Bitcoin is the Commoditization of Energy
For the past thousands of years, human beings have used commodities as a store of value. Because the production of a commodity requires work — expending energy — we know it’s not possible to arbitrarily devalue it: if producing a dollar’s worth of a given commodity costs a dollar in energy, the price of this commodity cannot be reduced ad infinitum by it being produced and sold into the market. Only through an increase in the efficiency with which a commodity is produced is its price reduced, by the producer spending less than a dollar’s worth of energy on production and selling the commodity into the market, until its price reaches the cost of production. While increasing the efficiency of production is exactly what we want for commodities that are consumed — wheat, cotton, lumber, iron, etc. — it’s exactly what we don’t want for the money commodity which is not consumed, but rather saved, in order to store value. Because of this, ever since the dawn of human trade, we’ve been looking for a commodity that can’t be produced with ever-increasing efficiency, thus enabling the storage of value. Many commodities have been used as money through human history: sea shells, cattle, wheat, salt, iron, copper, silver, and gold. Only with the last ones — gold and silver — did humans find a commodity where the progressive efficiency increases in production occurred slowly enough for its value to remain relatively stable.
Bitcoin is an attempt to directly commoditize energy, for the purpose of creating a digital store of value — completely leaving out the production of an intermediary, physical commodity. Through performing an energy-intensive calculation, which produces a proof that energy has been consumed, and using these proofs as tokens, we — as opposed to nature — control the efficiency of production, by varying the amount of work required to produce the next token based on how much work it took to produce the previous tokens. In this way, it’s possible for us to define, in almost exact terms, how many currency units will be produced for the next many years. Bitcoin is the realization that, firstly, the primary attribute of a monetary commodity is a strict limitation on increases in the efficiency of its production and, secondly, that no physical good needs to be produced in order for this requirement to be fulfilled. However, while it’s possible to engineer a digital commodity that has the main property of the money commodity, it is not possible to engineer money itself, since the defining characteristic of money is high liquidity. High liquidity for a good appears when consumers, merchants, and producers — the market — are willing to accept it in exchange for labor, goods and services, and is thus not a property of the good itself. In other words, the defining property of the money commodity is a strict limit on the efficiency of production, while the defining characteristic of money, in general, is high liquidity.
While the direct commoditization of energy affords us with the ability to almost exactly control the rate of production, it simultaneously robs us of the ability to unequivocally define ownership, since it can no longer be defined as possession. The solution to this challenge employs the property of proof-of-work a second time, combined with public key cryptography. Proof-of-work is firstly used to limit the rate of token production, but secondly it’s used to make the existence of multiple versions of the digital history of ownership as costly as possible. When a token — comprising a proof of expended energy — is produced, the producer has defined its own public key as the token’s current owner, and this public key is included in the data over which the proof-of-work was calculated. Immediately hereafter, ownership of this token can be transferred to a new party by the producer signing a transaction that defines a new public key as owner of the token. Importantly, the producers of the next tokens will include these transfers of ownership as part of the proof-of-work for the next tokens, thus locking in the transaction history by making it part of the expensive-to-calculate proof. If you want to change the transaction history, you must recalculate the proof, by redoing the energy-costly calculations.
In the case of digital currencies that do not use proof-of-work, because of this lack of a qualitative difference between conflicting transaction histories, the list of current token-owners is always reduced to vote-by-majority, at best. This security model opens up for an insidious attack, where a majority of token-owners collude against a minority, assigning the balances of the minority to themselves, without any possibility for anyone to prove this has occurred, since there’s no essential difference between competing versions of ownership-history — it’s all just information. And after a successful attack of this nature, it can be repeated easily with a new minority and majority, until a small but well-organized group owns all the tokens in existence. With proof-of-work, even in the most extreme case, where an attacker successfully penetrates all the computers that store the transaction history, the attacker is powerless to do anything, because alteration of the data that comprises the transaction history would invalidate the proofs-of-work, since they depend on the transaction history itself.
Fundamentally, proof-of-work gives us the ability to embed time in information. It’s easy to control the number of tokens in circulation simply by defining a limit, and counting how many exist, but it’s impossible to control the rate of production this way. In other words, 15 million tokens may very well exist — this is easily verified — but were they created yesterday, or over the course of the past ten years? In order to know whether some token, bearing a timestamp saying 2012, was really created five years ago, or whether it was actually created yesterday, its creation must be bound to expended energy. If a given amount of proofs-of-work were produced within the last year, and roughly five times this amount of work follows the creation of the token allegedly from 2012, we can be relatively sure that the token is indeed an old one, as opposed to being created a week ago in an attempt to modify the past. Thus, proof-of-work endows information with a property that was traditionally limited to physical commodities — requiring the consumption of energy in order to change the supply distribution — which enables us to use it as the basis of a digital store of value.