. they expend energy) in a global competition for the mining reward.
“Each miner starts the process of mining a new block of transactions as soon as he receives the previous block from the network, knowing he has lost that previous round of competition. He immediately creates a new block, fills it with transactions and the fingerprint of the previous block, and starts calculating the proof of work for the new block. Each miner includes a special transaction in his block, one that pays his own bitcoin address a reward of newly created bitcoins. If he finds a solution that makes that block valid, he “wins” this reward because his successful block is added to the global blockchain and the reward transaction he included becomes spendable...
...As the newly solved block propagates through the network, each node performs a series of tests to validate it before propagating it to its peers. This ensures that only valid blocks are propagated on the network. The independent validation also ensures that miners who act honestly get their blocks incorporated in the blockchain, thus earning the reward. Those miners who act dishonestly have their blocks rejected and not only lose the reward, but also waste the energy expended to find a proof-of-work solution, thus incurring the cost of electricity without compensation.” Mastering Bitcoin, Antonopoulos
In the context of hard money, it is important to bring attention to one of Bitcoin's most important characteristics, its scarcity of 21 million bitcoins with near limitless divisibility into 1/100 millionth of a bitcoin units called satoshis. This predetermined monetary policy is being continually and collectively reinforced by the global mining network with the help of a novel innovation called the difficulty adjustment. The difficulty adjustment ensures that new blocks are added to the bitcoin blockchain approximately every 10 minutes, so that new bitcoins are mined over a known extended period of time instead of all at once. The block reward of the first block was set to 50 bitcoin, and decreases by half every 210,000 blocks, which is approximately every four years given the difficulty adjustment target of 10 minutes. Over time, bitcoin will approach a block subsidy of zero bitcoins and a total supply of 21 million bitcoins in the year 2140, with the only remaining block reward to miners coming from transaction fees.
Due to the diminishing block subsidy, growing global hashrate competition for the remaining transaction fees, and eventual decline of the currently massive profit arbitrage opportunity to mine new blocks, miners over time will be forced towards ever cheaper energy. Fortunately, and perhaps by design, we are moving toward a society with abundant low cost renewable energy to back our new digital money supply. Over the coming decades, bitcoin miners will continue to utilize low value surplus renewable energy to mine the remaining 2.4 million bitcoins and compete for transaction fees from the late 21st century economy and beyond.
Bitcoin Mining: A Battery With Inverse Cash Flows
Energy storage is both a challenge and opportunity for our abundant energy future, and there are many ways to “store” energy. For example,
Level 1) Generate electricity on the grid and store instantaneously in goods and services that are produced in real time e.g. HVAC, EV charging, lighting, cooking food, hydrogen fuel production, etc.
Level 2) Store surplus electricity in batteries and reinject into the grid when you need more power to produce more goods and services e.g. using pumped hydro, lithium-ion, redox flow, etc.
Level 3) Use any remaining surplus electricity to back the money supply and use that money to pay for more goods and services at a later time e.g. instantly convert surplus electricity into scarce, divisible, durable bitcoin via the mining process.
Each type of energy storage comes with a tradeoff of costs and benefits. First, entrepreneurs who produce goods and services make decisions about how much energy (purely electricity in this example) to expend in their efforts, and that cost is typically much less than the total value they are able to generate in the sale of those goods and services. Second, in the case of battery energy storage, the ability to store and reinject that power into the grid effectively provides a secondary market for the energy whose value becomes that of the goods and services produced by it minus the cost of storage. Third, given that not all electricity can be consumed instantaneously to produce goods and services, and that batteries must be sized appropriately to minimize cost and maximize profitability, bitcoin mining effectively serves as the energy buyer of last resort. This makes perfect sense for the production of money to come from an economy's lowest value energy, because money is intended to be the lowest risk, lowest reward, most commonly held asset in an economy. Like gold, the profitability of bitcoin mining should eventually go to zero except in special cases of mining operations with unique cost advantages (firstname.lastname@example.org).
In fact, the idea of using surplus commodities to back money is not a new one and was proposed almost a century ago by Thomas Edison, a godfather of modern electricity, with a plan to issue new money to farmers in exchange for agricultural surplus. In his plan, the farmer would use their surplus agricultural commodities as collateral in exchange for a loan of 50% of the appraised 25 year average value of the particular commodity, plus a 1 year call option such that they would be able to repurchase and sell the commodity at market value any time before the 1 year expiration. In his effort to “take the variable out of money”, the plan would have given farmers the ability to sell their crops over the course of a year rather than all at once at the time of harvest when prices could be highly unfavorable and ultimately bankrupt the farmer. Edison, along with his friend Henry Ford who first proposed the idea, planned to expand to other commodities including energy. Nearly a century later, it's becoming more evident that the invention of bitcoin is built on the shoulders of giants.
In closing, bitcoin is taking the variable out of money using modular interruptible data centers, bitcoin miners, which work like battery energy storage systems with inverse cash flows. A battery participating in the energy market stores surplus energy when demand is low and sells it back to the grid when demand is higher, while a bitcoin miner stores surplus energy by converting it directly into hard money. As open wholesale power markets continue to offer increasing amounts of abundant low cost renewable energy, the market will find new ways to utilize that energy to improve the way we all live and work. One innovation that will be a foundation for many other society advancing innovations is bitcoin - energy backed money for a pro-human future.
Monthly Market Metrics - November 2020
At the close of November, bitcoin is:
- 11.918 years old
- $340B market capitalization
- 32.8 million addresses holding a non-zero balance
- 133 EH/s of globally decentralized data centers backing the money with low cost surplus energy
Thank you for reading.
Satoshi Energy Corp.