I follow the argument that Bitcoin is the monetization of energy consumption. Whenever the price of Bitcoin is higher than the price of the total quantity of energy required to mine it, it's profitable for miners to put more energy into mining Bitcoin. So they will. This action arbitrages away the difference between the two prices until the quantity of energy put into the mining process rises (or falls) to match the price of the Bitcoin.

But the price of Bitcoin itself isn't determined by the mining process. Bitcoin is a speculative asset much like gold. People buy (and hold) it because they're hoping it will increase in value. Just like gold, the price of Bitcoin could go to zero, but it probably won't because so many people out there are committed to "buying the dip" and holding it as a long-term savings instrument.

As you point out, Bitcoin (just like gold) is not a proper financial claim. And the energy that goes into Bitcoin mining is just gone.

So far, I basically agree with everything you're saying.

But then we get into your thought experiment about monetizing computing activity and making a market in CPU cycles.

Are you just saying that:

1. In addition to (or instead of) using their own data centers, Amazon could farm out some of its computational load to the public, and pay them for it?

2. Amazon can pay for the CPU cycles by issuing its own tokens that are IOUs for CPU cycles?

3. Miners can sell those tokens to people who want to pay Amazon for cloud computing services?

If so, what's in it for Amazon? Why don't they just use dollars? Why is it useful to issue a new token when they can instead just pay the miners in dollars and continue to bill their clients in dollars?

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Well, it's meant to be a thought experiment and so let's not overdo it. I wanted to think about how one could use the CPU cycles currently devoted to crypto mining, which I view as a waste, to instead do something useful.

Commodity computing power, fairly fungible, comes in the form of scalable cloud computing like AWS. So I thought that you could securitize or tokenize CPU cycles that way. But you are right, Amazon would not want to do that. Instead this would be a monetary authority, motivated by stability and using the cost of information processing to achieve it by stabilizing the price of computing power. Others have proposed monetizing oil, or abstract units of energy, or baskets of consumer goods, etc.

Again, I don't think it's a good idea for our world. If we put on our science fiction hats and fast forward some decades, to where computing power is not only an important but perhaps *the only* important resource, then it might make sense. In our real world, we might simply notice that there is some monopoly power that is held by these big commodity computing providers, and so perhaps we should think about the consequences of that.

Thanks as always for your dedicated reading!

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Dear Mr. Neilson

I find it very difficulty to understand your point on the design flaw of Bitcoin compared to gold. How does the fact that coins are digital make Bitcoin a worse base layer money? How does the form (digital vs. physical) have anything to do with the monetary function?

Let me also mention that I believe you mischaracterize the function of mining. In concert with the programmatic difficulty adjustment, prove of work ensures that miners deploy costly resources (capex and opex) to attend a new block to the timechain. Since node operators determine the value of the coins released to the miner, he / she must behave according to the rules to not end in financial ruin. Energy is the resource chosen by the protocol because it can never be costless.

Bitcoin, to mention an ancillary point, is not only appreciated because of scarcity, but has many more attributes that make it a suitable base layer counterparty-free money: privacy, divisibility, ease of storage, ease of transfer, ease of verification and infinite scalability (via smart contracts like The Lightning Network). Many of those attributes are not present in gold.

The emergence of credit is a function of market demand. Credit is also possible (actually a reality, see exchanges and custody wallets) in the emerging Bitcoin monetary system. However, the public ledger plus make credit expansion more difficult to credibly establish and generally less mandatory given the ease of storage, transfer, verification and divisibility.

Thank you for your consideration.

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Hi Sebastian! Thank you for reading, and for your comments.

It's not that Bitcoin is worse than gold. Bitcoin takes the idea of scarcity from gold, and copies it. But that's not how the gold standard worked. I'm not advocating for a gold standard, I assure you!

As to the function of mining, I don't see how what you are saying is different from what I am saying. Why is it helpful to require the consumption of energy? I don't see the benefit, unless you assume that the existence of Bitcoin is a benefit.

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Dear Mr. Neilson

thank you very much for your reply.

I am afraid I have to ask again: What do you mean by "that's not how the gold standard worked". And: "Under the gold standard, the (incorrect) argument goes, paper money was backed by gold." How not? That was printed on bank notes. The fact that (central) banks could fail to deliver on the promise of gold backing is exactly why bitcoin improves upon the gold standard.

To put your criticism of energy consumption on its head: If you a priori believe Bitcoin is useless, then the energy consumption is pure waste. Otherwise, it ensures that there will never be a free lunch. The "waste" is actually a feature to make sure that nobody receives free Bitcoin as a side benefit for something he / she would have done anyways. How could you do that otherwise?

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The gold standard worked, sometimes better and sometimes worse, by allowing the expansion and contraction of paper credit according to the competing needs of users of money. The scarcity of gold was not the defining feature of the gold standard. I think of Henry Thornton's "Paper Credit" on this topic: in 1797 the Bank of England stopped offering to redeem its notes in gold --- yet the system continued to function as before.

What is wrong with free lunches? Wouldn't it be better if all lunches were free?

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Any credit system allows for the contraction and expansion according to the needs of users. Will be the same with Bitcoin should it succeed. The separation of money from the state will, however, make it impossible to permanently expand the monetary basis by bail-outs.

If technology lets us produce double the output with the same input, half of everyone's lunch is free. But if money is debased, your free lunch reduces my portion. Isn't it?

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