Energy — an Intrinsic Value Currency
Linking the financial system to the real economy
Never mistake the stock market for the economy — unattributed
Real wealth has intrinsic value … Financial wealth has no intrinsic value — Ray Dalio
There is a financial system and there is a real economy. Money, debt and credit are components of the financial system. Wealth, goods, services and buying power are attributes of the real economy. Changes in GDP, productivity and buying power are indicators of the real economy. Between the real economy and the financial system are the capital markets which provide risk capital (e.g. money) that fuels growth in the real economy by concentrating buying power.
The financial system that we have today is relatively new and continually evolving. There are many indicators — interest rates, money supply, etc — used to measure and control the financial system. Innovations in the financial system increases overall wealth and buying power through incentives for risk taking in capital markets and applying technology, in the broadest sense innovations, to increase productivity.
The Central Bank
The Federal Reserve … functions in the public interest to promote the health of the U.S. economy and the stability of the U.S. financial system.
The Federal Reserve sets U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.
Central banks, e.g. the U.S. Federal Reserve, manage the financial system using monetary policy to maintain stable prices and maximize employment. Monetary policy tools evolve to minimize historic cyclic price and employment fluctuations. Central banks also manage the payment system and currencies used in those payment systems. Central banks manage the financial system *leading* to changes in economic activity. Fewer tools are available to directly change the real economy.
Currencies are a mechanism for participating in the financial system through payment systems, market exchanges, extension of credit and payment of debt. The amount and cost of currency available is controlled through monetary policy and other central bank technologies. Currencies are causally connected to the economy; e.g. changes in monetary policy influences capital markets which result in changes in buying power and the cost of risk capital. There is latency, overshoot, loss and sometimes unintended, and unwelcome, consequences to the economy from changes in monetary policy.
A tool comparable to monetary policy with the attributes of a currency designed to have direct, immediate effect on the economy indicated through ever increasing buying power; more efficient balance of supply and demand; and gains in productivity might be useful. Below is a framework for such a currency.
Intrinsic Value Currencies
Gold, silver, commodities and land have intrinsic value and have been used as hard, or physical, currencies throughout human history. Physical currencies have a relatively fixed supply; can be rare; are useful as stores of wealth; historically have been widely accepted; can be difficult to exchange; can be expensive to secure; can reduce the cost of trust; and have practical technology uses that, for some (elements), do not destroy them.
Physical currencies have limited use in the current financial system. Often physical currencies are stores of wealth.
Let’s categorize physical currencies as either elements, compounds or space.
Elements: Gold, silver, lithium and other elements have intrinsic value through unique physical properties that increase productivity through technology; e.g. coins, batteries, magnets.
Compounds: Oil, gas, water, ammonia, biomass and other compounds have intrinsic value for biological processes through energetic transformations; food, clothing, shelter, life.
Space: Land, sea, sky and space have intrinsic value through their location, embedded resources (elements and compounds) and future innovative use (technologies) for those who control them.
Our framework completely ignores intangible wealth (intellectual property, data) and artwork although the framework is motivated by cryptocurrencies linked to artwork.
Energy as Currency
Energy is the only universal currency — Vaclav Smil: Energy and Civilization — a History
A physical currency that leads to ever increasing wealth and buying power can not have a limited supply that is difficult to control, expensive to maintain, impractical to exchange and easy to seize. Gold, silver, land and most other physical currencies have these types of limitations.
On the other hand, commodities such as oil, gas and other energy assets have intrinsic value conveying buying power due to their use in producing goods and services; convertibility to financial system currency; and as stores of wealth. As financial system money, commodities fail for many of the same practical reasons as element and space type physical currencies; expensive to hold, exchange and verify. As well, commodities are easy to seize (or sanction or embargo or tax).
However, energy assets provide a framework for a series of physical currencies that, when combined, create intrinsic value as described below.
As in the financial system, we first need a representation of changes in the real economy; i.e. the energy asset framework needs measurable, tunable proxies comparable to money.
Metrics of energy assets fall into three broad categories; generation, distribution and storage. Energy assets combined with consumption metrics provides a measure for efficiency, productivity and products that meet demands.
Consider combinations of energy assets and consumption that increases productivity or balances supply and demand directly. These combinations are an intrinsic value coin.
Energy Currency Framework
Energy assets are broadly categorized as either generation, distribution or storage assets in the energy currency framework.
- Generation energy assets are power plants — broadly, generation assets consists of energy transformation technologies.
