A Physicist’s Perspective on Bitcoin

tl;dr Money is energy. Applying the Law of Conservation of Energy to different moneys reveals that moneys created in a work-free process form a parasitic relationship between the creators (parasites) and holders (hosts.)

Money is Energy

In physics, the definition of “energy” is “that which allows work to be done,” and work is the moving of a mass by a force. Money can readily be used to do work by paying people to move stuff. We pay people to cut lawns, stitch clothes, build cars, etc. As there is nuclear energy in a hydrogen atom, gravitational energy in water behind a dam, and chemical energy in a banana, there is economic energy in a five dollar bill.

Total energy was elegantly expressed by Einstein as mc^2. Despite its simple definition, the ability to harness total energy to do useful work is complex and difficult, often requiring atoms to be split or fused.

Chemical energy is stored in the bonds of atoms and molecules. It harder to define because depends on what chemical reaction occurs, as well as temperature, pressure, and volume. Despite its greater abstractness, chemical energy is more useful than total energy for doing work. Gasoline is easily harnessed in internal combustion engines.

Economic energy is commonly referred to as “value” and quantified in prices. However, its everyday use belies its strange foundations. Price is a function of supply and demand. While supply is straightforward, demand is a complex function of human emotions including fear and greed. Demand is also a function of political conditions such as the strength of property laws and the tax rate on capital gains.

Economic energy can take the form of a pig, a hammer, gasoline, a computer, phone credits, a website. However, the strangest form of economic energy is that which is in money. The demand for, and energy in, a gold coin and a $100 bill are due to pure human psychology.

Although economic energy is fuzzy and abstract compared to other types of energy, it can do work and it is, indeed, energy.

The Law of Conservation of Energy:

Energy can neither be created nor destroyed; rather, it transforms.

A $100 bill has significant economic energy. And yet, it was created in an automated process using inexpensive raw materials and an insignificant amount of electrical energy. This invites the question: from where did the energy in a $100 bill come from?

The answer lies in economics 101, which says that price (economic energy) is a function of supply and demand.

As the overall supply of a commodity increases, the energy of each unit decreases. Therefore, the energy contained in a new $100 bill was transferred from pre-existing dollars, each of which lost a tiny fraction of its energy.

This realization has ramifications for traditional monies such as dollars, proof-of-stake (PoS) monies such as those planned for future versions of ethereum, and proof-of-work (PoW) monies such as bitcoin.

Dollars, euros, etc

As explained above, when authorities create new dollars, they take energy from holders of pre-existing dollars.

The energy equation is simple:

Proof-of-stake coins

Let’s assume a future ethereum is a PoS network that awards new coins to ether holders in proportion to their holdings.

In other words, everyone holding X coins will have Cx coins after the next coin reward, (where C is some constant). Energy is transformed from old coins to new coins, which are held by the same people.

Without a flow of energy it is difficult to see the point of creating new coins in a PoS system. Supposedly the purpose is to find consensus on the growth of a blockchain. This remains to be seen.

Proof-of-work coins

The chips used to create PoW coins (like bitcoin) consume large amounts of electrical energy. The author doesn’t know what portion of that energy is transformed into heat in ASIC’s, but a typical CPU has an efficiency of just 10–20% (according to this PC maker.) This implies the bitcoin mining process transforms electrical energy into economic energy. (It does not, however, allow us to rule out a parallel transfer of economic energy of existing coins to new coins.)

Summary

Whereas those who store energy in dollars have energy syphoned by economic parasites, those who store energy in bitcoin do not. Bitcoin miners have found a way to convert electrical energy into economic energy.

As logical people realize that they can store pure economic energy without the drawback of hosting an economic parasite, they will sell their dollars for bitcoin. This will result in a conversion of energy from dollars to bitcoin.

It will also create a positive feedback loop: even people who cannot see the logic of holding a parasite-resistant money will see the economic energy (price) of bitcoin rise due to rising demand.

In the future, when the total economic energy in bitcoin approaches that of dollars, people will be unable to ignore the falling economic energy of dollars. Like a chemical reaction, economic energy will quickly transfer from dollars to bitcoin. This transfer will never happen be in a complete way, because some people will stubbornly refuse to give up their belief in dollars.

Finally, from a physicist’s perspective, there is an inevitable trend in the universe for entropy (disorder) to increase. We see this trend manifested in the metabolic history of animal and machine evolution. Metabolisms always trend upward. From plants to cold-blooded reptiles, to warm-blooded animals, flying animals, and thinking animal. From cold-blooded machines such as bicycles, to warm-blood machines such as cars, and to thinking machines such as CPU’s. Metabolisms increase.

The metabolism of bitcoin is a function of the number of people who own bitcoin. It is inevitable that more will get some.