Energy-backed currencies as the key to climbing the Kardashev scale

Opinion by: Andrew Cote, founder of Hyperstition

Every cryptocurrency proposes to replace fiat for the same reasons — it’s decentralized, resistant to inflation, outside of central control, and there’s trust built into producing a tamper-proof ledger of transactions.

 Yet the significant cryptocurrencies are still just fiat: They’re not backed by anything besides what people believe they’re worth. Backing currency with a commodity means you have to produce more of that commodity to increase the money supply. There is no commodity more critical for economic growth than energy. Suppose you want to align the financial incentives of capital return-seeking with the thermodynamics of industrial societies. In that case, there’s only one thing you need to do: denominate a currency backed by energy.

The fiat currency flaw

Fiat currency, over time, can become divorced from actual value-generating economic activity, while commodity-backed currencies necessarily align incentives toward economic value production. 

The critical flaw of every fiat currency is that the volume in circulation is not tied to any fundamental factor of production. In contrast, a commodity-backed currency requires producing more of that commodity in proportion to the new currency introduced to the economy. The US dollar used to be backed by gold; increasing the money supply meant acquiring and storing more gold in the Federal Reserve. Richard Nixon ended this in 1971 when the US could not make good on its obligations to repay US dollar holders in gold. France sent a warship to collect the gold they owed from the NY Federal Reserve, prompting the US to sever the promise to back the US dollar that was redeemable in gold. 

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Gold is a commodity, but it isn’t a common factor in production in other industrial processes and acts of value creation. In an ideal world, we would back our currencies with commodities we want to maximize production for future growth. Let’s consider capitalist markets as an evolutionary search algorithm exploring the space of possible business models to maximize returns as denominated in a particular currency. We should recognize that the choice of commodity we use to back our currency becomes the reward function that guides capitalist enterprise. 

Incentivizing energy production

The most critical factor of production across all economic activities is energy. Incentivizing more energy production is the number one recipe for fueling economic growth. 

The greatest inflection points in human welfare and prosperity align exactly when we unlock additional sources of cheap energy; the Industrial Revolution was fueled by coal and propelled society to greater heights through oil and refining it into things such as gasoline and aviation fuels. The more energy society can access, the richer it gets, and the inverse is also true: There are no energy-poor rich countries. 

We should incentivize the production of as much energy as possible and direct it toward value-generating activities. The easiest way is to establish a currency backed by energy.

Energy-backed currency aligns incentives automatically toward ascending the Kardashev scale and ensuring civilizational wealth and material abundance. 

Consider the capitalist economy as a means of exploring the possible space of business models, always seeking the highest returns. The overall speed of economic development and, therefore, the pace of this evolutionary search process is set by the availability and price of energy. If we use an energy-backed currency, returns on capital are denominated. We find a perfect alignment between the outputs of the capitalist economic machine and its required inputs: Producing as much value as possible, denominated in energy, creates more energy needed for further growth and expansion of markets.

An energy-backed currency is the best mechanism for automatically aligning all the incentives of economic activity with the maximum rate of economic growth; fiat currencies, in general, can incentivize the destruction of real monetary value by creating perverse incentives born of speculative frenzy, while commodities that are not significant factors of production produce a similar perverse incentive by demanding the stockpiling and hoarding of non-productive assets like a Federal Reserve building housing nothing but gold bars. 

Ascending the Kardashev scale means obtaining and using as much energy as possible and as quickly as possible for the production of real economic value. The ultimate promise of blockchain technologies goes beyond just a currency replacement that is fiat for fiat but rather the design of a novel, incentivized structure to orient individuals toward the maximal positive-sum games we can play. The answer is evident from the first principles of thermodynamic capitalism and the pragmatic psychology of market mechanisms: Energy-backed currencies are the best way forward for future growth and societal abundance. Sorry, fiat, your days are numbered. 

Opinion by: Andrew Cote, founder of Hyperstition.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.