- Distribution assets are power lines, pipelines, tankers and trucks — space dependent technologies.
- Storage assets are containers, caverns, tanks, batteries, biomass, plants and animals — including the compounds that are stored in them.
Metrics of energy assets for financial system purposes are standardized around physical quantities that are transparent in design, easy to measure and verify, universally accepted and readily convertible into other metrics. The basic unit of measurement for generation energy assets is the Watt, the Amp for distribution of energy assets and the Joule for storage of energy assets.
As with money in the current financial system, these metrics have no intrinsic value. Further, these metrics taken in isolation are not meaningful; i.e. the value of $100 in your pocket is dependent on whether it was borrowed and at what rate of interest; the therms of gas flared off from an oil refinery are not equivalent to a fully charged battery in your Tesla.
In place of fiat currencies in traditional financial systems, there are three currencies in the energy asset framework; the Watt, the Amp and the Joule.
Combinations of Energy Assets
Energy currencies can be exchanged, used as credit, earn a return, become encumbered with promises much as fiat currency. The energy assets represented by energy currencies are tangible and have intrinsic value. Energy assets can be seized or taxed; e.g. the windmill, the pipeline or the oil well.
Energy assets (compounds) are transformed into heat through consumption and produce a different store of energy which has more or less intrinsic value.
For example, the compounds — water, methane and air — are transformed through the Haber process creating ammonia, generating heat and waste carbon compounds. The ammonia, an energy storage asset, is further transformed to fertilizer through combination with other compounds (e.g. urea, nitrogen, etc.) that increases plant yields (productivity gain). The plants are another energy storage asset which is consumed (i.e. turned to heat) or transformed further to different energy storage assets (e.g. livestock, ethanol).
Ammonia alone has less intrinsic value (when converted to fiat currencies at market prices) than the water, methane and pure nitrogen used to produce it. In addition, the Haber process byproducts of heat and carbon dioxide decrease the intrinsic value of the input compounds.
However, fertilizers increase crop yields by 3x to 10x — a measurable productivity gain. Demand for crops can more than cover the cost of the fertilizer production process creating profit. The heat and carbon byproducts that subtract from the intrinsic value of the crop need the same accounting as the water and methane inputs.
Energy currencies are used to quantify all of the inputs and outputs. The excess value of the outputs over the inputs is the profit. Increasing (decreasing) profits over time reflect productivity gains (losses). The resulting energy coin is convertible to traditional financial system currencies (money) while the productivity gain is generally not directly measured by traditional currencies and is generally captured through equity or debt participation in the capital markets.
The combined full cycle from compound to compound is measured with energy currencies. The process itself that creates profit and meets a demand is the intrinsic value. The process corresponds to elements of traditional financial statements; e.g. balance sheet, income statement and statement of cash flows, but using energy metrics instead of currency metrics.
Another, simple example of our energy framework is the process of mining in proof of work cryptocurrencies. Mining is a relatively straightforward process where useful, accessible energy in the form of electricity is supplied to a computer system (graphics card) that creates mostly heat and a small amount of negative entropy in the form of block hashes. One hash that meets a predetermined threshold is used to confirm and create a block of transactions securing the network through a proof of work consensus mechanism. The miner is rewarded with cryptocurrency, see figure below.
Using energy framework semantics; useful, accessible electricity (Watts) are delivered (Amps) to a computer’s graphics card (Ohms) which transforms the energy supplied into heat and hashes. The hashes are transformed into cryptocurrency (Joules) that are convertible into financial system currency that is used to buy accessible (Amps) electricity (Watts) and graphics cards (Ohms) producing more cryptocurrency (Joules).
For example; in 2020 we measured on a daily basis that $1 of delivered electricity plus $1.65 of depreciated computer/graphics card expense (2 year life for aftermarket equipment) produced $5 worth of ETH. A 188% return neglecting smaller order costs of housing equipment, securing the currency, electrical wiring, etc which would impact industrial scale mining operations. These returns vary in time and between different cryptocurrencies and can range from zero (or negative for obsolete equipment) to more than 10X and depend on the network hash rate.
Cryptocurrency mining can be very profitable.
Cryptocurrency mining is scalable; twice as many cards fed twice as much electricity produced twice as much ETH while the ancillary costs per unit decline.
The entire process, combining Watts (electricity), Amps (accessible), Ohms (graphics card) to produce Joules (ETH) is what we define as the ERG, an intrinsic value coin.
Similarly the process of ammonia to fertilizer to crops/livestock can be fit into this energy framework and can be extended to any energy intensive process.
ERG — Intrinsic Value Coin
Any process — including all the components, inputs and outputs — that is convertible to a financial system currency and produces more of that currency than it consumes is the Erg. The Erg is a tangible measure of the profitability of a process. Let’s call the process, with all inputs and outputs reported as confirmed transactions, a node on the network.
- Non-fungible tokens (Watt, Amp, Joule) are minted defining an energy asset
- Token balance updates through confirmed transactions
- Tokens can be staked
- Combinations of tokens are mining nodes
- Mining nodes are minted tokens
- Proof of Energy: Watts + Amps + Joules — Ohms > 0
- Every node is a miner, miners selected randomly
- Network hash rate scales with token stakes
- Network secured by network wide mining pool
- Erg rewards proportional to (square root of) stakes
- Fees (small) proportional to (square root of) stakes (tx_size)
Watts (Amps) token minting is confirmed through proofs of Existence and Access. For example, power generation plants are observable from overhead imagery proving existence. Proof of access is provided by the token minter’s location coincident with the Watt facility.
Watts (Amps) token transactions are confirmed through proof of Production (Transmission). Whoever sends the (highest quality) production data can claim the token (see Token Economics and Incentives below).
Proof of Energy combines Watts production with Ohms consumption (or to Amps, Joules or heat) by the usual, but intentionally low-difficulty, Proof of Work mining. The required hash rate consumes a specific threshold of energy for a given device (Ohm) which is confirmed by a decrease in the process outputs and BFT confirmed by miners.
NB Joules discussion missing. Amps need sensors.
ERG Rewards and Oracles
A minimal node consists of Watts, Ohms and optionally Amps and/or Joules.
For example, a residential tokenized node might consist of Watts (grid electricity/gas) and Ohms (consumption to heat). Production metadata updates are Watts in and Ohms consumed updating the corresponding token balances. The staking of these tokens earns no Ergs; all energy is turned to heat. However, once staked such a node would enjoy a portion of the fees (necessary to prevent DoS attacks) in each block they are selected to mine; prorated by the value of their stake; which grows in time as Watt transactions are confirmed through proof of production.
Consider Ethereum mining as another example of a simple but profitable type of node. Ethereum mining consists of:
- Watts (electricity) + Ohms (graphics card) => Joules (ETH)
We realized an approximately 2X return in USD which varied over time. Nodes mine transactions confirmed using Proof of Energy. The process owner (miner) earns 2X Ergs paid out using, for instance, daily prorated Ergs under a constant yield accretion and 1-year look back to reward long process duration. As a node:
- Watts + Joules — Ohms = 2 Ergs over one year
Returns based on fiat currency requires Oracles for the prices on electricity, graphics cards and ETH. The fiat markets act as a reference price for the node to determine the return percentage and therefore the Erg reward.
Over time, Ergs can be used to encumber energy tokens and/or nodes. Then the relative amount of encumbered Ergs becomes the reference price for determining Erg rewards replacing fiat prices.
When supply and demand are not in equilibrium, Ergs can be used as low cost capital increasing supply. As well a decrease in the value produced by a process will reduce the amount of Ergs encumbered and eventually removing the inefficient process.
Incentives and Token Economics
- Energy assets are tokenized through minting.
- Anyone can mint an energy asset, but once minted a generation plant location (or pipeline or storage tank) is unique. The minter is given a royalty on all subsequent exchanges/encumbrances of the minted token. This will incentivize identification of energy assets. Uniqueness provides early adopters a “land grab” advantage; e.g. minting tokens for the local utility power plants or substation.
- A token can be claimed for free by providing metadata updates; i.e. periodic production data from a power generation plant (e.g. solar array kWh). Free tokens for energy asset owner incentivizes claims. Claim jumping possible.
- Tokens balances are used in staking and incentivize production data updates.
- Combinations of tokens (node creation) is incentivized through earning fees (Ergs) when selected for (low difficulty = low cost) mining.
- Nodes that create profit earn prorated (some duration) Ergs less mining fees. Free Ergs.
- Pre-mining of Ergs to fund ongoing open source development, incentivize early investors. Reasonable number of Ergs to foundation.
- Foundation mints key tokens for potential royalty streams.
- Ergs producing nodes can be encumbered (i.e. sold, rented, etc.)